CHINA TECHNOLOGY: CHINA HANDSET MARKET, UPDTAE: FROM BLACK TO WHITE - BILL LU
Conclusion: Recent checks with IDHs, local brands, chipmakers, and other food chain suppliers indicate that: 1) China handset demand remains very robust in 2H07 with new emerging local brands gaining the most share; 2) local handset makers are starting to make inroads internationally (e.g. South Asia, Russia and India), but 3) the roll-out of TD-SCDMA seems to be delayed slightly; and 4) the pricing environment remains tough given the lack of new killer applications and rising competition.
Raising our China handset shipment forecasts: We are revising up our 07 shipment estimate to 206 mn units (up 25% YoY) from 176 mn units –with the combination of grey market and emerging local brands outgrowing with 55% YoY growth, far ahead of global brands’ 18% rise and Tier 1 local brand names’ 25% YoY decline. We expect 08 YoY unit growth to decelerate to 16%. Our cross-checks with chipset vendors suggest “export” shipments could reach 52 mn and 78 mn units in 07 and 08, up a sharp 60% and 50% YoY.
Implications for IC design: We see robust handset unit demand as a positive for Mediatek and Spreadtrum, both IC suppliers to the domestic handset makers. We note that while TD appears to be pushed out slightly, it is not unexpected, and actual units are still likely to exceed our current forecasts; we are more comfortable with Spreadtrum’s competitive position after recent checks. On the other hand, the continuation of share loss by Moto is likely to be a negative for Solomon Systech, although our view is that most of this is well understood by the Street and thus in the stock price.
Implications for handset food chain: We read this as overall neutral for China IDHs (SIM Tech, Longcheer) as robust volume growth was offset by pricing and margin erosion, although fundamentals seemed to trough in 1H07. The next catalysts are when overseas expansion starts to bear fruit and TD takes off. Among IDHs, we think SIM Tech is still ahead of peers in NRE collection from brand names despite a delay in TD rollout.
CONSUMER ELECTRONICS: CORRECTION: EFFECT ON JAPAN BRANDS OF US COMSUMPTION - MASAHIRO ONO
Risk of FPD TV price fall: Risk of slower consumption in N. America is showing up as a rising share of cheaper models in LCD and other FPD TVs. Momentum in Taiwanese/Chinese brands (eg, VIZIO) also needs to be watched for risk of price falls for Japanese brands too.
High risk for Funai, Pioneer: All of our forecasts factor for annual falls of 25-30% for average prices in all sizes, and weighted average falls of 5-10%. However one question we ask concerns the effect on operating profit in a risk scenario of firms pushing through added price cuts of 10%. Funai and Pioneer could be hardest hit, and Sony and Sharp would be affected relatively mildly.
Still bullish on Sony, Sharp: Distances to fair value in our bear case are greatest for Sanyo, followed in order by Sharp, MEI and Pioneer. Sharp’s high valuation multiples relative to industry averages make downside look substantial assuming the valuation gap adjusts. Yet we think the premium is warranted by the high certainty of growth in the LCD business especially, and its cost competitiveness in LCD TVs. Sony currently trades close to our bear case fair value and even with gains on the former HQ land sale is unlikely to turn in strong 2Q numbers. Further PS3 price cuts may also loom from late September. But we are hopeful that momentum will pick up from 3Q and we remain Overweight.
Our industry view is In-Line: We believe the lines of success have already been drawn. Competition is heating up noticeably in the FPD field but we expect the
competitiveness of Japanese brands to shine through again from F/309, as screens become ever larger.
A/P CONTAINER SHIPPING: US SUB-PRIME NOT ENOUGH TO CHANGE OUR POSITIVE VIEW; PREFER TAIWANESE TO HK/CHINESE CARRIERS - SOPHIE LOH
Conclusion: We reiterate our positive view on the global container shipping industry despite the market’s lingering concerns over the sub-prime issues in the US.
That said, as select stocks in the sector, most noticeably CSCL and OOIL, are now trading either near or above our fair value estimates, we would recommend investors to focus on the Taiwanese long-haul carriers, YMM in particular, for exposure to the anticipated sharp earnings recovery of the sector beginning 2H07.
What's New: Given current low/no profitability of the transpacific trade, slower US import volume should have a minimal impact on liner profitability, in our view. Moreover, as capacity is being continually removed from the trade, the loss-making inter-modal services in particular, we believe this will provide solid support to
freight rates even assuming continued anemic demand growth. On the other hand, we continue to expect carriers’ earnings will improve markedly from 2H07 onwards, underscored mainly by the extremely robust freight rates and volume growth of the Asia-Europe trade since the beginning of this year.
Stock Recommendations: We are downgrading our long-held Overweight rating on CSCL to Equal-weight. We retain our HK$5.35 price target on the stock, but consider the expected strong earnings momentum, proposed A-share issue and possible corporate restructuring activities to have been fully discounted by the 330% share price appreciation YTD. In contrast, we believe the market has continued to underestimate the value of the Taiwanese long-haul carriers, YMM in
particular. The stock is currently trading at 1.0x P/BV, 0.7x P/NAV and 8.5x 2008 P/E, suggesting a 25-55% discount to its HK/China peers.
Risks: Major global economic slowdown.
STEEL, NONFERROUS METALS & MINING, WIRE & CABLE: WATCH FOR VALUATION DISCOUNT FACTORS TO LOSE FORCE - HARUNOBU GOROH
Monthly, Vol. 138 (August 2007)
Watch for discount factors to ease: Steel stocks may be discounted due to (1) US-originated financial market instability and recession concerns since late July and (2) alarm over volatile steel prices in China. From Oct-Dec, however, we may be able to confirm a turnaround in North American steel prices and stabilization of Chinese steel prices. As reasons to apply a discount recede, hare price levels should be pushed up.
Domestic steel sheet supply/demand in a phase of inventory buildup: Japan’s steel sheet cycle remains in the inventories rising/shipments rising quadrant. This marks the bumper period for earnings, reflecting aggressive production in response to brisk orders currently being booked by the large steel makers. We
expect earnings in 1H F3/08 to track ahead of full-year company forecasts. There is room for robust fundamentals to be valued more fully in stock prices.
Steel view Attractive, In-Line for nonferrous metals, wire & cable: For steel, high-grade product prices are firming, and we expect mid-term growth in Asian high-grade steel demand. For wire/cable, telecom demand growth is easing but we are watching electronic materials growth strategies. In nonferrous, despite concern about high LME prices, we watch individual strategies in electronic materials, etc.
Picks: JFE, Kobe, Hitachi Metals, DOWA and SEI. Hitachi Metals is lifting core business profits and entering growth areas. JFE faces better fundamentals and has an investor-centric FCF strategy. Kobe Steel has high exposure to special steel and rising medium-term input from machinery, construction machinery and electronic materials. Electronic materials are driving better asset returns at DOWA. SEI has new growth areas (electronic materials, etc.) and automotive business margins should recover in F3/08.
