RHB Investment Bank expects Malaysia technology sector’s momentum to remain intact into the second half, supported by robust supply chain order flows amid elevated artificial intelligence (AI) infrastructure spending, an improving earnings growth trajectory, and positive management guidance.

The research house said in a note on Monday that the sector is supported by robust orderbook growth trends and loadings amid the industry upcycle.

Such positive factors would be underpinned by the ongoing global semiconductor upcycle, driven by high-performance computing, power semiconductors, and a recovery in automotive demand.

It noted the upcycle is becoming increasingly broad-based, extending beyond the logic and memory segments that dominated the sector over the past two years.

This is reinforced by Malaysia’s electrical and electronic (E&E) export growth, which surged significantly to MYR 468 billion ($115.36 billion) in the first half, jumping 43 percent year on year and contributing over half of the nation’s total export growth.

RHB’s recent ground checks across the Penang technology supply chain reinforce its high conviction view that the sector is firmly entrenched in a multi-year upcycle – one which could extend into FY27.

This momentum is anchored by robust factory loadings, expanding orderbooks, and bullish customer forecasts, predominantly driven by the accelerating AI ecosystem.

In particular, automated test equipment (ATE) manufacturers and engineering support service providers continue to report record-high order backlogs.

This strength is underpinned by rising front- and back-end semiconductor equipment demand, escalating chip design and packaging complexity, and the rapid evolution of specialized testing protocols and higher-density boards.

Concurrently, outsourced semiconductor assembly and test (OSAT) players — especially those exposed to mission-critical AI peripherals such as power semiconductors, networking such as optical transceivers, and high-speed switches — remain prime beneficiaries of strong structural demand and widening operating leverage.

“That said, their performance will inherently diverge according to specific client and application exposures,” said RHB.

Meanwhile, it noted the electronics manufacturing services (EMS) segment has clearly bottomed out, with order visibility improving on the back of inventory normalization and project overflow from global Tier-1 EMS players.

Furthermore, stronger seasonal demand in the second half is expected to steadily lift capacity utilization rates and support a meaningful margin expansion, it added.

In the front-end design space, RHB said domestic integrated circuit (IC) design houses are witnessing a sharp uptick in project enquiries.

This is significantly catalyzed by strategic access to the ARM Flexible Access (AFA) program and Compute Subsystems (CSS), which dramatically expedites design turnaround times while lowering initial capital expenditure and execution risks.

In parallel, it sees select enterprise software and domestic-focused information technology (IT) providers remain well insulated and uniquely positioned to capture the secular growth in government spending, corporate digitalization, cloud migration, AI deployment, and mission-critical cybersecurity spending.

:Nonetheless, near-term operational headwinds persist across the value chain. Widespread supply-side component tightness — spanning multi-layer ceramic capacitors (MLCCs), specialized motors, and memory chips — poses delivery risks for ATE equipment and could temper the capacity ramp-up schedules of OSAT and EMS operators due to the long lead times,

“Compounding these hardware bottlenecks is a persistent shortage of high-tier engineering talent, which continues to drive up recruitment and retention costs across the entire ecosystem,” said the research house.

Looking ahead, RHB expects the majority of the technology supply chain’s earnings performance to strengthen year on year and quarter on quarter.

This should be underpinned by healthy order backlogs, robust factory loadings, steady project execution, and accelerating billings amidst the ongoing sector upcycle.

“This positive earnings trajectory is set to sustain into the second half, further buoyed by the seasonal ramp-up in global smartphone product cycles — which typically gains traction towards the tail-end of the second quarter — providing substantial volume support,” said RHB.

In addition, a favorable quarter on quarter movement in foreign exchange rates (the USD strengthening against the MYR) should serve as an operational tailwind, thereby enhancing exports, expanding operating margins, and lifting bottom line growth.

“While select OSAT, EMS and IC design players may exhibit isolated quarter on quarter or year on year moderation, we believe any relative underperformance should largely be idiosyncratic — stemming from company-specific execution issues or high-base comparisons — rather than a deterioration in broad industry fundamentals,” said RHB.

It is noted that Semiconductor Industry Association SIA has raised its forecast for global semiconductor sales, projecting 89.9 percent growth in 2026 to reach $1.5 trillion, led primarily by the memory segment on stronger average selling prices (ASPs) and robust demand.

Growth forecasts for the logic, micro and analogue IC sub-sectors were also revised upwards, while that for the optoelectronic and sensor segments were toned down.

