Tech players likely to post strong 3Q showing

PETALING JAYA: Locally listed technology companies are seen to deliver for the upcoming third-quarter reporting period on strong seasonality factors and the absence of chip tariffs thus far.

Hong Leong Investment Bank Research (HLIB Research), however, warned that any decision by the United States to impose tariffs on this sector could cause a reset in its overall valuations.

It noted that sector valuations had already rerated sharply with the KL Technology Index having risen some 63% since their April lows, which leaves little room for error and places stricter scrutiny on both earnings delivery and guidance this time around.

“The key overhang for the sector remains the outcome of the US-China trade negotiations (Nov 10 deadline) and Section 232 tariff review (which has the Dec 27 deadline).

“After numerous delays, investors have largely put it behind them, showing muted reaction even as recent news reports surface on this matter.

“We still see Section 232 outcome as a key event risk that could affect sector outlook and sentiment, as the market looks ahead to 2026,” it said.

The research house maintained its “neutral” stance on the tech sector and has advocated for investors to stay selective.

“Since local tech share prices had a good rally in recent months, we wait for the results season to pass for the opportunities to revisit some of our calls. For now, we continue to favour domestic-focused names, with ITMAX System Bhd and SMRT Holdings Bhd as our top picks.

“This is underpinned by resilient recurring revenue bases and structural growth drivers, including smart city systems and Tenaga Nasional Bhd grid upgrades,” HLIB Research said.

“Within tech hardware, we maintain preference for companies with exposure to foundries and front-end equipment makers, namely, Frontken Corp Bhd and UWC Bhd,” it added.

Meanwhile, HLIB Research said there are epectations of a memory upcycle into 2026-2027 years that’s being underpinned by tightening supply in NAND and DRAM as capacity is diverted for artificial intelligence type of chips.

This is driving higher growth assumptions for wafer fab equipment (WFE) capital expenditures, it noted.

“Offsetting this optimism is the risk of further restrictions on WFE sales to China, which was indicated earlier by Applied Materials, a market that still accounts for 20% to 35% of sales for the leading equipment makers.

“While the datapoints to watch out for are capital expenditures guidance from memory chipmakers including Samsung, SK Hynix, Micron; and commentary from WFE manufacturers such as Lam Research and Applied Materials,” it said.

Also, it noted Malaysian outsourced semiconductor assembly and testers such as Unisem Bhd and Malaysian Pacific Industries Bhd are now trading at above their five-year price to book level averages, which implies the market is already pricing in a strong cyclical recovery for analog semis.

But the research firm expects a more gradual recovery instead, as tariff risks are likely to cloud the outlook, especially for automotive and industrial end-markets.