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Asia Technology Strategy------------------------------------------------------------------------------------
Conclusions for the portfolio
● Asian tech was already underperforming the region in February
and March before the quake. Since then, it has fallen another 3%,
though just in line with Asia ex. Japan.
● Korea tech is up 1% in USD terms since the quake, but hardware
sectors (ex-Korea) have taken it on the chin falling another 7-8%
each (after having already fallen 5% in the first 10 days of March).
● Near-term semis look better than downstream from earnings
perspective as semis enjoy likely ASP upticks whereas downstream
suffers because of margin hit (rising component ASPs).
● However, supply chain constraints should result in unit cuts
across the sector in 2Q. Combined with our pre-quake concerns
around earnings and the likelihood of continuing uncertainty
around the supply chain, we maintain our bearish bias, despite the
price falls.
● Those inclined to add to their tech positions should look to add
some laggard names (Fig 2) – Hon Hai, Wistron, AUO/CMI are all
at or near their 52-week lows and are now trading at 1 s.d. below
their historical average valuations.
● Investors should also use the sell-off to add to the Apple and
smartphone/tablet supply chain – TPK/Wintek/Unimicron.
Samsung is very well placed too.
As we mentioned in the accompanying note, our key conclusions, in
no particular order, in the aftermath of Japanese quake are:
(1) A short-term rise in some semi ASPs as supply outages and risk
of potential shortages result in inventory hoarding. This should in
the short-term help some semis companies.
(2) 2Q shortfall in final tech units sold driven by component and
supply chain shortages. We fear that outages in Japan will run
longer than current inventory levels in the supply chain can
endure. While Japan demand is small for overall tech (12% of
global LCD TV units, 5% of PCs, 2 of handsets and 6% of
smartphones), but at the margin would contribute negatively to
total demand. Impact on global consumer sentiment is too early
to gauge. This should result in cuts to 2Q numbers – we will try to
put an estimate around that when the situation from Japan is
clearer. John Pitzer, our US semis analyst, estimates that 2Q
semis could see a 5-10% top-line cut.
(3) Bigger guys would get higher materials allocation. Thus, Korea
tech gains at the expense of Taiwan tech near term – we believe
the conglomerate nature of LG and Samsung provide them with
more heft at the negotiating table than most names in Taiwan
except TSMC. The favourable KRW/JPY move – so far – also
helps them.
(4) Downstream players risk losing both units and margins (higher
component prices) in 2Q. However, that negative needs to be
balanced against severe underperformance and the fact that
quite a few of these names are now trading 1 standard deviation
below their historical average valuations.
(5) If materials shortages last only for a quarter and end-consumer
sentiment isn’t damaged badly, we could get a 3Q snapback as
the supply chain starts to sputter back into full gear for the ‘highseason”
and the likely strong sell-through of tablets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia Technology Strategy------------------------------------------------------------------------------------
Conclusions for the portfolio
● Asian tech was already underperforming the region in February
and March before the quake. Since then, it has fallen another 3%,
though just in line with Asia ex. Japan.
● Korea tech is up 1% in USD terms since the quake, but hardware
sectors (ex-Korea) have taken it on the chin falling another 7-8%
each (after having already fallen 5% in the first 10 days of March).
● Near-term semis look better than downstream from earnings
perspective as semis enjoy likely ASP upticks whereas downstream
suffers because of margin hit (rising component ASPs).
● However, supply chain constraints should result in unit cuts
across the sector in 2Q. Combined with our pre-quake concerns
around earnings and the likelihood of continuing uncertainty
around the supply chain, we maintain our bearish bias, despite the
price falls.
● Those inclined to add to their tech positions should look to add
some laggard names (Fig 2) – Hon Hai, Wistron, AUO/CMI are all
at or near their 52-week lows and are now trading at 1 s.d. below
their historical average valuations.
● Investors should also use the sell-off to add to the Apple and
smartphone/tablet supply chain – TPK/Wintek/Unimicron.
Samsung is very well placed too.
As we mentioned in the accompanying note, our key conclusions, in
no particular order, in the aftermath of Japanese quake are:
(1) A short-term rise in some semi ASPs as supply outages and risk
of potential shortages result in inventory hoarding. This should in
the short-term help some semis companies.
(2) 2Q shortfall in final tech units sold driven by component and
supply chain shortages. We fear that outages in Japan will run
longer than current inventory levels in the supply chain can
endure. While Japan demand is small for overall tech (12% of
global LCD TV units, 5% of PCs, 2 of handsets and 6% of
smartphones), but at the margin would contribute negatively to
total demand. Impact on global consumer sentiment is too early
to gauge. This should result in cuts to 2Q numbers – we will try to
put an estimate around that when the situation from Japan is
clearer. John Pitzer, our US semis analyst, estimates that 2Q
semis could see a 5-10% top-line cut.
(3) Bigger guys would get higher materials allocation. Thus, Korea
tech gains at the expense of Taiwan tech near term – we believe
the conglomerate nature of LG and Samsung provide them with
more heft at the negotiating table than most names in Taiwan
except TSMC. The favourable KRW/JPY move – so far – also
helps them.
(4) Downstream players risk losing both units and margins (higher
component prices) in 2Q. However, that negative needs to be
balanced against severe underperformance and the fact that
quite a few of these names are now trading 1 standard deviation
below their historical average valuations.
(5) If materials shortages last only for a quarter and end-consumer
sentiment isn’t damaged badly, we could get a 3Q snapback as
the supply chain starts to sputter back into full gear for the ‘highseason”
and the likely strong sell-through of tablets.
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