Analysts turn cautious on tech in 2H

 

PETALING JAYA: As macroeconomic headwinds intensify heading into the second half of 2025 (2H25), analysts are adopting a more cautious stance on the technology sector, citing downside risks to earnings revisions.

Hong Leong Investment Bank (HLIB) Research, which is maintaining its Neutral rating on the tech sector, points to three major headwinds underpinning this outlook.

Firstly, visibility on end-demand remains limited due to unresolved US tariff policies and the earlier boost from demand pull-ins is expected to fade as channel inventories become fully stocked.

Earlier this week U.S. President Donald Trump announced a 25% tariff on Malaysian exports to the US.  Secondly, Malaysian companies are facing rising cost pressures, including higher electricity tariffs and the mandatory 2% Employees Provident Fund contribution for foreign workers, which appear difficult to fully pass through in the current environment, says HLIB Research . 

Thirdly, the research firm said foreign exchange (forex) headwinds will pose a challenge to earnings of tech companies as the ringgit has appreciated roughly 5% year=to-date against the US dollar. 

"Against these backdrop, we see limited scope for a positive inflection in the near term; sentiment is likely to remain subdued until earnings expectations are reset and the outcome of US tariff policy becomes clearer, HLIB Research said in a report yesterday. 

Explaining its cautious stance on the sector, the research firm said earnings revisions remain skewed to the downside. While early reads suggest that the second quarter 2025 (2Q25) earnings may demonstrate relative resilience, the outlook for 3Q and 4Q of 2025 remains opaque with heightened risks.

It noted that the Bursa Malaysia Technology Index was down by 21.4% in 1H25, significantly underperforming the broader KLCI, which declined 6.7%.

On stock picks, the research firm continues to favour domestic-focused names, such as  Itmax System Bhd and SMRT Holdings Bhd driven by their resilient recurring revenue base and structural growth story.

Within the tech hardware space, it prefers companies with exposure to foundries or frontend equipment makers like Frontken Corp Bhd, UWC Bhd and SAM Engineering & Equipment (M) Bhd.  Meanwhile, global semiconductor sales for May 2025 reached US$59.0bil, marking the 19th consecutive month of year-on-year sales growth. 

This came on the back of sustained demand for AI and high-performance computing applications, TA Research said citing data from the Semiconductor Industry Association. (SEMI).  However, media reports indicate that the administration of U.S. President Donald Trump plans to restrict shipments of AI chips to Malaysia and Thailand as part of efforts to curb suspected semiconductor smuggling into China.

At this stage, the proposed rule remains in draft form and is still subject to change. 

"This move is not entirely unexpected, as Trump has previously expressed his intention to implement his own version of an AI diffusion policy. For Malaysia’s technology sector, we do not expect a significant immediate impact, given the local semiconductor industry’s currently limited direct exposure to AI chips.

:However, we are more concerned about the potential long term implications, as such restrictions could hinder the country's ambition to move up the value chain," said TA Research.

In view of the prevailing uncertainties related to U.S. trade policy, TA Research also maintains a Neutral stance on the sector.

"Should the U.S. implement sector-specific tariffs on semiconductors, it could materially impact end-market demand and corporate earnings. On the other hand, we believe the Malaysian government will remain steadfast in executing the National Semiconductor Strategy, with the goal of elevating the country’s position within the global semiconductor value chain," TA Research added.