Global semiconductor upcycle seen extending Into 2026

The global semiconductor industry remains firmly in an expansionary phase, with the market on track to approach the USD1 trillion mark by 2026, underpinned by strong demand for artificial intelligence (AI), data centres and high-performance computing (HPC), according to a new report by Kenanga Investment Bank.

Citing the World Semiconductor Trade Statistics (WSTS), Kenanga noted that the industry body has raised its 2025 growth forecast to 22% year-on-year, valuing the global market at USD772 billion. Growth is expected to accelerate further in 2026, with WSTS projecting more than 25% expansion to about USD975 billion, driven mainly by logic and memory chips, which are forecast to grow by more than 30% year-on-year.

Kenanga said this outlook reinforces its overweight stance on the sector since last quarter, as the current semiconductor upcycle — which began in November 2023 — could plausibly extend into mid-2026 or beyond. This would be in line with historical cycle durations and supported by the structural upgrade cycle linked to AI and HPC adoption.

Wafer fab equipment spending still early-cycle
Front-end semiconductor spending remains a key anchor for growth into 2026, with the capital expenditure cycle appearing to be in its early stages rather than peaking, Kenanga added. Industry group SEMI projects wafer fab equipment (WFE) spending to rise to USD116 billion in 2025, up 6%, before increasing a further 8% to USD125 billion in 2026.

Growth is expected to be led by foundry and logic investments, alongside an acceleration in memory equipment spending. Importantly, Kenanga highlighted that current tool spending has yet to fully reflect the scale of announced fabrication plant projects, as outlays remain skewed towards facilities and infrastructure rather than equipment.

This suggests the equipment upturn still has room to broaden as advanced technology transitions — such as 2-nanometre nodes, gate-all-around (GAA), backside power delivery, and high-bandwidth memory (HBM) and DDR5 — gather pace.

For Malaysia’s front-end semiconductor ecosystem, this constructive trajectory is expected to translate into improved prospects. Kenanga said companies such as Kelington Group Bhd (KGB) are well-positioned to benefit from sustained demand for ultra-high purity (UHP) process gas systems, chemical delivery networks and tool hook-ups. Meanwhile, UWC Bhd stands to gain from rising demand for precision modules and systems integration for wafer-fab tools.

Historically, such upcycles have supported stronger order intake, deeper tender pipelines, higher utilization rates and improved revenue visibility across the segment, the research house noted.

AI boom supportive, but tail risks remain
Despite the positive near-term outlook, Kenanga cautioned that risks are building beneath the surface, particularly around what it termed “AI circular capital flows”. Citing Bloomberg, the report highlighted how large, interconnected funding and procurement arrangements are effectively locking in GPU demand and enabling outsized capital expenditure, reinforcing Nvidia’s dominant position in the AI ecosystem.

However, with several AI-related players still burning cash and revenue growth lagging spending, any disappointment in AI monetisation or adoption could quickly ripple through closely linked counterparties, including hyperscalers, cloud providers, AI labs and semiconductor suppliers. Such a scenario could amplify downside risks and trigger valuation de-rating across the sector.

Memory tightness may weigh on consumer devices
Kenanga also flagged emerging risks from tightening memory supply, as chipmakers prioritise higher-margin AI products such as HBM and advanced DRAM, while recovery in conventional DRAM and NAND capacity lags after earlier capex restraint.

This is pushing up component costs and constraining availability for consumer electronics. As a result, IDC now expects global smartphone shipments to grow by just 1.5% in 2025 to 1.25 billion units, before contracting 0.9% in 2026, citing memory-related cost inflation, record-high average selling prices and pockets of component shortages.

The research house warned that similar pressures are emerging in PCs and storage markets, potentially creating a less favourable demand backdrop for consumer-facing semiconductor supply chains into the first half of 2026.

Auto chip supply risks persist
Another watch point highlighted was the risk of supply disruptions in automotive chips, particularly following developments involving Nexperia. While some supply flows have resumed selectively, ongoing governance and export-control uncertainty continues to limit near-term visibility. Kenanga said this raises the risk of localised production hiccups and higher procurement costs if restrictions are tightened again.

Valuation updates and stock calls
In terms of valuations, Kenanga refreshed its assumptions to reflect the evolving industry landscape. In the outsourced semiconductor assembly and test (OSAT) segment, it lowered INARI Amertron Bhd’s target price to RM2.20 from RM2.45 after reducing its target price-earnings ratio to 29.3 times, though it upgraded the stock to “outperform” on recent share price weakness as a tactical opportunity.

Target prices and ratings for MPI (market perform, RM31.70) and Unisem (underperform, RM1.90) were maintained.

For the electronics manufacturing services (EMS) sector, Kenanga trimmed target prices by applying lower valuation multiples, citing customer programmes still in a gestation phase amid ongoing supply-chain relocations. The firm said it prefers to remain conservative until demand pull-through and scaling become clearer, while continuing to favour SKP Resources Bhd with an “outperform” call and a target price of RM0.98.

Overall, Kenanga concluded that while the semiconductor cycle still has meaningful runway, investors should remain mindful of rising risks tied to AI monetisation, memory constraints and geopolitical uncertainty. 

-- Business World, Malaysia.