• Back in 1H24, Gartner projected significant growth in global semiconductor sales for 2024 and 2025, driven by a rebound in AI chips, memory pricing, PCs, smartphones, and consumer devices. However, the performance of downstream electronics industries has been mixed in 2024, with cyclical factors causing a slower recovery.

• Similarly, Venture Corp's 3QFY24 group revenue declined sequentially due to weak demand in Life Science, Lifestyle Consumer, and Test & Measurement Instrumentation tech sectors, partly offset by higher revenue in Networking & Communications and Semiconductor Related Equipment sectors.

• Aztech, Valuetronics and ISDN have shown mixed returns this year, with Valuetronics trading above its 5-year P/S average. Valuetronics is the most geographically diversified of the trio, while ISDN focused on China and Aztech on North America. All three use Manufacturing Execution Systems to boost efficiency, with ISDN focusing on real-time monitoring, Aztech automating workflows, and Valuetronics enhancing control systems.

• Asia remains responsible for 70% of global electronics exports, with the MAS recently relaying ASEAN's share has risen 5pp to 18% since 2015. Aztech and Valuetronics have manufacturing facilities in both China and ASEAN, while ISDN's capabilities are focused in Suzhou and Huzhou, Zhejiang.

From One-Tenth to One-Quarter: The Rise of Global Tech Stocks

Over the past decade, the expanding field of technology applications has driven significant capitalisation growth in global technology stocks, increasing their share in global index benchmarks from one-tenth to one-quarter. In the US, this growth has created a clear valuation divide: the top quartile of tech stocks by market cap, which have the most scale and pricing power, maintain a median P/E of 40x, while the rest of the sector averages around 20x. In comparison, the consumer sector is less fragmented, with the top quartile maintaining a median P/E of 20x, versus 14x for the remainder.

The impact of long-term structural growth and recent cyclical trends is exemplified by the past performance of Venture Corp (SGX:V03), Frencken (SGX:E28), and UMS Integration (SGX:558). These companies averaged -10.6%, +7.5%, and +17.4% in 3, 5, and 10-year annualised total returns through to Nov 20.

These three companies have been the most traded technology stocks listed in Singapore for most of 2H24. However, AEM (SGX:AWX) Holdings displaced UMS Integration (SGX:558) as the third most traded Technology stock in November, coinciding with the company raising its 2HFY24 revenue guidance midpoint by 18%, on a key customer bringing forward some orders from FY25.

Note: All Data as of 20 Nov 2024. Silverlake Axis and Broadway Industrial Group omitted from table due to privatisation offers. 5-year metrics for Nanofilm Technologies and Aztech taken from respective IPOs.

Source: SGX & Refinitiv.

Broad Strategic and Cyclical Drivers

Earlier this year, Gartner projected global semiconductor revenue would grow 18.8% in 2024 and 13.8% in 2025, surpassing US$700 billion, indicating a rebound in PCs, smartphones, and consumer devices, despite weak demand from the automotive and industrial sectors.

This widely cited projection generally paralleled corporate outlooks in Singapore, UMS Integration recently maintained an optimistic outlook for the semiconductor industry, citing industry reports that predict significant improvements in supply chain resilience both in the US and globally.

Two key developments driving the optimism this year are the sustained global interest in AI and the continued efforts by the US and China to boost self-sufficiency in chipmaking. At the TSMC 3Q24 Earnings Call, Chairman and CEO C.C. Wei highlighted the impact of AI, noting that TSMC's use of AI and machine learning has significantly enhanced productivity and efficiency, yielding substantial ROI benefits, such as a 1% productivity gain worth nearly US$1 billion.

Just as much attention this year has focused on the US's strategic initiatives, including potential significant investments from the Chips and Science Act. The Semiconductor Industry Association and the Boston Consulting Group projected in May that US fabrication capacity would triple by 2032, growing its share of global fabrication capacity from 10% to 14%. The report also noted that the US is expected to grow its capabilities in critical technology segments like leading-edge fabrication, DRAM memory, analogue, and advanced packaging. Furthermore, US capacity for advanced logic is projected to increase from 0% in 2022 to 28% by 2032.

As trade policy directives also firm up under the new Trump 2.0 administration in 2025, global attention will also turn to China's efforts to boost domestic semiconductor production in what is expected to be a highly competitive global marketplace. Most players in the global value chain are likely to encourage certainty and consistency in the implementation of government policies, funding, and trade restrictions.

However, the above projections and structural developments coincided with significant challenges for the downstream electronics industry, including the global trade downturn and semiconductor slump of 2022-2023, compounded by inflation, high interest rates, and geopolitical uncertainties.

As relayed by AEM (SGX:AWX) in its 3QFY24 Business Update, the semiconductor industry has been experiencing mixed fortunes this year. AEM notes that sectors like AI and high-performance computing are thriving, but other segments such as smartphones, automotive, traditional computing, and industrial applications are struggling with a slower-than-expected recovery.

Grand Venture Technology (SGX:JLB) also highlighted in its 9MFY24 Business Update that this year's sales growth was most prominent in its semiconductor segment, with sales increasing 51% from 9MFY23.

Venture Corp (SGX:V03) noted that its 3QFY24 (ended Sep 30) group revenue declined sequentially, primarily due to weak demand in the Life Science, Lifestyle Consumer, and Test & Measurement Instrumentation tech sectors. However, this was partially offset by increased revenue in the Networking & Communications and Semiconductor Related Equipment sectors, where growth initiatives led to improved performance.

