Malaysia’s Ministry of Economy yesterday announced that the government has signed an agreement with ARM Holdings Plc for a US$250m chip licensing commitment over a 10-year period. The deal will see ARM granting Malaysia access to its broad range of IPs for the development of silicon chips and specialised computing platforms aimed at various end-industries. CGS International notes that there will be 25 token recipients for Arm Flexible Access (AFA), targeting small-scale entities, and another 7 token recipients for a more comprehensive access to ARM’s tools and technology under the Compute Subsystem (CSS), targeting larger-scale enterprises. The recipients are also not exclusive to local entities, thus allowing the government to share the IPs with foreign entities investing in Malaysia in bid to accelerate the development of the local IC design industry, in our view. We believe this will complement the existing ecosystem where there already are several established homegrown IC design houses, such as Oppstar, Skyechip, Infinecs and Symmid, as well as other entities operating in the new IC design park located in Puchong, Selangor. The government also emphasised the importance of having a greater degree of localisation across the supply chain, with the processes beyond the tape-out and fabrication stages being procured through local tech players, thereby benefiting local backend assembly and testing, equipment and automation solutions providers, as well as EMS players. Broadening the IC design portfolio among local playersThe key advantages for the token recipients are subsidised operating costs on licensing fees and tools, as well as access to ARM’s training and technical knowhow, which in turn will lead to shorter time-to-market and at competitive pricing, in our view. Moreover, this could also broaden the portfolio of local IC design houses beyond service providers (i.e. validation) into high-value IPs for field programmable gate array (FPGA) and application specific integrated circuit (ASIC) chips. CGS believes significant buy-in from local manufacturers using smart factory solutions, as well as local automotive makers to use local-made chips is imperative for this vision to translate into high-volume manufacturing. Maintain UnderweightThe house remains Underweight on the sector, given the heightening uncertainty on trade and industry policy changes under the new US administration, as well as muted demand recovery for consumer electronics and automotive, both of which could lead to downside risks to sector earnings. Its average 2025F sector EPS is currently 8% below Bloomberg consensus. The KLTEC Index has fallen by 22% YTD, primarily due to the recent poor results season. The sector now trades at 23x 12-month forward P/E vs. its pre-Covid average of 17x. CGS has an Add calls on Mi Tech, Uchi and Genetec. Sector upside risks are 1) stronger-than-expected broad demand, 2) continued ringgit weakness against the US$, and 3) strong China+1 and AI spillover. Downside risks: 1) weakening demand recovery, 2) new projects failing to materialise, and 3) escalation in US-China chip war

ARM Deal To Spur Local IC Design Ecosystem

Malaysia's Ministry of Economy has signed a US$250 million chip licensing agreement with ARM Holdings Plc for a 10-year period. The deal will provide access to ARM's IPs for the development of silicon chips and specialized computing platforms. The government aims to accelerate the development of the local IC design industry and enhance the local supply chain.