JANUARY 2022 was excruciatingly painful for technology stocks, but it was a correction that the sector badly needed.
The Technology Index of Bursa Malaysia declined by 15.3% in the month alone, wiping out the entire gain made since mid-2021.
The index ended January with a reading of 81.81 points, down from its record-high of 100.86 points in November last year.
The massive selloff locally was triggered after technology stocks on Wall Street were slammed due to worries about higher inflation, expectations of tighter monetary policy from the United States’ Federal Reserve and a spike in bond yields.
The Federal Reserve’s more hawkish stance in December on rate hikes is a key factor that pulled investors away from growth-oriented technology stocks to value-oriented shares, which are obviously more favourable in a high interest rate environment.
Even the celebrated “Faang” stocks on Nasdaq took a hit, with the biggest blow suffered by Netflix Inc that shaved off about 29% of its share price in January.
Faang is an acronym referring to the five most popular technology companies: Meta (formerly known as Facebook), Amazon, Apple, Netflix and Alphabet (formerly known as Google).
Similarly on the Malaysian stock exchange, technology stocks including the industry “big boys” could not escape the market rout last month.
Frontken Corp Bhd was down by over 21%, Greatech Technology Bhd declined by about 25%, Vitrox Corp Bhd fell by 21% and Inari Amertron tumbled 18%.
Prior to the correction, the technology sector’s super bull run had created dizzying valuations, and it was anyone’s guess on how long the euphoria could sustain.
Only a correction could cool the bull down and rightly so, technology stocks’ valuations have currently reduced to more palatable levels in the past one month.
Nevertheless, valuations are still above historical average.
Trident Analytics chief research officer Peter Lim Tze Cheng hopes for more healthy corrections in technology stocks to bring the valuations to an attractive level.
“At the height of the bull run, the valuation in terms of price-to-earnings ratio (PER) was around 50 times. With the correction in January, this has fallen to above 40 times now. But, the historical level is about 30 times. We need the valuations to drop further to make the sector more attractive,” he tells StarBizWeek.
Lim points out that while the technology sector continues to be able to deliver strong earnings growth, the high valuations may dampen investor interest.
“The best is to look at individual stocks. There are some technology stocks that have strong earnings growth outlook in 2022 and their valuations are about the historical levels,” he adds.
Following the sell-off in January, the PER valuations of technology stocks have dropped significantly.
For example, Inari’s current PER is about 30.45 times, slightly lower than the five-year average of 31.79 times.
Meanwhile, Vitrox’s current PER has normalised to slightly above the five-year average of 45.28 times. Currently, the PER is 47.89 times.
Analysts think that the correction in January could just be a temporary blip for the technology sector, which continues to enjoy a strong earnings outlook.
In fact, there are already signs of recovery among technology stocks. Bursa Malaysia’s Technology Index, to be specific, has begun to inch up since the last few days of January.
MIDF Research expects the technology sector to return to normalcy in mid and longer terms.
It says the recent selldown in local technology stocks was just an overreaction fear over higher interest rate environment, and not due to expectations of lower global semiconductor sales after two years of robust demand that was sped up by the pandemic.
“We opine that the fortunes of the Malaysian technology sector are highly correlated to global demand for semiconductors.
“Regarding this, we are expecting that demand will stay solid in the next couple of years, given the proliferation of computer chips in our daily lives from personal devices, such as smartphones, laptops and wearables to electric vehicles, and Internet of Things devices.
“We maintain our positive call on the technology sector as the importance of semiconductors and the companies that produce them cannot be understated, especially as technology is going to play a much more significant role than ever before,” according to MIDF Research.
US tech firms vs M’sia
One of the reasons that dragged some of the Faang stocks in January was the disappointment over user or subscriber growth.
Despite its stronger-than-expected earnings, Netflix shares were hammered as it reported a slowing subscriber growth and fewer subscribers are forecast to be added in the first quarter of 2022.
Meanwhile, Meta missed Wall Street’s earnings estimates, and pointed to increased competition from platforms like TikTok and YouTube for the weaker performance.
