Weak Demand Weighs On Malaysia's Semiconductor Sector

MIDF Amanah Investment Bank Bhd (MIDF Research) and Hong Leong Investment Bank Bhd (HLIB) have both maintained a NEUTRAL recommendation on Malaysia's technology sector, citing a muted near-term outlook and absence of rerating catalysts in the semiconductor space.

MIDF Research noted that the recently concluded 1QCY25 earnings season saw underperformance across outsourced semiconductor assembly and test (OSAT) companies, with weak utilisation rates and continued demand softness. This has led to downgrades for D&O and Unisem to Trading Sell and Sell respectively, while Inari was upgraded to Neutral from Trading Sell due to its relatively resilient earnings profile.

HLIB similarly flagged 1Q25 results as underwhelming, with most local technology and electronic manufacturing services (EMS) companies missing both house and consensus estimates. The earnings were impacted by weak volumes and margin pressure, in stark contrast to global peers in the US and  Europe, who posted strong results. Post-results, consensus earnings downgrades were modest, suggesting a cautious "wait-and-see" sentiment rather than a full-blown sectoral downgrade.

MIDF Research highlighted that while artificial intelligence (AI) remains the only notable catalyst, persistent headwinds in the smartphone and automotive segments are expected to weigh on recovery. The World Semiconductor Trade Statistics (WSTS) maintained its 2025 global growth forecast at +11.2% year-on-year, largely driven by logic and memory chips.

However, segments like discrete semiconductors, optoelectronics and micro ICs are expected to contract due to geopolitical tensions and supply chain disruptions. MIDF believes a more broad-based recovery is only likely in 2026.

In the smartphone space, global shipments grew a marginal +0.4% year-on-year in 1QCY25, primarily due to Chinese subsidies and anticipatory buying ahead of potential US tariffs. However, IDC has revised down its 2025 forecast to +0.6% growth, with Malaysia-based analysts cautioning that demand may falter unless driven by innovation rather than subsidies. Apple's market share is forecast to contract by -1.9% year-on-year in 2025, possibly hinging on the upcoming iPhone 17's reception.

On the automotive front, MIDF reported that Chinese automakers such as Geely and BYD have cut prices aggressively—by up to 20%—to retain market share, triggering concern from regulators and hinting at ongoing consolidation in the electric vehicle (EV) market. The pricing pressure and slower EV adoption are expected to dampen volumes and average selling prices, further complicating prospects for semiconductor players tied to the automotive supply chain.

HLIB maintained their preference for selective exposure within the tech sector. UWC remains a top pick with a Buy call and a target price of RM2.78, supported by rising orders and improving margins. Frontken and Inari Amertron are rated Hold, though both are seen as core portfolio names to accumulate on price pullbacks.

The house cautioned that the strengthening Ringgit, up 8.6% year-on-year in 2Q25 to date poses translation and margin headwinds for exporters, with earnings sensitivities ranging from 1.0% to 2.3% per 1% currency appreciation.

Both research houses advised close monitoring of upcoming events such as the US Section 232 semiconductor tariff decision, the expiry of temporary China tariff pauses, and the July/August earnings season which may offer clearer guidance for 2H25.