Mixed fortunes have seen multiple players in the value chain focus on continued cost efficiency and optimisation. Advanced Info Services plc maintained this has helped strengthen its core foundation and operational efficiency for profitability. The recent cyclical challenges have coincided with nine of the 10 most traded Singapore technology sector stocks all trading at P/S multiples below 5-year averages as detailed in the table above.

Aztech, Valuetronics & ISDN's Future-Ready Strategic Moves

Aztech (SGX:8AZ), Valuetronics (SGX:BN2) and ISDN (SGX:I07) generated mixed total returns this year, at -14.0%, 12.8% and -18.2% with Valuetronics the one stock of the 10 tabled above that is trading at a Price-to-Sales (P/S) multiple above its 5-year average.

A key difference among the three stocks is that

• ISDN reports the majority of its revenue to China.
• Aztech reports the majority of its revenue to North Asia.
• Valuetronics is the most geographically diversified of the trio with 40% revenue reported to the United States and 20% reported to China.

All three companies maintain integrated solution lines that encompass technology design, manufacturing, testing, and packaging. Their delivered solutions include Aztech's IoT devices like security cameras, ISDN's industrial automation systems, and Valuetronics' transaction printers and sensing devices.

Additionally, engineering expertise and advancing technology enable these businesses to offer an ever-expanding range of innovative solutions to customers.

• Aztech maintain that proactive customer engagement has led to a strong pipeline of new products, expanding its New Product Introductions portfolio in 3QFY24 with 10 new products in the communication, consumer, health-tech and industrial segments, some of which are scheduled for commercial production from 4QFY24.
• ISDN is actively venturing into the hydro power and solar-energy sectors in Asia, with three hydropower plants now operating in North Sumatra.
• Meanwhile, the influx of Valuetronics' Industrial and Commercial Electronic customers, who use the products for industrial applications or further processing before shipping to end consumers, has shifted their main revenue source away from Consumer Electronics in recent years.

Operational Footprints of ISDN, Aztech, and Valuetronics: From China to ASEAN

The MAS October 2024 Macroeconomic Review maintained that as of 2023, Asia has maintained a 70% share of global electronics exports while ASEAN's share increased by 5 percentage points from 2015 to 18%. McKinsey notes examples of completed products include mobile devices, computers, and broadcasting equipment.

Aztech and Valuetronics operate manufacturing facilities in both China and ASEAN, while ISDN's manufacturing capabilities are concentrated in its campuses in Suzhou and Huzhou Zhejiang, China.

• Aztech has four R&D centers, located across Singapore, Hong Kong and China (Shenzhen and Dongguan) and three manufacturing facilities located across China (Dongguan), and Malaysia (Gelang Patah Johor and Pasir Gudang).
• Valuetronics' 110,000 sqm China Campus is located at Huizhou City, close to Shenzhen, while its 52,541 sqm Vietnam Campus is in Vinh Phuc Province, close to Hanoi. The two campuses enable Valuetronics to offer diversified manufacturing solutions that are tied to the latest technological advancements.

The Hinrich Foundation maintain that Emerging ASEAN countries are strategically positioned along key trade routes and near major markets, making them vital to China plus one strategies.

MES Innovations and ROE Trends of Tech Stocks

Aztech, Valuetronics and ISDN have been enhancing their manufacturing operations with Manufacturing Execution Systems (MES), leveraging software to increase production efficiency.

• ISDN's MES focuses on efficient operational management, real-time production monitoring, AR-based training, and supply chain agility.
• Aztech has implemented a MES to automate workflows at Surface Mount Technology lines and is integrating its systems to collect real-time shop floor data, enabling informed decisions to enhance production processes, yields, transparency, traceability, and lean manufacturing.
• Valuetronics has also extended its MES into a 'Smart Manufacturing Control' system for real-time data monitoring, automation, and error reduction, enhancing overall operational performance.

Gauging both profitability and efficiency in generating profits, the most recent FY ROEs for the three companies have declined from their previous peaks. This has coincided with the global semiconductor downcycle that has spanned mid-2022 through 2023.

• Aztech held the highest ROE at 32% for the trio in the latest fiscal year (FY23), down from 44% in FY21.
• Valuetronics' ROE for FY24 (ended March 31) was 12%, compared to 15% in FY20 and 20% in FY18.
• ISDN's FY23 ROE was 2%, significantly lower than its 14% ROE in FY21.

These recent ROE peaks have mirrored the respective share price highs in recent years, with

• Aztech's share price reaching S$1.56 in 2QFY21,
• Valuetronicc' share price hitting S$0.86 in 4QFY20 (and S$1.12 in 4QFY18), and
• ISDN's share price reaching S$0.85 in 3QFY21.

Looking ahead to 2025,

• Aztech intends to enhance its design and manufacturing capabilities, diversify its customer base, and explore M&A opportunities.
• Valuetronics also plans to seek new opportunities with existing customers and expand its customer base, leveraging its integrated manufacturing solutions in Vietnam to address evolving demands and geopolitical uncertainties.
• ISDN maintains it is positioned to capitalise on a cyclical recovery and long-term growth, bolstered by its core capability build-up during the downturn, and rising demand for industrial automation.