In contrast to such “Internet-based” technology stocks that rely on user or subscriber growth, Malaysia’s listed technology companies landscape is dominated by component and test equipment makers, especially in the semiconductor segment. It is worth noting that such local companies are still riding high on the semiconductor supercycle, and many companies’ productions are still stretched in meeting their orders.
To put it into perspective, Malaysia’s exports are projected to grow further this year, given the encouraging outlook of external demand for electrical and electronics (E&E) and commodity products export.
In 2020, the E&E sector contributed 39.3% or RM386.29bil to Malaysia’s total exports. The country accounted for almost 7% of total global semiconductor trade and 13% of global capacity in terms of back-end assembly tests and packaging.
Industry players are optimistic that the semiconductor supercycle will continue to sustain.
Technology index
Speaking with StarBizWeek, QES Group Bhd managing director and president Chew Ne Weng says the company’s orders momentum continues to be strong, going into this year.
“While the semiconductor supercycle has been going on for more than two years, we continue to see lots of purchase orders from our clients.
“There’s still a huge shortage in the market that needs to be addressed,” he says.
However, Chew points out that QES and the larger industry continue to face supply chain challenges that have affected the ability to deliver orders.
This has created a huge order backlog in the industry. As for QES, Chew says that it would take another six to nine months to clear the backlog.
Because of the industry-wide supply chain issues, including the movement restrictions, Chew says QES’ manufacturing division had experienced about 15% to 20% loss in potential revenue amid strong orders.
“Thankfully, the revenue contribution from our distribution segment and our recurring income sources, which are both semiconductor-based, have delivered huge growth to offset the potential loss in revenue from the manufacturing division,” according to him.
Chew further points out that test equipment maker QES will be expanding its production capacity to meet the rising demand.
The construction of its new plant in Batu Kawan, Penang, will commence in July or August this year and will be completed in one year’s time. Its current facility in Glenmarie, Shah Alam is running at 85% to 90% capacity.
“We have quite a substantial backlog of orders, and the delivery for these orders will be carried into this year.
“Coupled with the new orders that we are getting, I’m sure that we will see better earnings in 2022 compared to 2021,” he says.
Frontken chairman and CEO Nicholas Ng Wai Pin is also optimistic on the outlook, adding that the group is actively expanding its production capacity to meet the ever-increasing demand.
Ng says that Frontken’s clients are also actively expanding their operations, and this would in turn spill over to the group.
“Phase One of our new facility in Kaohsiung, Taiwan, will be ready in the middle of this year. It is a three-phase expansion which will expand our production space size by 2.5 times.
“At the same time, we are looking to acquire more land for future expansion. We won’t be planning for expansion if the outlook isn’t good,” he adds.
According to the group’s website, Frontken and its subsidiaries are engaged in providing surface and mechanical engineering solutions, serving a wide range of heavy industries such as oil and gas, power generation, semiconductor and marine.
According to Ng, the best is yet to come for Frontken, as it would only see a full-year revenue contribution from the Phase One development in Kaohsiung in 2023, supported by the new works for its clients.
“Even the new capacity will be filled quickly, given the work we do for our clients.
“At Frontken, we don’t just aim at expanding our capacity, we also continuously work on improving our efficiency. Our focus is on the bottomline,” he says.
Judging from the robust technological advancements, especially in the past several years, Ng says the need for innovation-intensive solutions and components in the technology sector will continue.
“We work with our clients on the tools they need, right from the early stages of research and development.
“Given our ability to customise solutions for ever-evolving technologies, we continue to see our long-term clients keep coming back to us for new projects.
“For now, we have received guidance from our clients for future works up until 2023,” says Ng.
On the ground, industry players remain hopeful for another strong business performance in 2022, even as some investors may have turned wary due to the massive tech sell-off in January.
As the selldown eases, this presents an opportunity for investors to buy the dip within the technology sector.
Areca Capital CEO and fund manager Danny Wong says that investors should capitalise on the present opportunity to accumulate technology stocks.
“The year 2022 will be another good year of earnings for the technology sector.
“Looking at the scarcity of E&E components in the market and the benefits enjoyed by Malaysian companies due to the diversion from the US-China trade war, local technology companies’ business fundamentals will continue to be supported,” he says.