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Technology
We are positive on technology and particularly those companies
benefiting from techtonic shifts in smartphones, LED televisions
and tablets
Rather than attempt the one hot product of 2011, focus on subcomponent plays on faster growth segments
Top picks: Samsung Electronics, TPK and UMC
Semiconductors
Chasing Moore’s Law
Moore’s Law continues to be an influence in the
semiconductor space, continually driving faster
and cheaper new-generation chips. This situation
is clearly playing out within the foundry space,
where the likes of TSMC, GlobalFoundries and
Samsung push the law’s limits, ramping up
volume at 40/45nm and setting the stage for a
battle in 28/32nm next year. 2010 will be
remembered as the year when ARM-based
architecture (made possible because of seemingly
never-ending process shrink) emerged as a serious
competitor to Intel’s x86 thanks to smartphones.
We see smartphone penetration rates continuing
to increase together with the emergence of tablets.
The continued process shrinks in the
semiconductor space will allow for even lower
power consumption in these mobile devices,
memory storage in devices will also become
greater. However, competition at 28nm in 2H11
from the likes of GlobalFoundries and Samsung
may put pressure on pricing and hence margins
may decline.
PCBs
Greater demand for HDI suppliers
We see the continued growth for smartphones and
tablets remaining a key theme for PCB and IC
substrate suppliers in 2011, driving demand for
high density interconnect (HDI) boards and chip
scale packages (CSP). However, we see greater
upside for HDI suppliers for two reasons. Firstly,
smartphones and tablets consume a greater dollar
value of HDI (on the order of USD4-8 per unit)
than CSP (less than USD2 per unit). Secondly, we
believe that all tablets will use an HDI board,
while not all tablet devices will use CSP-based
ICs (Windows/x86-based tablets likely to use flipchip BGA-based Intel CPUs).
Handsets
Smartphones fuel growth
Following expected 14% and 55% y-o-y global
shipment growth for the handset and smartphone
markets this year, IDC forecasts that 2011 will
continue to be a good year for smartphones. The
growth of smartphones (2010-14e CAGR of 18%)
will continue to outpace that of handset industry
(2010-14e CAGR of 6%).
The replacement of feature phones will continue
to drive smartphone growth in the handset
industry. Based on IDC forecasts, global handset
shipments will grow from 1.3bn units in 2010 to
1.7bn units in 2014 (a 2010-14e CAGR of 6%),
and smartphone shipments will grow from 270m
units (20% of total handset) in 2010 to 527m in
2014 (32% of total handsets, representing a
2010-14e CAGR of 18% vs. 6% for the industry
overall).
The Android OS will continue to gain market
share during 2010-14, based on IDC forecasts.
Android’s market share is forecast to increase to
25% in 2014 from 16% in 2010 (a 2010-14e
CAGR of 31%). However, the competition is
intensifying within Android OS. HTC has been
first to market with Android versions but Google
has started to work with other vendors such as
Huawei (Android 2.2) and Motorola (Android
3.0). In addition, version migration for
smartphones will start to slow in 2011, which will
also lower the technology barrier and allow
latecomers such as LGE to catch up.
LED
LED TV penetration to reach 50% in
2011
A major inventory adjustment happened industrywide in 3Q10 due to disappointing sales of LEDbacklit LCD televisions (LED-LCD TVs), in line
with the thesis in our 10 May 2010 report
Expectations high – but so are the risks.
But we have recently turned positive as we
believe LED-LCD TV demand will accelerate for
two reasons: 1) retail prices will soon reach mass
market levels (ie, 15% below current prices);
2) the phasing out of CCFL-LCD TV models;
3) legislation that will benefit the sector.
This will pave the way for positive surprises in
2011 for LED-LCD TV sales and LED demand.
We expect the penetration rate (the percentage of
LED-backlit LCD TVs) to reach 50% in 2011 (60%
by end-2011) from below 20% in 2010 (20% now),
implying y-o-y shipment growth of 194%.