“Overall, we expect a broader-based semiconductor upcycle across most product categories in 2026,” said RHB.

It forecasts the global semiconductor market to grow by a further 27 percent year on year into 2027, citing the continued deployment of AI systems, advanced computing infrastructure, and expanding semiconductor content across end-markets that are expected to support the ongoing industry momentum.

Improving visibility in the ATE market and strengthening front-end semiconductor activity further reinforce expectations of a sustained industry upturn, it added.

SEMI also reported that global semiconductor equipment billings rose 14 percent year on year to a record $36.6 billion in the first quarter of 2026, driven by continued AI-related investments, capacity expansion, and technology upgrades across leading-edge logic, DRAM and advanced packaging.

This supports its projection for global semiconductor equipment spending to increase 10 percent year on year to $138 billion in 2026, across both the front-end and back-end manufacturing spaces.

Meanwhile, FY26 capital expenditure (capex) estimates for the Magnificent 7 hyperscalers continue to trend higher, with the consensus raising estimates for Alphabet (+49.8 percent), Microsoft (+46.2 percent), Meta (+25.2 percent) and Amazon (+12.7 percent), said RHB.

Upward revisions have also extended into FY27 at +57.8 percent, +39.3 percent, +32 percent and +15.1 percent of the respective companies mentioned, reinforcing expectations of a sustained AI infrastructure buildout.

In contrast, Apple’s FY26 (-6.3 percent) and FY27 (-8.7 percent) capex estimates have been pared down – reflecting its capital-light AI strategy, which emphasizes on device AI and selective cloud partnerships over large-scale AI-data center investments.

“With Alphabet already raising its FY26 capex guidance, upcoming earnings from Microsoft, Meta and Amazon will be key to validating consensus expectations. Sustained AI spending should continue to support front-end WFE before flowing through to advanced packaging, HBM, testing and OSAT, underpinning semiconductor demand into FY27,” said RHB.

For RHB, the structural growth outlook for advanced packaging, power semiconductors, and networking devices remains highly favorable – driven by the insatiable compute and energy demands of generative AI workloads and multi-tenant hyperscale clouds, which has ignited new semiconductor growth catalysts.

Meanwhile, a profound market transition from a heavy reliance on traditional automotive electric vehicle (EV) pipelines to powering massive AI-DC architectures places an absolute premium on hyper-efficient energy conversion and unprecedented interconnect bandwidth.

As AI rack power densities skyrocket past 100kw and individual accelerators draw immense currents, the research house sees traditional power delivery networks face severe thermal and resistive bottlenecks.

To combat this, it noted the industry is rapidly scaling wide-bandgap (WBG) materials like SiC and GaN. These materials enable highly efficient high-voltage rectification and high-frequency intermediate power conversion, drastically shrinking the footprint of DC power supplies and mitigating severe grid-to-core power losses.

Because monolithic silicon dies have reached their physical reticle limits, it said scaling compute power now requires heterogeneous integration. Advanced 2.5D and 3D packaging technologies are being utilized to stitch together multiple specialized chiplets and HBM stacks onto high-density interposers, utilizing direct copper-to-copper micro-bumps and intricate thermal management to sustain the immense heat and data flow within these microscopic super-chips.

Similarly, the evolution expands from advancing package to the network interconnects to address the bottleneck in data transfer, it said.

Transporting data over traditional copper traces at 800G and 1.6T speeds results in unsustainable signal degradation and massive power consumption, it added.

“To overcome this physical limit, the industry is accelerating the adoption of high-speed optical transceivers and silicon photonics. Innovations are culminating in CPO, which mounts the photonic optical engines directly onto the same advanced substrate as the compute switch. This limits the electrical trace length to mere millimeters, drastically reducing the latency and energy required,” said the research house.

The sector’s near term risks, however, included elevated memory prices which could weigh on consumer electronics demand by increasing costs for smartphones, personal computers (PCs), automotive electronics, and other devices.

It is noted that IDC forecasts the global personal computing device (PCD) market to decline 10.4 percent for the full-year of 2026, with total shipments to reach 401.9 million units.

The downward revision is mainly due to a combination of component shortages and product cycle adjustments, exacerbated by the ongoing global memory shortage that is expected to constrain supply and lead to price increases, with the impact is expected to carry into 2027.

Other key risks include geopolitical tensions, foreign exchange volatility (particularly a stronger MYR), cost driven margin pressure, and intermittent order delays arising from component shortages.

Malaysia’s chip sector faces uneven AI gains, supply risks – HSBC