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Chip recovery to help manufacturing turn corner in 2024

Douglas Toh
Douglas Toh • 10 min read
Chip recovery to help manufacturing turn corner in 2024
Global semiconductor sales set to jump in the teens this coming year
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Following a downtrend of more than a year, Singapore’s electronics manufacturing sector looks poised for a recovery in the coming year.

The key semiconductor segment has already seen bottoming and is staging a return. In October, the semiconductor segment expanded 17.8% y-o-y, extending the 16.5% y-o-y growth recorded in September. In contrast, this segment contracted 25.2% in August, according to figures from the Economic Development Board.

In a nod to the highly volatile nature of the industry, the semiconductor segment in October also grew much faster than the 7.4% growth for total manufacturing output.

Maybank’s Chua Hak Bin and Brian Lee Shun Rong see green shoots emerging. “Global electronics demand in recovering, driven by a replacement cycle with new models and upgrades; depleting US inventories; and generous US subsidies on semiconductors and vehicles,” write the economists in their Dec 11 note.

In a Dec 4 report, research firm Gartner expects the industry to decline 10.9% to US $534 billion ($716 billion). “We are at the end of 2023, and strong demand for chips to support artificial intelligence (AI) workloads, such as graphics processing units (GPUs), is not going to be enough to save the semiconductor industry from double-digit decline in 2023,” says Gartner analyst Alan Priestley.

“Reduced demand from smartphones and PC customers coupled with weakness in spending on data centres and hyperscalers are influencing the decline in revenue this year.”

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However, for the coming 2024, global revenue for the industry is seen to jump by 16.8% to US $624 billion. The growth, says Gartner, will be driven by a projected double-digit growth in the memory sub-segment of the semiconductor market.

On the other hand, the growth in graphics processing chips, led by the current AI frenzy, will continue in the new year.

In its separate report on Nov 28, the World Semiconductor Trade Statistics (WSTS) predicted a similar trend to that which Gartner has painted. The auto and industrial segments are seen to account for a bigger share of the growth in demand in the near term but AI-related applications, requiring more computing muscle, will be the longer-term drivers, says WSTS.

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This year, global sales of semiconductors could fall 9.4% y-o-y to US $520 billion but rebound 13.1% y-o-y to US $588 billion next year. This current forecast is a slight upgrade from the projections made in June when WSTS expected 2023 to end with a drop of 10.3% over 2022 and for 2024 to see an 11.8% increase over 2023.

The bullish industry projections have inspired CGS-CIMB Research’s analyst WilliamTng to upgrade his call on the semiconductor sector to “overweight” from “neutral” previously.

Besides the worldwide recovery, which is seen to accelerate into 2025, Tng expects the Singapore-listed semiconductor stocks, with their regional network of operations, to benefit from specific localised trends. “Suppliers supporting the semiconductor industry would continue to benefit from trade diversion into Malaysia, given the ongoing US-China geopolitical tension,” states Tng in his Dec 6 report.

Frencken Group

He has a favourable call on three semiconductor-linked stocks under his coverage. Frencken Group E28 -

, which generates 40% of its business from semiconductor clients, could potentially enjoy double-digit earnings growth thanks to a “nascent recovery”. Frencken had already reported better-than-expected earnings in 3QFY2023 ended September as it was able to eke out better margins, inspiring Tng to raise his FY2023 earnings forecast for Frencken by 6.9%.

His target price of $1.37 is pegged to 12.2 times forward earnings multiple.

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For Tng, potential re-rating catalysts for Frencken include a “less severe” slowdown in its semiconductor business segment, better cost controls and greater concessions from customers on cost pass-throughs while downside risks include further cost escalations and a continued weakening in semiconductor demand.

DBS Group Research is similarly positive on Frencken. It expects net margins to further improve from 3.9% in 3QFY2023. A rebound starting from 2024 through 2026 will be driven by demand from AI, high-performance computing, 5G, automotive and industrial applications, says DBS.

