Alternative Views: More than RM32 bil vanishes as tech falls from grace

This article first appeared in Forum, The Edge Malaysia Weekly, on May 23, 2022 - May 29, 2022.
Alternative Views: More than RM32 bil vanishes as tech falls from grace
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At the height of the technology run in the last quarter of 2021, the combined market capitalisation of the top 10 technology companies on Bursa Malaysia was close to RM80 billion. As at last Thursday, the market cap of the top 10 companies, led by Inari Amertron Bhd, had fallen to RM48 billion.

Some RM32 billion in paper wealth has been wiped out from the companies in the last five months. Nevertheless, the shareholders are still wealthy and a good number of them still qualify for the corporate billionaires’ list.

For instance, the wealth of Chu Jenn Weng, co-founder of ViTrox Corp Bhd and its largest shareholder, is about RM1.8 billion even with about RM700 million shaved off since the end of last year.

The value of Greatech Technology Bhd’s major shareholder, Datuk Tan Eng Kee, has taken a sharp fall compared with the others. Tan’s 65% shareholding in Greatech is now worth RM2.9 billion, down from RM5.5 billion five months ago.

The other individuals who have seen their paper wealth shrink, owing to the “tech wreck”, are Goh Nan Kioh of D&O Technologies Bhd, MI Technovation Bhd’s Oh Kuang Eng and UWC Corp Bhd’s Datuk Ng Chai Eng and Lau Chee Kheong. Their companies’ market capitalisation have fallen at least 50% during the period.

The fall in valuation of technology stocks is due to the easing of the microchip shortage, concerns over rate of growth and rising interest rates.

Some of the world’s largest foundries that produce microchips — the key component in the making of memory chips — have increased capacity and overcome the production kinks that hit them during the pandemic. Taiwan Semiconductor Manufacturing Co Ltd (TSMC), Samsung Electronics Co Ltd and Micron Technology Inc have expanded capacity since last year and worked towards easing the chip shortage.

This is despite a strict zero-Covid policy in countries such as China. Rating agency Fitch has predicted that the easing of the microchip shortage will continue in the second half of this year as the global production environment returns to normal.

A reason for the shortage was automotive manufacturers’ miscalculation of the demand for cars at the start of the pandemic. Demand picked up despite the pandemic, sending automotive manufacturers scrambling for microchips.

Now, however, automotive players have changed tack. They are focused on fulfilling sales instead of the old practice of stocking up on inventory. The big boys tend to focus more on higher-value cars instead of mass-market models.

Also, the rise of electric vehicles, which require fewer microchips than non-electric cars, has contributed to the easing of the microchip shortage.

According to Fitch Ratings, several global automotive players such as General Motors Co and Ford Motor Co have stated that they will keep their inventory levels below those of pre-pandemic times. The rating agency stated that in China, the rise in electric cars has contributed to the easing of demand for microchips.

As for the diminishing growth of technology companies, the first signs of changing sentiment emerged in late January this year when some of the Big Tech companies recorded a slowing down in subscriber numbers.

In the first week of February, Meta Platforms Inc founder and CEO Mark Zuckerberg acknowledged that the business was facing increasing competition and he was feeling the pinch. That news cost Meta, formerly Facebook Inc, a US$230 billion loss in market cap in a single day.

In April, streaming content provider Netflix Inc reported its first dip in subscriber numbers in 10 years. The company’s value took a hit of about 25% with that announcement.

Finally, the rise in US interest rates has made it untenable for investors to put their money in stocks with lofty price-earnings (PE) valuations. This is because future earnings will erode when the cost of funds rises.

The US Federal Reserve has announced two hikes this year, bringing the fed funds rate to between 0.75% and 1%. It was between 0% and 0.25% before March this year. The rise in rates is an attempt to tame inflation. However, this hits valuations, particularly those of technology stocks.

The data shows that Netflix had a PE valuation of more than 50 times at end-2021 while Malaysia’s ViTrox and Greatech commanded a valuation of 60 times. Netflix is now trading at a PE of 16 times while ViTrox and Greatech are at 36 times.

In the world of investing, valuations rise and fall based on the prevailing sentiment in a sector. In 2020, the buzz was around glove producers, which commanded lofty valuations.

However, apart from rewarding shareholders with healthy dividends and spending money on futile share buyback schemes, the major shareholders of the glove manufacturers did not capitalise on the rising valuations. None of the major shareholders in the top four glove manufacturers reduced their stakes to monetise their investments and take some money off the table when the going was good.

Last year, the attention shifted to technology companies, particularly those providing services to the semiconductor industry.

The entire value chain of technology companies — comprising outsourced semiconductor assembly and test companies, automated test equipment manufacturers, electronics manufacturing services companies and automated solution providers — benefited from the shortage of microchips.

However, just like the owners of the glove companies, most of the major shareholders of the technology firms have so far not taken advantage of the lofty valuations for their own benefit or for the benefit of the companies.

For instance, when valuations are high, it is only natural for companies to place out shares or issue debt papers covered by the underlying shares to raise more money for expansion or even pay dividends. Unfortunately, it did not happen.

There are some exceptions. Insas Bhd, the major shareholder of Inari, reduced its position in the company by about 3%. Insas is majority-owned by seasoned stockbroker and investor Datuk Thong Kok Khee.

The tech sector is not in a meltdown, like the one seen in the 2000 dotcom burst. It is only going through a normalisation of valuations in the light of the easing of the chip shortage and rising interest rates.

There are still opportunities for investors to explore options on their shareholdings.


M Shanmugam is a contributing editor at The Edge

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