#whatstrending feat. Phillip Securities (a member of PhillipCapital)

Ever wondered what is currently driving the local and regional markets? #whatstrending is a new series addressing some of the most trending questions/topics on the markets for investors. Designed to be educational, expect to get factual information on what is driving sectors and stocks listed on SGX, featuring insights from professionals in the community.

Today, we hear more from Phillip Securities’ Dan Chang, Trading Representative/Remisier and SGX Academy Speaker, as he shares his thoughts on three stocks to ride the AI wave.

From Dan Chang, Trading Representative/Remisier at Phillip Securities:

Singapore occupies a unique and strategic position in the global AI and semiconductor markets due to its robust ecosystem, advantageous geography, and forward-thinking policies. 

Some of the world's leading semiconductor companies, such as GlobalFoundries, Micron, and UMC have presence in Singapore, and the market contributes about 11% of the global semiconductor market share, making it a cornerstone of global supply chains. 

The government’s Smart Nation Initiative has also enhanced Singapore’s position in the AI and semiconductor space by providing funding and support not only to assist companies in AI adoption, but also to nurture more AI talent to support the market. After all, Singapore’s unique advantage in the global market is in Human Resources. 

With the potential for a rebound or uptrend continuation in this industry, there are some Singapore small caps in this space, which may offer potentially high rewards. Such hidden gems could help an investor build a well-diversified core-satellite portfolio, capitalising on the global uptake of AI with the tactical “satellite” component. 

1. Valuetronics

Valuetronics (BN2) is an integrated electronics manufacturing services (EMS) provider, offering a competitive and broad combination of Design, Engineering, Manufacturing, and Supply Chain Support services for high quality electronic and electro-mechanical products.

• On Jun 24, Valuetronics announced its first strategic initiative to explore the AI era with a new joint venture (JV). The Group will acquire GPU chips, servers and ancillary hardware, which will be leased to Trio AI, the JV Company, as part of the collaboration with SinnetCloud HK, its JV partner.

• Valuetronics has been profitable in recent years, with 1HFY25 net profit margin increasing by 1.3 percentage points year-on-year to 10.5%. Despite persistent global inflationary pressures, slower-than-anticipated pace of rate cuts and heightened geopolitical instability, Valuetronics expects to remain profitable in FY2025.

• For investors who are worried about the fundamentals of small caps, Valuetronics had proven over the past few years that it is not only profitable, but had also paid out dividends in the past five years, with yields above 4%, even during the Covid-19 period. This may appeal to “defensive” investors.

2. Micro-Mechanics

 Micro-Mechanics (5DD) designs and manufactures a market-leading range of consumable tools and parts used in the assembly and testing of semiconductors, while also engaging in the contract manufacturing of precision parts and tools used in process-critical applications for the semiconductor wafer-fabrication and other high-technology industries.

• For its 1QFY25, Micro-Mechanics reported a third consecutive quarter of revenue increase with a rebound in orders particularly in the Wafer-Fab Equipment (WFE) segment.

• The Company serves customers at both front and back-end of the semiconductor value chain, with consumable tools making up 78.4% of Group revenue. With disciplined capital management, the Group maintains its track record of zero debt.

• With the Semiconductor industry set to recover, Micro-Mechanics could see a positive impact on revenue, especially from the consumable tools segment. In addition, the contract manufacturing facilities in Silicon Valley has given Micro-Mechanics distance proximity to leading semiconductor companies (e.g., Intel, NVIDIA) and AI giants (e.g., Google, OpenAI). This potentially allows more direct collaboration with these key players with quick response times and easier coordination.

3. ISDN

ISDN’s (I07) core business focuses on 3 main areas – Industrial Automation Solutions, Manufacturing Capabilities, and Clean Energy Solutions.

• Under its core industrial automation business, ISDN offers “full stack” integrated solutions that include components, machinery, software and intelligence in a single solution for customers. The Company has also reached full commercialization for all 3 of its mini hydropower plants in its clean energy business, which would deliver an estimated S$8 million in annual net cash income for the next 20-25 years. 

• On Nov 1, ISDN announced that its subsidiary, Servo Dynamics, secured exclusive rights to distribute Dafang’s robots for construction in Singapore and Malaysia. Dafang - a leading AI company in intelligent robots for the construction industry - offers HDB-approved solutions that cut labour costs by 50-80% and material waste by 15-50%. With BCA projecting Singapore's construction demand to remain steady at S$31 – S$38 billion annually from 2025 through 2028, this partnership supports HDB’s plans to implement robotics in about half of new BTO projects from 2025 to boost construction efficiency, allowing ISDN to tap into industrial automation and robotics in construction. 

• ISDN’s investment in expanding the breadth of its “full stack” solutions to protect its competitive position in Asia during the downcycle should position the Group well to capitalise on cyclical recovery of key end markets and build long-term sustainable growth.   

Even as investors look towards opportunities to invest in AI, they should also be aware of potential risks:

• US-China trade tension, especially with the recent tariff pledges by President Donald Trump, could potentially heightened trade tension between the world’s two largest economies. This might potentially lead to some disruption in the semiconductor supply chain, even though the outcome is still uncertain currently.

• The situation in the Middle East, might also present concerns, and investors should still keep an eye on the situation.

• On the economic front, Yen Carry Trade has been one of the oldest and most well-known strategies in the world of global finance. Its origins trace back to Japan's prolonged period of ultra-low interest rates, which began in the 1990s following the burst of the Japanese asset bubble. With Japan now potentially on a rate hike cycle, with rate turning positive, it might also disrupt the economy, which in turn, might lead to adverse impact on the AI/Semiconductor industry.