AEM Holdings

CGS-CIMB’s Tng is also positive on AEM Holdings AWX -

, arguably the most direct local player in the semiconductor sector. Besides providing testing services for Intel Corp, it is winning new customers. In its 3QFY2023 ended September business update, AEM reported a 96.9% y-o-y drop in its earnings.

Besides lower volume, it had to account for a legal settlement too.

Even so, Tng is seeing “solid” earnings growth for the coming FY2024 and FY2025.

From an earlier target price of $3.28, Tng values AEM at $3.76 per share. Existing significant shareholders of AEM, UK asset manager abrdn and Employment Provident Fund of Malaysia, have both added to their respective stakes. EPF, in particular, now owns 34.43 million shares, equal to 11.146% of the company. Temasek Holdings, its largest shareholder, holds 37.2 million shares.

Tng says stronger-than-expected orders from AEM’s major customer and a ramp-up in new customer orders could be catalysts for re-rating.

Downside risks include a further pushback in the delivery timeline for its customers, slower global economic growth and slowing customer demand, he adds.

UMS Holdings

UMS Holdings, the integrated original equipment manufacturer (OEM) for front-end semiconductor equipment, has garnered a similar sense of optimism from analysts as the decline of its revenue in 3QFY2023 ended September slowed yet again. In 3QFY2023, UMS reported earnings of $15 million, 64% lower y-o-y and 32% higher q-o-q, in line with what UOB Kay Hian’s John Cheong had projected.

In his report, Cheong sees a “buoyant outlook” for the company, supported by the “sanguine guidance” of key semiconductor makers expected to deliver sustainable outperformance going forward. DBS agrees, noting that the quarterly decline of revenue has narrowed to 4.2% in 3QFY2023 from a decline of 7.9% in 2QFY2023 and 20% in 1QFY2023.

Similarly, Tng has also kept his “add” call on UMS with an unchanged target price of $1.49, citing its potential for earnings growth by an average of 18.1% over FY2024–FY2025.

Another plus point is UMS’s early success in customer diversification, where an unnamed new customer is seen to contribute sales of at least US$30 million in the coming FY2024.

Aside from securing new customers, Tng includes improving factory utilisation rates, return of orders for aircraft components benefitting UMS’s aerospace division and better-than-expected cost management as catalysts. Conversely, downside risks largely constitute the opposite, as well as an increase in price competition from other suppliers in UMS’s Penang operations as the market ramps up efforts to secure business with semicon companies that have recently expanded there.

Manufacturing ambitions

Notably, UMS’s key client is leading global semiconductor equipment manufacturer Applied Materials, which has been based in Singapore for more than 30 years and whose overall output in the city-state accounts for around 50% of global semiconductor equipment.

“Locally, there is a comprehensive base of activities across the semiconductor value chain from global players to small-to-medium enterprises, enabling the ongoing growth of equipment and materials suppliers, design houses and test and packaging operations,” says Ong Kay Chong, corporate vice-president and head of worldwide manufacturing at Applied Materials.

US-headquartered Applied Materials is by no means the only global semiconductor firm with a significant presence in Singapore. For decades, the government has wooed semiconductor companies to set up shop in the city-state to increase dollar-earning exports and create jobs with decent wages.

As regional competition intensifies, Singapore is compelled to constantly make sure its manufacturing ecosystem remains attractive. Back in December 2020, a $25 billion R&D budget for the industry was announced and at this year’s iteration of the Industrial Transformation Asia-Pacific conference, deputy prime minister and coordinating minister for economic policies, Heng Swee Keat, spoke on the country’s intentions of further fortifying its manufacturing output, which is made up mostly of semiconductor fabrication.

“In Singapore’s case, manufacturing accounts for around 20% of GDP. It is now over $130 billion and we aim to grow this to around $160 billion by 2030,” says Heng.

Applied Materials’ Ong adds that many “cutting-edge” semiconductor research and development activities are conducted in Singapore, such as those by the Singapore Institute of Microelectronics (IME). Skilled people to operate these facilities come from specialised education and training in semiconductor-related fields at the Singapore Institute of Technology (SIT) and Nanyang Technological University (NTU).

