Tech manufacturers could see demand shrink amid looming recession: analysts

AS rising macroeconomic headwinds batter markets, analysts believe technology manufacturers could experience a significant pullback in demand as consumers tighten their belts.

Head of OCBC Investment Research Carmen Lee, for one, said that while the fourth quarter is historically a busy period for such manufacturers amid the year-end festive period, it is unlikely to be as busy this year as the global economy faces several key risks.

“High energy costs, elevated inflation and rising interest rates are brutal factors that will impact consumer consumption and corporate earnings outlook.

“Most electronic products, from electronic watches to electric vehicles, are likely to be items that will see deferred purchasing if unemployment goes up,” she said.

In particular, Lee highlighted that manufacturing companies, especially those using more raw materials, could be further impacted by higher material costs and a stronger US dollar.

DBS analyst Ling Lee Keng noted that downstream players, including electronics manufacturing services providers, original equipment manufacturers and original design manufacturers, could be more affected by a potential recession than upstream semiconductor stocks, although both segments could see adverse impact to their businesses.

“Companies that have a bigger exposure to the consumer electronics segment such as PCs, laptops, tablets, mobile, could be more hard hit than those with a higher proportion of revenue generated from the enterprise segment such as data centres, network, etc,” she said, adding that consumer electronics are more vulnerable to shifts in consumer sentiment on the back of a recession.

On specific stocks, Ling said AEM Holdings could see weaker demand in the second half of the year due to inflationary pressures, supply chain issues and geopolitical tensions.

However, she remained positive on the company as it will benefit from a growing system level test (SLT) market. SLT, which happens after wafer probe and functional testing, has benefited from increased chip complexity and the need for advanced heterogeneous packaging.

As for semiconductor equipment maker UMS Holdings and tech solutions provider Aztech Global , she noted that both companies still have strong order books. UMS is also likely to see some upside to net earnings from a tax write-back, after its Malaysian subsidiary saw its pioneer tax status reinstated.

UMS posted higher revenue in the first half of the year due to strong demand for a new generation of equipment and tools that it introduced last year. Revenue jumped 181.1 per cent on the year to S$540.5 million, while net profit soared 180.3 per cent to S$82.8 million.

Maybank’s Jarick Seet said he is nevertheless positive on tech manufacturing companies since the majority of them still have robust pipelines and order books, while still being able to transfer costs to their customers to maintain margins.

In a report on Oct 7, he maintained a “buy” call on Venture Corporation , albeit with a lowered target price of S$19.55 from S$22.90, as he “conservatively” expects margins to come down as new orders are negotiated.

Seet expects the company to trade at 16 times its forward earnings, down from 19 times. He also revised down his estimates for FY22 and FY23 earnings by 3 per cent.

In another report on Sep 30, Seet downgraded Frencken Group to “hold” with a target price of S$1.05, down from S$1.80, after cutting forecasted earnings for FY22 to FY23 by 2 to 14 per cent to account for slower growth in the industrial automation space as well as the risk of growth tapering in its semiconductor business.

“As Frencken’s factories are largely based in Europe, it may suffer an unexpected drop in demand with a recession looming. As a result, its robust pipeline of orders may suffer a setback as other competitors did in the past,” he said.

Across the causeway, CGS-CIMB analyst Mohd Shanaz Noor Azam also downgraded the Malaysian semiconductor sector from “overweight” to “neutral” in a report released on Oct 4. He expects industry demand to weaken, resulting in sluggish earnings prospects in the next six to 12 months.

“While most industry research groups still expect positive semiconductor sales growth in 2022, most of them also project an average of 4 per cent year-on-year decline in semiconductor industry sales in 2023 mainly due to anticipation of a slowdown in the global economy and inventory correction,” he said.

He also noted that the share prices of Malaysian outsourced semiconductor assembly and test and automated test equipment players have declined 25 to 68 per cent year to date (YTD).

“We believe the pullback in share prices YTD is reflective of the global demand uncertainty going into 2023 and poor sentiment for the global tech sector amid a rising interest rate environment and inflationary cost pressures.”

Mohd Shanaz downgraded semiconductor assembly and test services provider Unisem from “add” to “hold” with a lower target price of RM2.60. He noted, however, that the company could benefit from its customers’ desires to diversify with a “China plus one” strategy amid the ongoing trade war between the US and China.