Smart Money Rotates Toward Downstream Semiconductor Winners. What Stocks Does DBS rate "Buy"?

THE CONTEXT •Artificial Intelligence has catalysed a boom in front-end companies of the semiconductor value chain. Some Asia’s tech stocks are on a roll, helped by signs that the chip industry’s recovery is spreading out.  • The front-end—the part where chips are actually made—still hasn’t peaked thanks to strong demand for AI and advanced computing, but now the back-end is starting to catch up.  • That means companies handling assembly, packaging, and testing are starting to see more business, driven by inventory replenishment and new gadget launches. Leaders like TSMC, UMS, and Frencken look set for brighter days ahead. • Investors should pay attention also to companies that make high-end electronics for consumers. As demand for AI personal computers, for example, grows, picking a few strong players in these areas is a good move. • For more, read excerpts of DBS' 13-page report below ...

Excerpts from DBS Research report
Analysts: Lee Keng LING, Fang Boon FOO & Jim Au

Source: DBS, Bloomberg. Closing price as of 16 Oct 2025 

 
UMS's outlook is positive, driven by several key factors:

1) a significant production ramp-up and new product introductions (NPIs) for a new customer; Andy Luong, CEO of UMS2) stable performance from key existing customers, including contributions from its new Tampines plant; 3) positive guidance from its two largest global semiconductor customers, fuelled by strong AI-driven demand; 4) a robust semiconductor market, projected to grow by 17.8% y/y in both 2025 and 2026, according to Gartner; and 5) its position as a second-order AI beneficiary through exposure to key semiconductor customers.

The semiconductor segment, which contributed 50% of total revenue as of 2Q25, remains the core growth engine for the group.

Frencken CEO Dennis AuAs previously noted, the global semiconductor market is projected by Gartner to grow 17.8% y/y in both 2025 and 2026, with SEMI expecting the rebound to extend through 2026.

The front-end segment has yet to peak, while the back-end remains in the early recovery phase.

As a second-order AI beneficiary through its semiconductor customers, Frencken is well positioned to capitalise on the technology sector recovery, supported by a sound balance sheet and diversified business portfolio.

Beyond semiconductors, its other segments are expected to deliver steady performance, reinforcing earnings stability.

The group is also executing strategic investments and capacity expansion initiatives, including production upgrades in Singapore and a new facility in the US, to enhance efficiency, enable product transfers from Europe to Asia, and support customers’ growth roadmaps in both regions.

In the HK-listed consumer electronics space, our preferred picks are Lenovo, Sunny Optical, and BYDE.

All three have re-rated alongside a broader recovery in downstream tech and renewed interest in Apple-adjacent supply chains, yet we still see room for upside as earnings repair is mix-led rather than unit-led.

The core of our thesis is unchanged from the main text: premiumisation is lifting optics, thermals, and casings; foldables are becoming a genuine spec catalyst; and the Windows 11/AI PC refresh is sustaining demand for microphones, cameras, and thermal assemblies.

We also see improving pricing discipline in handset optics and a healthier competitive landscape after the 2022-2023 shakeout.

Against that backdrop, we maintain BUY on all three names, with target prices and details as below.

Sunny is already printing the margin recovery we expect for handset optics.

In 1H25, the group delivered a 19.8% gross margin (up 2.6ppt y/y) and flagged higher ASPs and margins in both handset lens sets and camera modules as the product mix shifted toward larger sensors and periscope telephoto.

With Apple’s folded‑telephoto now standard across both Pro models and Android vendors pushing 6P/7P lenses and bigger sensors, we see Sunny’s scale, process knowhow, and share leadership translating into further ASP/GM repair through 2026.

Our BUY call and TP of HKD110.0 are supported by a sustained premium mix, a stabilising unit backdrop, and optionality from vehicle optics.

BYDE remains our preferred pick for exposure to premium casings/frames and Apple content.

The integration of Jabil’s China mobility assets has expanded its machining capabilities and customer reach.

Concurrently, the industry’s shift towards titanium and other lightweight alloys, coupled with the mechanical demands of foldable devices, significantly raises the value of precision metalwork.

In the near term, we expect seasonal Apple ramp ups and product-mix upgrades to support utilisation.

Over the medium term, automation and an expanded role in high-spec frames (including as a supplier of titanium parts for Apple’s first foldable iPhone) are expected to drive margin improvement.

We maintain BUY with TP at HKD57.0, underpinned by an improving mix in smartphones and growing contributions from adjacent verticals.

Lenovo (BUY, TP: HKD15.0) Lenovo’s outlook is positive, driven by several key factors: 1) its clear leadership in AI PCs, with AI-capable models already constituting 30% of shipments (vs. HP’s 25% in 3QFY25), positioning the group to capture the Windows 10 to 11 enterprise refresh through FY26; 2) favourable premium mix trends (on-device NPUs, OLED/ultraslim designs, higher‑spec webcams/mics/thermals) are expected to support ASP and margin resilience; 3) accelerating AI server momentum within the Infrastructure Solutions Group (ISG), where high-density GPU platforms and Neptune liquid-cooling solutions are ramping up, and the conversion of a robust backlog is poised to turn ISG operationally profitable in the mid-term; and 4) operating leverage stemming from a normalising component cost environment and continued growth in the higher margin Services & Solutions Group (SSG), which adds recurring revenue and stabilises group margins. We maintain BUY with TP HKD15.0 (unchanged), anchored by (i) Lenovo’s AI PC leadership and the Windows-driven replacement cycle, and (ii) operating leverage as ISG transitions from loss-making to profitable, primarily on the back of AI servers and an improved ESMB (small and medium business) mix.

See the full DBS report.