Although the outlook for the industry looks rosy next year, Ong flags several challenges that will manifest in the long term. The designs of chips are getting more complex while the pace of miniaturisation has slowed as engineers seek the next big breakthrough. As R&D costs grow in the effort to create new designs and refine new manufacturing techniques, theindustry also faces a talent shortage.

Citing a report by Deloitte, he says that the global semiconductor industry will need more than one million additional skilled workers by 2030. “In this environment, attracting and retaining top talent in the semiconductor industry is paramount to maintaining technological leadership and innovation,” says Ong.

Manufacturing takes a multi-pronged approach

The semiconductor — and the broader electronics sector for that matter — is not the only component of Singapore’s manufacturing muscle. This multi-pronged approach is part of a deliberate diversification of manufacturing activity. Various other industry segments have at varying points in time pulled their own weight or helped make up for the slack in manufacturing. But challenges remain.

According to the Ministry of Trade and Industry (MTI) on Nov 22, Singapore’s manufacturing sector shrank 4.6% y-o-y in 3Q2023, a deceleration from the drop of 7.6% y-o-y suffered in 2Q2023. Adding to tentative signs of a bottoming-out, on a q-o-q and seasonally-adjusted basis, the sector expanded 0.5% in 3Q2023 versus a contraction of 1.5% in 2Q2023.

In October, the manufacturing sector recorded 9.8% m-o-m growth, extending 13.1% m-o-m in September.

“Our view for Singapore’s manufacturing momentum to strengthen into 4Q2023 has materialised very nicely,” says RHB’s acting chief economist Barnabas Gan.

Within the manufacturing sector, the recovery is uneven across the different industry segments.

In October, the biomedical manufacturing segment managed an increase of 5.1% y-o-y. Specifically, the medical technology segment increased by 8%, thanks to heightened export demand for medical devices, while the pharmaceuticals segment also saw a 3.3% y-o-y uptick due to a shift in the composition of active ingredients used.

General manufacturing output showed a 4.3% y-o-y advancement, while the food, beverage and tobacco segment experienced a notable 6.7% increase as did miscellaneous industries, which posted a 4.8% increase, thanks to more construction-related materials sold.

Conversely, the chemicals segment dipped 1% y-o-y, partly due to a 9.9% contraction in the petrochemicals sub-segment because of plant shutdowns for maintenance.

On a year-to-date basis, the output of the chemicals cluster contracted 8.5% compared to the same period a year ago.

Lastly, output in the precision engineering segment declined by 2.2% y-o-y, largely influenced by a 20.5% drop in the precision modules and components segment while machinery and systems production increased 3.3%, buoyed by stronger demand for semiconductor-related equipment. On a year-to-date basis, the precision engineering cluster contracted 7.6% compared to the same period a year ago.

If the MTI economists are correct, the manufacturing sector is indeed picking up. As GDP growth in the US and the eurozone looks set to slow in 1H2024 due to continued tight financial conditions, a gradual pick up in 2H2024 could coincide with a dissipation in the post-pandemic demand for services. “This, alongside a normalisation of inventory levels, is likely to support a turnaround in global manufacturing activity for the year.

In particular, global electronics demand is projected to recover, which will bolster the growth of most regional economies,” says MTI.

However, with the latest data, DBS economist Chua Han Teng is flagging a “gradual and fragile recovery” this coming year. While electronics manufacturers can anticipate “better business conditions” from the “modest turnaround” in global semiconductor sales, following inventory digestion, they must remain alert for lingering geopolitical risks that could disrupt supply chains.

Despite the gradual growth expected, Chua continues to observe the challenging global economic environment for potential downside risks that could derail or delay Singapore’s recovery.

Chua says that high-for-longer interest rates in advanced economies to curb inflation could result in much weaker-than-expected global economic growth.

In addition, China’s post-pandemic recovery remains bumpy and faces headwinds in the real estate sector.

“Lastly, geopolitical risks from ongoing wars to US-China tensions, notwithstanding some progress after the Biden-Xi Summit, continue to linger and could still disrupt supply chains,” he adds.

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