Solar
The end of Oligo-poly
Poly-Si prices at the peak of the shortage in 2008
surpassed USD450/Kg (9x current prices). Given
that the production cost of a fully-ramped up poly
plant is only USD20-30/Kg, several Asian
competitors were lured by the strong business
case. New entrant build-out resulted in
overcapacity and prices crashed to USD50/Kg by
the end of 2009. A strong pull-in of demand due
to various subsidy cuts at the end of 2010 has
helped prices to rise by 10% since then, but
oversupply looks set to return in 2011 (see our
sector downgrade report, Brace for the hangover,
27 September 2010 for details).
In our view, the impact of the poly oversupply in
2011 could be significantly worse than in 2009 as
the end of an oligopolistic market is cemented.
The top-5 poly producers which accounted for
95% and 75% of production in 2006 and 2008
respectively would account for less than 45%
while exiting 2009. Increased fragmentation has
also come along with a more homogenous cost
structure as well as declining differentiation. This
means that cutting oversupply in the sector would
require much sharper price cuts than in the past.
We estimate that more than 90% of global supply
produces at a cash cost of under USD30/Kg and
price pressure will be severe when demand drops
below 18GW in 2011 (HSBC estimate: 13.2GW).
Cheaper poly is a clear negative for producers of
polysilicon as well as its substitutes (thin-film
solar players). GCL-Poly (3800 HK, UW(V),
HKD2.52, TP HKD1.30), the fourth-largest
polysilicon producer, is our key underweight in
this space. At the same time, poly oversupply is a
positive for downstream solar manufacturers
which could offset part of the price pressure on
their products by lower polysilicon prices. In this
space, our preference is for Suntech Power (STP
US, N(V), USD7.14, TP USD8.50), which is the
biggest cell & module maker globally.
Display
Lack of catalysts for pure panel players;
2011 the year of component makers
We do anticipate a recovery for the LCD sector’s
business outlook starting from late 1Q11.
However, the recovery will be mild compared to
the V-shape recovery seen in 2009, which was
driven mainly by strong restocking demand. Also,
product migration from CCFL-based LCD TVs to
LED-based LCD TVs, which are priced 30-50%
higher, has slowed down size migration in the
LCD TV segments. We forecast the panel price
recovery in 2Q11/3Q11 will be only 5-10% from
trough to peak (vs. 15-20% in the last cycle).
Though the LCD food chain has gone through
inventory adjustment for about six months, we
believe only the NB and monitor segment
(accounting for 40% of area demand for the LCD
sector) inventory levels in the food chain are back
to slightly lower levels. However, even with
recent better than expected LCD TV sell-through
in China, the excess inventory level in the LCD
TV segment (55% of total area) improved only
marginally from a global perspective
We forecast ROE for LCD panelmakers will stand
at 1-7% in 2011, which cannot justify a sustained
share price rebound. Thus the upside will be
limited, if any. Meanwhile we see a number of
component players that are leveraging on the three
major themes – rising LED penetration, touchpanel adoption and LCD utilisation – that we
expect for 2011, and offer better investment
prospects versus the pure panel players.
High conviction call
Samsung Electronics (005930 KR, OW,
KRW826,000, TP KRW1,139,000)
To sum it all up, we believe Samsung Electronics
is well positioned to benefit greatly from the key
2011 techtonic shifts (discussed above) in
smartphones, LED televisions and tablets thanks
to its diversified business model and strong
product portfolios.
Samsung’s flagship smartphone model, the
Galaxy S, is a huge success, hitting sales of more
than 7m units worldwide since its launch in June.
Being the global market leader in LED TVs, we
also believe that strong LED penetration growth
rates will enable even higher sell-through in
television units for the company, maintaining its
global No.1 ranking. The increasing number of
major flagship smartphone models and new TV
products with AMOLED display to come into the
market looks set to further boost Samsung’s LCD
division. Lastly, the proliferation in tablets next
year will benefit Samsung greatly due to the
explosive demand for NAND; the Galaxy Tab
also reached sales of 600,000 units in its first
month after launch.
