AI-Driven Re-Rating Expected for Tech Sector

PETALING JAYA: Malaysia’s technology sector looks set to remain on a firm growth trajectory as artificial intelligence (AI) adoption broadens across the semiconductor supply chain and demand for higher- value solutions accelerates.

Investors are also likely to watch for fresh catalysts in the second half of 2026 (2H26) that could further lift valuations and reinforce confidence in the sector.

CIMB Research said several developments are lining up to support a re-rating of Malaysian technology stocks over the coming months.

“Near-term re-rating catalysts in 2H26 include an earnings upgrade cycle, the potential inclusion of tech stocks in the FBM KLCI if it expands to 50 constituents (from 30 currently), ringgit depreciation against the US dollar, and election-year domestic demand uncertainty,” the research house explained.

“Together, these factors point to sustained investor sentiment and potential price-earnings multiple expansion in the sector,” it added.

The research house retained an “overweight” rating on the technology sector, forecasting a three-year revenue compound annual growth rate (CAGR) of 10% between 2025 and 2028, supported by a broad-based recovery across the automated test equipment (ATE), outsourced semiconductor assembly and test (Osat), and electronics manufacturing services (EMS) segments.

The research house expects the ATE segment to lead earnings growth with a projected core net profit CAGR of 60% over the period, followed by EMS at 40% and Osat at 20% – resulting in an overall sector core net profit CAGR of 30%.

However, CIMB Research pointed out that currency movements remain a key risk, particularly for export-oriented companies.

It added that Osat players are the most exposed, with every 10% appreciation in the ringgit potentially reducing earnings by 30% to 40%, while EMS companies are relatively insulated through cost pass-through arrangements.

Following a technology tour in Penang involving 13 institutional investors from Malaysia and Singapore, the research house observed that artificial intelligence (AI) participation is expanding beyond chip manufacturing into multiple layers of the ecosystem.

“Our key takeaway is that Malaysia’s AI exposure is broadening, with more companies participating across different layers of the AI infrastructure supply chain.”

Among its preferred stocks, CIMB Research continues to favour Malaysian Pacific Industries Bhd, maintaining a “buy” call with a target price (TP) of RM57, citing expanding exposure to industrial applications, growing demand for general-purpose servers, stronger content in AI power semiconductors and opportunities arising from the Carsem Bangkok acquisition.

It also remained positive on Vitrox Corp Bhd for its exposure to the ATE segment, supported by strong demand, an upcoming product refresh cycle and tax incentives from the Malaysian Investment Deve-lopment Authority, alongside expectations of margin recovery in 2026.

Meanwhile, Inari Amertron Bhd is retained as a “buy” with a TP of RM2.65, with the research house viewing the company as undervalued relative to domestic Osat peers.

The research house believes new radio frequency content wins and the Inari Semiconductor Lab will underpin earnings expansion through the 2027 to 2028 financial years.

The research house also identifies silicon photonics as an emerging growth theme, saying it is becoming increasingly critical as AI clusters require faster optical interconnects.

“Beyond near-term AI demand, we believe integrated circuits design and advanced packaging offer structural growth potential for Malaysia’s semiconductor industry,” it said.

“Government-backed initiatives such as the Malaysian Advanced Packaging Consortium are strengthening collaboration across chip design, equipment, materials, and Osat players, helping accelerate domestic advanced packaging capabilities,” it added.

Meanwhile, one analyst said investor sentiment towards the technology sector should remain constructive as earnings improve and AI-related demand broadens across the supply chain.

“Companies that can capture new rising opportunities are likely to outperform over the medium term,” he noted.

– The Star