KUALA LUMPUR: Automotive semiconductor manufacturers are still dealing with the effects of an inventory correction that began a few quarters ago, despite the worst being over, according to Kenanga Research.
The research firm highlighted that one challenge is the softening global market for electric vehicles (EVs).
Current prospective EV buyers are mostly single-car owners who prioritize a vehicle's range on a full charge, unlike previous generations who were primarily multicar owners.
"No helping either, is the investment in charging infrastructure that is significantly lagging the growth in EV population, prompting leading EV manufacturer BYD to reconsider plug-in hybrids.
"Automotive semiconductor players will have to reassess their customer concentration risk in the EV sector in China and step up their diversification to the European automotive market," it said in a note.
The firm also noted that European Commission has imposed an additional tariff of between 17.4 per cent and 38.1 per cent on Chinese EVs, on top of the existing EU duty of 10 per cent.
This follows President Biden's move a month ago to increase tariffs on Chinese EVs from 25 per cent to 100 per cent. As such, Kenanga anticipate more supply chain shifts, which could potentially benefit Malaysia, given its neutral stance in the US-China trade conflict.
"However, unlike consumer devices, the automotive supply chain is rather sticky due to lengthy qualification durations. "Hence, this mixed outlook influences our cautious stance on automotive semiconductor companies like D&O Green Technologies Bhd, whose valuation remains high, while JHM Consolidation Bhd has yet to see significant progress from its various projects still in the incubation stage.
"We also continue to monitor a long-forgotten name — KESM Industries Bhd which has missed out entirely on the previous tech run (2020-2022) but has strategically invested RM143 million to revamp all its equipment in anticipation to capture next-gen automotive chips in the coming upcycle," it said.
Overall, Kenanga has maintained its "overweight" rating on the technology sector.
It noted that Malaysian companies, mostly involved in back-end semiconductor processes, are beginning to reap the benefits of six consecutive months of year-on-year growth in semiconductor sales from Nov 2023 to April 2024.
"We believe the seasonally weak first quarter of calendar year 2024 (1QCY24) is behind the sector with its earnings momentum poised to pick up strongly in 2HCY24.
"We sense optimism among Malaysian players—which are mostly at the back-end—from their tone during their recent post-1QCY24 result briefings as the recovery in the semiconductor sector that started early this year trickles down the value chain," it said.