Tech manufacturing counters take a beating in Q1 on weak end-consumer demand

SINGAPORE-LISTED tech manufacturing counters’ top and bottom lines have taken a hit in the first quarter ended March, as the semiconductor industry grapples with weak end-consumer demand and a cyclical downturn.

Inflation and higher interest rates dampened end-consumer demand last year, said RHB senior research analyst Alfie Yeo, even as tech manufacturers rushed to produce components to support the recovery of supply chains that were disrupted during the pandemic.

“The demand and supply mismatch has thus developed into an oversupply of components, including PC and chip inventories in 2022,” Yeo said.

“Coming into 2023, economic uncertainties have resulted in slower production and research and development activities within the tech value chain companies, as they re-adjust their investment and production requirements to slower demand and excess inventories.”

In its first-quarter outlook, semiconductor equipment manufacturer UMS Holdings cited estimates by electronics manufacturing trade group Semi, which pointed to a decline in global fab equipment spending for front-end facilities.

Spending for such facilities is expected to fall to US$76 billion in 2023 from a record high of US$98 billion in 2022, before rising to US$92 billion next year.

Maybank analyst Jarick Seet noted that the company’s management also remains wary about the near-term outlook.

“Its new customer may delay its ramp-up due to weak semiconductor demand,” Seet said in a research note on May 11. “As a result, we believe UMS may face higher cost pressures. Coupled with a lower revenue base, UMS’ margins could decline further in the quarters ahead.”

Similarly, high-precision tools and parts manufacturer Micro-Mechanics noted that trade group Semiconductor Industry Association (SIA) saw demand cool from record-high levels in the second half of 2022.

“This downward trend has continued into 2023 with data from the World Semiconductor Trade Statistics (WSTS) showing that chip sales in Feb 2023 slowed on both a year-on-year and month-on-month basis for a sixth consecutive month,” the company said in an earnings report for its third quarter ended March.

Micro-Mechanics chief executive Chris Borch said: “Moving into (the fourth quarter of 2023), we believe the semiconductor industry will continue to slow until the excesses and supply-demand imbalances ease.”

Aside from players directly affected by the slowdown in semiconductor demand, companies such as Nanofilm Technologies International are also seeing softer end-consumer demand hurt revenue.

The company noted that its advanced materials business unit, which accounted for about 75 per cent of the group’s revenue in Q1 this year, saw “relatively softer end-consumer demand as (the) market took time in Q1 2023 to adjust and recover from post-China reopening in Q4 2022”.

This was compounded by a high-base effect, as the company saw stronger demand for computer, communications and consumer electronics devices over the same period last year.

CGS-CIMB analysts Izabella Tan and William Tng noted that some of the observed declines in the sector may have been due to over-ordering by customers last year as they feared that they would not be able to get hold of products.

“Higher costs from inflationary pressures and foreign exchange translation costs (such as for Aztech) mostly contributed to decline in net margins,” they added.

Stronger demand ahead

Still, some companies and analysts remain bullish about the longer-term fundamentals of the semiconductor and tech industry.

Semiconductor testing solutions provider AEM Holdings noted in its first-quarter business outlook that inventory corrections are expected to conclude sometime in late 2023 or early 2024.

“Technology nodes are continuing to advance as two of the world’s most advanced foundries are forecasting new process nodes to be up and generating revenue in the second half of 2023. This, in turn, is expected to drive demand for new test capability,” the company said.

The CGS-CIMB analysts added that onshoring and near-shoring has also spurred the development of new manufacturing bases.

For instance, they noted plans by semiconductor manufacturing giants Samsung Electronics and TSMC to set up plants in Japan.

“Some companies, such as Grand Venture and AEM, said that they have new customers that are just waiting to commence high-volume production, so the rebound for them could be stronger when the inventory issue in the industry is resolved and customers turn more bullish,” the analysts said.

Maybank’s Seet also noted in a recent report on Aztech Holdings that while the company’s margins were compressed in its first-quarter earnings, the company’s key customer could make an additional 15 per cent to 20 per cent more orders this year.

He added that the company could benefit from a trend towards diversifying manufacturing away from China.

“Utilisation rates at its Dongguan factory in China and Malaysia is close to 100 per cent, signalling positive quarters ahead,” he said.

RHB’s Yeo noted that there are signs of a “bottoming out” process in trade, industrial production, retail sales and purchasing managers’ index data in many Asia ex-Japan economies, and that the global economy is poised for an imminent recovery.

“While we expect end demand to improve, chip inventories – according to Gartner’s projected worldwide semiconductor inventory index movement for 2022 and 2023 – are still expected to be in the severe surplus range for the rest of this year,” Yeo said.

“Hence, downstream tech players could benefit better than players that are exposed to the upstream semiconductor component segment,” he added.