Valuation
Our TP of KRW1,139,000 is derived using an
average of 2011e PB of 2.2x, sum-of-the-parts
(industry-average 2011e EV/EBITDA multiple),
and DCF (12% WACC).
Risks
Risks to our rating and estimates include a
stronger KRW, sharp rise in industry capacity in
memory and TFT-LCD, ASP erosion on key
products such as handsets, and a protracted delay
in the global economic recovery. Potential
catalysts include strong quarterly results, upward
revisions to market forecasts on memory, new
product launches, business expansion into
promising areas, and global IT demand recovery.
2011 themes
Techtonic shift
A key growth area in the display space for 2011
will be touchscreens. We expect the increasing
popularity of tablet PCs (iPads and iPad-like) and
robust growth in smartphone sales to drive about
45% growth for touchscreens in 2011.
There are many touchscreen technologies
available. Apple’s iPhone and iPad use what is
called the P-cap solution, the ideal method to
achieve responsive, stylus-free, multi-touch
performance. We expect the projected capacitive
(P-cap) solution, which has 40% of the
touchscreen market now, to become mainstream
in 2011 and its area demand to increase at an even
more robust +110% in 2011.
TPK (3673 TT, OW(V), TWD664,
TP TWD850)
Leader in P-cap, Apple touchscreen supplier
TPK was the first company to adopt and
commercialise P-cap on display screens. Back in
2007 the company developed the touchscreen of
the first-generation iPhone, which was the first
commercially successful device with a multi-touch
function. The success brought TPK opportunities to
develop touchscreens for other Apple devices.
Due to the close relationships forged during the codevelopments, we expect TPK to maintain 45-50%
share of Apple’s business in the long run. As more
smartphones and tablets (other than Apple’s) adopt
P-cap technology, we expect TPK to be a main
beneficiary with its leading technology.
Valuation
Our target price of TWD850 is based on 20x
2011e EPS. The multiple is based on a 20%
premium to the normalised peak of YFO (Young
Fast-3622 TT, another major touchscreen
supplier) of 16.5x. The premium is justified by the
company’s high exposure to new technology
(YFO – mostly conventional resistive) and Apple.
Risks
The company’s own yield issues and/or
improvement in the yields of competitors will
reduce the technology gap of TPK and is the
biggest risk faced by the company. In addition,
the company generates well over 50% of sales
from Apple alone, which creates risk from high
single customer exposure.
Pricing anomalies
2010 and 2011 are two good years for investors
for lofty dividend payments into 2012. Most of
the Taiwan technology companies in our coverage
universe have 2011e dividend yields of around
5%. In the current investment climate, where
capital gains are hard to find, we believe investors
can seek defensive exposure by buying companies
which pay out good dividends. Furthermore, there
is limited debt on the balance sheets of Taiwan
technology companies, which should also help
dividend payouts.
UMC (2303 TT, OW(V), TWD15.1,
TP TWD16.5)
We continue to prefer UMC based on improved
cycle-to-cycle metrics, valuation (0.8x book and
66% of market cap in cash/investments), and
dividend yield (8%+ sustainable for at least two
years, in our view).
Valuation
Our target price is TWD16.5, based on 1.0x 2011e
book value. As a reminder, UMC shares did not
trade below 1.3x prior to early 2008. However, in
the depths of the last downturn, the shares
bottomed at approximately 0.6x book value and
now trade at 0.86x 2011e book.
Risks
The risks to our rating include: weak end-demand
limiting recovery; relatively high customer
concentration from customers such as Texas
Instruments, Xilinx and Mediatek; potential
increased competition in the foundry space
resulting in loss in market share or margin
pressure; struggles with technology roadmap; and
continued valuation multiple compression.
Potential upside catalysts include increased
demand offsetting oncoming supply or a potential
takeout by a larger competitor (unlikely in our
view, but not impossible).
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