Wafer equipment upcycle drives tech optimism

PETALING JAYA: Analysts remain constructive on the technology sector, underpinned by record semiconductor demand, a multi-year wafer fab equipment (WFE) upcycle and sustained artificial intelligence (AI) infrastructure spending.

Kenanga Research said in a note that its recent Penang and Johor visits reinforced this view, with demand broadening across semiconductor equipment, inspection, storage and data-centre infrastructure, while capacity constraints are becoming more apparent.

“With many new programmes still undergoing qualification or in the early stages of ramp-up, we see financial year 2027 as a key earnings inflection year for the sector,” the research house told clients in a report.

That said, the research house said it believes the next phase of re-rating will increasingly be driven by execution and earnings conversion rather than AI exposure alone.

“Investors are likely to place greater emphasis on customer qualification, equipment installation, utilisation ramp-up and tangible earnings contribution.

“Intermittent profit-taking remains possible, and we see macro headwinds, including elevated bond yields, tighter financial conditions and geopolitical risks, as the key near-term threats rather than weakening industry fundamentals,” the research house said.

Kenanga Research noted that the local technology sector has enjoyed a strong rally since January, driven in part by renewed optimism surrounding the AI investment cycle.

“Looking ahead, however, we believe AI-related exposure alone will be increasingly insufficient to justify premium valuations, with investors likely to place greater emphasis on whether AI-related investments are translating into tangible financial returns,” it said.

“While announcements of new AI facilities, production lines or capacity expansion may continue to generate initial market interest, we see a more compelling and sustainable investment case in companies that can demonstrate clear execution milestones – from customer qualification and equipment installation to utilisation ramp-up, revenue contribution and ultimately earnings growth,” Kenanga Research further added.

“In our view, the next phase of sector re-rating is therefore likely to be increasingly driven by AI earnings conversion rather than AI exposure alone,” the research house said.

It said the recent meetings across Penang and Johor reinforced its view that the technology upcycle is gaining momentum, with management confidence noticeably stronger and demand increasingly running ahead of what the supply chain can currently deliver.

“What stood out to us is not just the strength of orders, but also the breadth of the recovery, with demand emerging across semiconductor equipment, inspection, storage and data-centre infrastructure rather than being driven by a single product or customer.”

Kenanga Research said capacity is increasingly becoming the bottleneck, with companies adding machines and expanding facilities to keep pace with customer requirements, while those with readily available and qualified capacity better positioned to capture near-term opportunities.