Electronic sector stocks: Can they give you the growth you seek?

Electronics has seen a surge in demand with the advent of artificial intelligence, “smart” homes and the connectivity associated with the “Internet of Things”.

This trend has provided a fillip to the industry and resulted in the enlargement of the pie for all players.

Needless to say, investors in the electronic component sector have seen healthy capital gains and surging dividends due to this increased business demand.

However, the sector is also known for being notoriously cyclical and demand may rise or fall drastically, catching investors by surprise.

Is there still room for the industry to enjoy further prosperity? Or are we seeing a peak in the industry’s business cycle?

Good results all around

As we delve further into electronic component stocks’ earnings, it seems that the companies are reporting good numbers all around.

Micro-Mechanics (Holdings) Ltd, a designer and manufacturer of tools and parts used in the semiconductor industry, reported a sterling set of earnings for its fiscal 2021 first quarter.

Revenue rose by 18.3 per cent year on year to $18.1 million while net profit after tax soared 42.3 per cent year on year to $4.7 million.

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UMS Holdings, a company providing engineering and manufacturing services for original equipment manufacturers of semiconductors, reported that revenue jumped 37 per cent year on year for its third quarter.

Net profit surged by 41 per cent year on year to $12.9 million, and the group declared an interim dividend of $0.005, unchanged from the year before.

And AEM Holdings Ltd, a system test and handling solution provider for semiconductor and electronic companies, reported a stellar set of numbers in its latest business update.

For the quarter, revenue almost doubled from $83.8 million to $161.8 million, while net profit increased by 77.4 per cent year on year to $24.3 million.

The 5G promise

The obvious question is: what is driving the good results from these companies?

One key trend that has taken root is that of the development of 5G networks.

5G technology promises to be a significant upgrade over the current 4G networks, promising speeds that are up to 100 times faster and with less lag.

With this level of seamless connectivity, many activities that seemed like science fiction are becoming a reality.

One of these is autonomous cars that utilise sensors to pick up signals from wireless connection points so that they can “see” traffic conditions around them and react accordingly.

Many countries are now gearing up to build the necessary infrastructure that will enable 5G to become ubiquitous in five to ten years.

In Singapore, Singtel and StarHub have both started 5G trials with limited coverage and will expand this to the whole of Singapore soon.

Covid-19-induced digitalisation

The Covid-19 pandemic has also spurred a wave of adoption for online payments and digital services.

This acceleration in digitalisation can be seen from the recent earnings report of both Mercadolibre and Paypal.

The former is the largest e-commerce services provider in Latin America, while the latter operates a worldwide online payments platform that facilitates money transfers.

For Mercadolibre, gross merchandise volume on its platform jumped 62.1 per cent year on year in its latest quarter to US$5.9 billion (S$7.9 billion).

Total payments volume (TPV) surged over 90 per cent year on year to US$14.5 billion.

Paypal reported a 36 per cent year on year rise in TPV during its third quarter, while the company added 15.2 million net new active accounts, 55 per cent higher than the 9.8 million net new actives added a year ago.

Back home, companies such as Singapore Airlines Limited are tapping on digital methods to minimise physical contact for passengers to restore confidence in flying.

Get Smart: Numerous catalysts in action

From the above, it can be seen that numerous catalysts can continue to spur growth in the semiconductor and electronics sector.

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The World Semiconductor Trade Statistics (WSTS) projects that semiconductor sales are poised to increase by 3.3 per cent in 2020 due to higher demand for integrated circuits, memory and logic.

For 2021, WSTS expects global semiconductor sales to rise by a further 6.2 per cent.

These tailwinds signal that there is still room for further growth for the electronic component stocks.

The wave of digitalisation and technological improvements are a long-term trend that is here to stay, and investors can ride on it to enjoy resounding investment success.

Disclaimer: Royston Yang does not own shares in any of the companies mentioned.