Tech sector rally expected to spur rotation

PETALING JAYA: The technology sector could see pockets of correction after its strong rally, particularly among counters that have experienced a sharp surge.

Nevertheless, the sector still has more to offer, with companies guiding for stronger quarters ahead and investors rotating towards smaller-cap and laggard tech counters, says Rakuten Trade head of equity sales Vincent Lau.

He said the laggards include Dagang Nexchange Bhd and SNS Network Technology Bhd, which could offer further upside as their valuations remain relatively attractive and their share prices have yet to catch up with the broader tech rally.

“Investor interest is gradually shifting towards the second-liners, particularly smaller-cap technology companies that have yet to see a meaningful re-rating.

“These also include Elsoft Research Bhd, Cnergenz Bhd and Crest Group Bhd,” he told StarBiz.

Lau said most technology companies’ results for the second quarter ended June 2026 (2Q26) were largely in line with expectations.

“ViTrox Corp Bhd, Pentamaster Corp Bhd and Unisem M Bhd all delivered very strong numbers and are guiding for stronger quarters ahead.

“The earnings trajectory is there, and artificial intelligence (AI) demand remains strong.

“Players like Stratus Global Holdings Bhd and Skyechip Bhd are also fairly strong, and even Oppstar Bhd has turned around.

“Hence, there is depth in the sector, with more to come,” he said.

Hong Leong Investment Bank (HLIB) Research said in the near term, Anthropic’s pending S-1 should offer a first read on AI monetisation, while a potential US Federal Reserve (Fed) rate hike is a sentiment risk.

Although these factors would likely not lead to a cut in sector exposure, the research house said it is expecting rotation towards names with stronger earnings visibility and positive revision momentum.

“The global bellwethers put hard figures on the upcycle this quarter, which, in our view, add more conviction to the sector’s medium-term earnings visibility.

“Nvidia guided to about 70% revenue growth in the financial year 2028 (January year-end) and framed it as supply-constrained rather than demand-limited.“

Broadcom expects AI revenue to double in each of the next two years on strong custom chip demand from hyperscalers.

ASML is adding 30% lithography capacity for 2027 (fully booked), with a further 30% under evaluation for 2028 (substantial order book already in hand).

Likewise, TSMC and the three major memory makers have raised capital expenditure (capex) guidance and continue to expand aggressively.

“These commitments cascade through the entire supply chain and are already visible in the forward outlook guided by Malaysian players – particularly those involved in equipment and precision engineering; optical and photonics; power semiconductors; and hard disk drive-related, among others,” HLIB Research said.

The research house said underpinning this demand is the sheer scale of hyperscaler capex, set to reach US$800bil this year before rising to more than US$1.2 trillion in 2027.

However, HLIB Research noted the central debate on AI capex has never been about the spending itself as hyperscalers have both the cash flow and the balance sheet capacity to fund it), but about whether the returns are sufficient to justify it.

“Beside the cloud revenue growth disclosed by the hyperscalers, we will soon get a clearer read on the scale and economics of the AI frontier lab themselves, with Anthropic’s S-1 filing for initial public offering due to be made public soon,” the research house said.

On the potential rate hike from the Fed, HLIB Research said it does not see it triggering a material reduction in sector exposure – inflationary pressures may yet recede, and the opportunity cost of being underweight into a capex upcycle is high.

“We would likely see more rotation within the sector, in favour of names with stronger earnings visibility and positive revision momentum that is not yet fully reflected in valuations.

“We therefore continue to prefer companies where earnings growth can outpace multiple expansion.”

HLIB Research rolled forward the valuation base year across its coverage to mid-2028 (from 2027), while taking a disciplined approach to modestly trim its target multiples.

All in all, this led to a modest increase in its target prices (TP), except for a slight decline in SkyeChip.

The research house maintained an “overweight” stance on the local technology sector, underpinned by the broadening semiconductor upcycle and sustained earnings momentum, with its top picks for technology hardware being ViTrox (TP: RM10.50), UWC Bhd (TP: RM7.70), and SAM Engineering & Equipment (M) Bhd (TP: RM6.15), given their stronger earnings visibility and positive revision momentum.

“Separately, we view the recent pullback in Itmax System Bhd as an opportunity to accumulate, as the weakness appears driven more by broader concerns around politically-linked stocks, while earnings delivery remains solid,” HLIB Research said.