KUALA LUMPUR (Jan 5): Hong Leong Investment Bank (HLIB) on Wednesday (Jan 5) reiterated its overweight call on the Malaysian technology sector as it expects the industry to experience multi-year earnings growth on fundamental exponential demand and government incentives.

HLIB analyst Tan J Young wrote in a note that HLIB maintains its tactical position in favour of front-end players as many countries rushed to develop their semiconductor capabilities, especially in leading edge front-end fabrication to be self-sufficient on the back of national strategic and security interests.

"KLTEC (Bursa Technology index) outperformed the broader index in 2021 (KLTEC +39% vs KLCI -4%). The latest industry average growth projection of 23% exceeds our initial estimate of 20%. 

"As for 2022, the sector is expected to be in expansionary mode with 8%. Capital spending is expected to reach another record on the back of strong fab (semiconductor fabrication plant) construction pipeline.

"Stronger greenback outlook may boost the sector’s prospect. We are not overly concerned on the rising input prices as tech players are believed to be able pass through the additional costs. Growth is expected to be driven by smartphone, communication, HPC (high-performance computing), IoT (Internet of Things) and auto,” Tan said.

According to him, HLIB expected the US dollar to be stronger in 2022 against the ringgit for an average of RM4.16 compared to 2020’s average of RM4.14.

Tan said HLIB also expected technology firms to be marginally boosted as their sales are majority denominated in US dollars and partly offset by the US dollar-denominated cost.

"Gold, aluminium, copper and steel prices are on the upward trajectories and may spell bad news for tech players. Pricier commodities will exert pressures on margins for packagers and equipment makers. 

"However, we are not overly concerned as industry wide capacity constraint positions tech players with stronger bargaining power to pass through higher material costs,” he said.

Recovery in smartphone demand along with communication segments are expected to be the major growth driver for the technology industry on the back of 5G proliferation, according to Tan.

Next will be HPC supported by robust investments in cloud, cryptocurrency and metaverse, he said.

In technology-sector terminology, metaverse refers to a virtual-reality realm where users can communicate via a computer-based environment.

Tan said although IoT devices generally have lower integrated circuit content, the sheer forecasted volume demand for such products suggests that this market is too big to ignore. 

"Lastly, demand from (the) automotive (sector) is expected to be solid as electric/autonomous vehicles require significantly higher semiconductor content,” Tan said.

Tan said Frontken Corp Bhd, UWC Bhd and Kobay Technology Bhd are HLIB’s top picks in the Malaysian technology sector.

HLIB, which reiterated its buy call for Frontken shares, has a higher target price (TP) of RM4.42 for the stock, compared to the previously-estimated RM4.15, according to him.

Tan said HLIB also reiterated its buy calls for UWC and Kobay, with unchanged TPs at RM6.52 and RM8 respectively.