Hong Leong Investment Bank Research has on Tuesday maintained its overweight stance on the Malaysian technology sector, underpinned by the broadening semiconductor upcycle and sustained earnings momentum.

The research house said in a note that as expected, second quarter earnings season for Malaysia’s tech sector was broadly positive (except for consumer electronics manufacturing services [EMS]), with respective managements’ commentary notably more confident and offering more details about their demand outlook and capacity expansion plans stretching into 2027.

“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,” said Hong Leong.

Nvidia guided to about 70 percent revenue growth in FY28 (January year-end) and framed it as supply-constrained rather than demand-limited.

Broadcom expects artificial intelligence (AI0 revenue to double in each of the next two years on strong custom chip demand from hyperscalers.

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

Likewise, TSMC and the three major memory makers have raised 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 (i) equipment and precision engineering; (ii) optical and photonics; (iii) power semiconductors; and (iv) HDD-related, among others,” said Hong Leong.

Underpinning this demand is the sheer scale of hyperscaler capital expenditure (capex), set to reach $800 billion this year before rising to more than $1.2 trillion in 2027, according to the research house.

“However, the central debate on AI capex has never been about the spending itself (the hyperscalers have both the cashflow 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,” said the research house.

While the AI capex cycle remains strong, Hong Leong opined that a potential US Federal Reserve rate hike would still weigh on near-term sentiment.

“That said, we do not see this 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,” it noted.

Malaysia tech seen entering earnings-driven upcycle despite pullback risks – analysts