SINGAPORE – A lack of consumer demand for electronic goods and an inventory glut continue to weigh down the profitability of Singapore’s semiconductor industry.

But analysts are optimistic about its long-term prospects as they expect a boost when next-generation devices spurred by artificial intelligence (AI) come into play.

For now, two of Singapore’s top semiconductor equipment makers – AEM Holdings and UMS Holdings – have announced large drops in their revenues and net profits. They are the only companies listed on the Singapore Exchange that provide contract manufacturing services to global chipmakers.

While global chip sales have been ticking up in recent months, they remain way below the growth they had achieved in 2022 and the year before, when chipmakers made huge profits as the work-from-home trend induced by the Covid-19 pandemic fuelled demand for computers, cellphones and other consumer devices.

Still, analysts believe the outlook for semiconductor demand in the long term remains on a path of steady growth. An added boost to chip demand may come when emerging technologies such as AI mature, unleashing a host of next-generation consumer devices and industrial equipment.

“The silicon layer has been the de facto foundation of almost all technological shifts over the past six decades and we expect generative AI will drive significant growth for compute, network, and memory chips,” Citibank said in a recent report.

There has been an explosion of interest in generative AI, as tools such as ChatGPT showcase their ability to learn the patterns and structure of their input training data and generate new data that has similar characteristics.

But for now, the semiconductor industry is still working through the excess inventory built up between the third quarter of 2020 and the second quarter of 2022, with global economic growth not giving much confidence in a rebound.

AEM – a manufacturer of semiconductor testing equipment and components with a focus on back-end testing solutions – reported a 76 per cent drop in net profit in the first half of 2023 amid lower demand for its chip-testing services.

Its revenue in the same period slid by 49 per cent. The company also lowered its full-year 2023 sales forecast to between $460 million and $490 million, from an earlier guidance of around $500 million.

The company, which in recent years has put a lot of its focus and efforts on new-generation, system-level testing equipment, said that while demand for the next-generation equipment remains strong, the overall state of the industry has led to low utilisation and constrained capital expenditure. This has impacted Intel’s next-generation device release schedule, it said. This is of significance, as analysts estimate that 90 per cent of AEM’s revenues are tied to Intel.

AEM now believes that Intel’s new product launches have been pushed out into 2024.

The company, however, was unable to provide revenue guidance for financial year 2024 or an indication of the magnitude of a potential recovery in the near term, given the lingering market uncertainty, said Citi analyst Jame Osman.

“While this had come as a negative surprise to us considering the incrementally positive nearer-term data points from its key customer Intel, we continue to believe that the upcoming completion of its significant capacity expansion in Bayan Lepas by early 2024 should support demand for AEM’s test equipment,” he said, referring to its facility in Penang.

Both Singapore and Malaysia in recent years have seen a host of global chipmakers announce new investment and expansion of existing facilities that are likely to help boost the business of the local precision equipment and component industry.

These investments, experts believe, are part of the supply chain diversification usually referred to as the China-plus-one strategy.

Intel itself reported in July an above-consensus set of earnings in the second quarter, mainly due to high personal computer sales.

Hence, Citi has maintained a buy recommendation for AEM, saying: “The company remains well positioned to capture structural demand growth for back-end semiconductor testing solutions... both from its key customer Intel and as it expands its customer base both organically and through strategic acquisitions.”

DBS Bank believes Singapore chip equipment makers should see a turn in their fortunes in 2024 when global semiconductor revenues are poised for a strong rebound.

Industry consultant World Semiconductor Trade Statistics in its spring forecast said the chip market will experience a downturn of 10.3 per cent in 2023. However, this is anticipated to be followed by a robust recovery, with an estimated growth of 11.8 per cent in 2024 to US$576 billion (S$784 billion), it added.

UMS also reported a drop in its net profit – a 27 per cent fall in its first-half performance. The company’s top customer is global chip equipment maker Applied Materials.

“Near-term conditions for the semiconductor industry may remain cloudy, but mid- to longer-term prospects are expected to brighten,” said Mr Andy Luong, UMS chairman and chief executive officer.

“Moving into the third quarter of 2023, there are signs that demand may stabilise. Our key customer has shared it expects to outperform its markets this year,” he said.

DBS analyst Lee Keng Ling said: “This is in line with our view that the semiconductor industry is expected to see a gradual recovery in the second half. We believe that the decline in global semiconductor shipments that started in June 2022 is likely coming to an end.”

AEM shares closed at $3.25 on Thursday, down 4.97 per cent so far this year. UMS ended at $1.13, down 4.2 per cent for the year.