AI-linked chip players set to lead uneven semiconductor sector recovery

KUALA LUMPUR: The outlook for Malaysia's semiconductor sector remains constructive, although the recovery is expected to be uneven across subsectors, TA Securities said.

The firm said the sector continued to benefit from structural growth areas, particularly artificial intelligence (AI)-related investments, data centre expansion and demand for advanced semiconductor applications.

"Nevertheless, we expect the recovery to remain uneven across subsectors, with growth likely to be led by integrated circuit design, optoelectronics, and semiconductor packaging and testing, particularly among companies with exposure to AI-related and data centre infrastructure demand.

"In contrast, players with greater exposure to traditional end markets such as personal computers and smartphones may face a more challenging operating environment, partly due to rising memory costs," it said in a note.

TA Securities said the recent US interest rate hike was expected to have a limited direct impact on the earnings of Malaysian semiconductor companies, given the strength of these structural growth drivers.

However, tighter monetary conditions could weigh on valuations, particularly for stocks trading at high multiples.

"This could, however, be partially offset by a potentially stronger US dollar following the rate hike, which would provide some earnings support to export-oriented semiconductor players with US dollar-denominated revenue.

"Overall, we expect the rate hike in the US to have a relatively minimal impact on the local semiconductor sector," it said.

TA Securities said the global semiconductor industry remained firmly in a supercycle, driven by sustained demand from AI-related investments and continued expansion of data centre infrastructure.

Citing the Semiconductor Industry Association, the firm said global semiconductor sales reached US$146.8 billion in July 2026, up 6.4 per cent month-on-month and 135.1 per cent year-on-year (YoY).

This marked the 33rd consecutive month of YoY growth, while cumulative sales for the first seven months of 2026 surged 93.6 per cent to US$784.6 billion.

TA Securities maintained its "Neutral" stance on the semiconductor sector and named Dagang NeXchange Bhd as its top pick, with a target price of 66 sen.

It cited semiconductor subsidiary SilTerra's exposure to the ongoing AI cycle and strong order flows for silicon photonics products amid demand from AI and data centre applications.

The firm also upgraded Unisem M Bhd and Malaysian Pacific Industries Bhd to "Buy" from "Hold", with target prices of RM4.81 and RM47.30, respectively.

It maintained its "Hold" call on Inari Amertron Bhd with a target price of RM2.70.

For Elsoft Research Bhd, TA Securities cut its FY26 to FY28 earnings forecasts by 27.1 per cent, 10.4 per cent and six per cent, respectively, citing lower sales of conventional automated test equipment.

It lowered Elsoft's target price to 25 sen from 28 sen, based on an unchanged 30 times calendar year 2027 price-to-earnings multiple, while maintaining its "Hold" call.