The semiconductor industry is notorious for being cyclical.
Demand for microchips and electronics shot through the roof during the pandemic as more people went online to stay in touch with their families and loved ones.
Many corporations also rode on the digitalisation wave and embraced cloud computing.
However, as the pandemic eased and supply caught up with demand, the semiconductor sector entered a cyclical downtrend that began in the second half of 2022.
2023 saw a continuation of the weakness with World Semiconductor Trade Statistics (WSTS) anticipating a single-digit year-on-year contraction in global semiconductor sales.
The good news is that WSTS projects a robust recovery for 2024 with sales growing 13.1% year on year.
Here are five stocks that could potentially benefit from the upturn in the semiconductor cycle.
Micro-Mechanics (Holdings) Ltd (SGX: 5DD)
Micro Mechanics, or MMH, designs and manufactures high-precision tools and parts used in the wafer fabrication and assembly processes in the semiconductor industry.
The group operates five manufacturing facilities in Singapore, Malaysia, China, the Philippines, and the US.
For its first quarter of fiscal 2024 (1Q FY2024) ending 30 September 2023, MMH saw revenue fall 21.5% year on year to S$15.9 million.
Operating profit declined 31.6% year on year to S$3.8 million while net profit plunged 36.4% year on year to S$2.7 million.
The weaker performance was in line with the global semiconductor sales trend.
However, the group enjoyed a slightly higher gross margin of 48.8% in 1Q FY2024 compared with the previous quarter’s 44.7%.
MMH recently started an initiative called “Five-Star Factory” to increase all its factories’ operating efficiency to prepare for the upturn.
Venture Corporation Limited (SGX: V03)
Venture Corporation is a provider of technology products, services, and solutions.
Like MMH, the blue-chip contract manufacturer’s revenue and net profit were impacted by softer demand and inventory adjustments from their customers.
For the first nine months of 2023 (9M 2023), Venture’s revenue fell 18.8% year on year to S$2.3 billion.
Net profit declined by 25.2% year on year to S$203.3 million.
Despite the weaker result, Venture maintained a strong net cash position of S$956 million as of 30 September 2023.
The group is also on track to roll out new product introductions with existing and new customers in 2024.
Looking ahead, management intends to expand the group’s participation in new high-growth technology domains to expand its revenue streams.
Frencken Group Ltd (SGX: E28)
Frencken provides original design, original equipment and diversified integrated manufacturing services to the analytical and life sciences, automotive, healthcare, industrial and semiconductor industries.
For 9M 2023, revenue dipped by 8.4% year on year to S$535.4 million while net profit plunged by 48.2% year on year to S$19.2 million.
The weaker result was because of inflationary pressures and higher depreciation arising from capital investments made to upgrade the group’s manufacturing facilities.
Management believes it can weather the current downturn despite a weak outlook because of its strong balance sheet.
Frencken will also focus on programs for existing and new customers to position itself for a recovery.
UMS Holdings Ltd (SGX: 558)
UMS provides equipment manufacturing and engineering services to original equipment manufacturers of semiconductors and related products.
The group also saw its 9M 2023 revenue and net profit fall in the wake of weaker demand for semiconductors.
Revenue declined by 17% year on year to S$226.4 million with net profit plunging 46% year on year to S$44.3 million.
The group continued to generate a positive free cash flow of S$26.5 million for 9M 2023.
For the quarter, UMS also declared and paid an interim dividend of S$0.012, 20% higher than the S$0.01 paid in the prior year.
CEO Andy Luong posted an optimistic outlook supported by sanguine guidance from major semiconductor equipment makers.
According to UMS, SEMI, an industry association for the semiconductor sector, projects a 2024 rebound that should continue through 2026.
The group also recently completed its new production facilities in Penang and is well-poised to capture this recovery.
New technology innovations, along with the boom in artificial intelligence, should bode well for the sector over the long term.
AEM Holdings Ltd (SGX: AWX)
AEM offers comprehensive semiconductor and electronics test solutions and has a global presence spanning Asia, Europe, and the US.
The test handler reported a 48.2% year-on-year drop in revenue to S$387 million as customers held back on capital expenditures and pushed them to 2024.
Net profit plunged by nearly 97% year on year to S$3.5 million but was impacted by exceptional items including a US$20 million arbitration settlement.
Excluding this item, group profit before tax would have been S$42.6 million.
AEM sees signs of stabilisation in the smartphone and personal computer markets with inventory levels reducing across the board.
Management believes that the generative AI wave should lead to devices with greater complexity, thus necessitating more testing.
These act as long-term tailwinds for the business even as it grapples with the current slowdown.
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Disclosure: Royston Yang owns shares of Micro-Mechanics (Holdings) Ltd.