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Cautious on upstream tech shares
We remain generally cautious on upstream tech shares, with very few
BUY rated stocks for company specific reasons. Many investors have
started to view now as a good time to position for the next upcycle,
believing the “bad news” has already been priced in. Indeed, upstream
stocks in Taiwan have bounced around 25-50% from their lows in
November 2008 (i.e., TSMC (2330 TT; SELL) already trading at 2.9x
2009F P/B), suggesting the consensus has already played the theme
that the worst is already over and a recovery is underway. Nonetheless,
we caution that a recovery in 2H09/2010, if any, could be much
weaker than seen in the past. In some respects, it is arguable that
2009 could be an even worse cycle than 2001-02, in terms of
unemployment, GDP, PC/handset demand, retail sales, etc. With this
downturn likely to persist longer than expected, it is possible to see
leaders like TSMC, SPIL (2325 TT; SELL), etc. to outperform on a
“relative” basis as investors try to play “defensive”. Nonetheless, we
believe their absolute share performance will still be vulnerable in what
we view as a prolonged recovery process in 2009.
Risk-reward is not attractive
Although we estimate YoY revenue to bottom sometime in 1Q09 for
most upstream tech companies (a bottom in YoY revenue has
historically supported a bottom for share prices), the recovery, if any,
will likely be weak. Indeed, given the high comparison base seen
during the first three quarters of 2008 (for example foundry capacity
utilization was still at 100% in 3Q08), positive YoY growth (in both
revenue and earnings) might not be seen until the end of 2009 at the
earliest, capping share price upside in the near-to-medium term.
Although share prices tend to move ahead of fundamentals, the riskreward
profile is not attractive enough to discount nearly one year
ahead of a hypothetical recovery, in our view. In addition, we believe
the next cyclical upturn, if any, could be much weaker than the ones in
1999 (Y2K demand), 2002 (later proven a “fake” inventory build-up),
and 2005/2006 (decent PC/handset demand coupled with many new
consumer products introduced).
Buying on trough utilization could prove premature in this cycle
Many also point out that historically semiconductor share prices and
capacity utilization rates (CUR) tend to bottom during the same quarter,
suggesting that we should witness a share price bottom this quarter,
assuming that utilization rates will trough sometime in 1Q09. However,
we note that such a bottom in the past was usually followed by a very
strong rebound (which we define as CUR improving by more than 40-
50ppt within two to three subsequent quarters).
Table of Contents
Outlook for the Year of the Ox - Foundry ......................................... 4
Top-down analysis ...........................................................................................6
Operating analysis ...........................................................................................8
Scatter plot analysis ......................................................................................10
Valuation ........................................................................................................14
Outlook for the Year of the Ox – Taiwan SATS and substrate
industries........................................................................................15
Top-down analysis – Global SATS industry...................................................17
Operating analysis .........................................................................................21
Scatter plot analysis ......................................................................................23
2009 BOD elections........................................................................................27
Valuation ........................................................................................................28
Outlook for the Year of the Ox – IC Design....................................29
Top-down analysis .........................................................................................31
Operating analysis .........................................................................................33
Scatter plot analysis ......................................................................................36
2009 BOD elections........................................................................................40
Valuation ........................................................................................................41
Outlook for the Year of the Ox - DRAM fabrication........................ 42
Top-down analysis: DRAM fabrication ..........................................................45
Top-down analysis: memory modules ...........................................................48
Operating analysis: DRAM fabrication ..........................................................49
Operating analysis: memory modules...........................................................51
Scatter plot analysis ......................................................................................52
2009 BOD elections........................................................................................56
Valuation ........................................................................................................57
Outlook for the Year of the Ox – TFT-LCD Industry ....................... 59
Top-down analysis: TFT-LCD panels .............................................................62
Top-down analysis: TFT-LCD Components....................................................66
Operating analysis: TFT-LCD panels .............................................................68
Scatter plot analysis ......................................................................................72
2009 BOD elections........................................................................................76
Valuation: TFT-LCD panels ............................................................................77
Outlook for the Year of the Ox – Solar ........................................... 79
Top-down analysis .........................................................................................81
Operating analysis .........................................................................................83
Scatter plot analysis ......................................................................................85
2009 BOD elections........................................................................................89
Valuation ........................................................................................................90
Important Disclosures.................................................................... 91
In 1999, CUR surged from below 60% to over 100%, driven by Y2K replacement
demand, while in 2001, CUR also trended up from the historical low of around 40%
to nearly 90% within six to nine months (again, this was later proven a “fake”
inventory build-up coming out of the 9/11 tragedy). Thus, unless there is a strong
recovery starting from 2Q09, which we view as optimistic, the strategy of buying
on trough utilization could be proven premature in this cycle.
Meanwhile, spending on back-end semiconductor equipment has also been highly
correlated to semiconductor share prices in the past. The reason that back-end
booking has worked even better than front-end booking as a share price indicator
is due to its short lead-time, or better timing of the cyclical inflection. Historically,
when spending patterns bottom, a recovery in semiconductor fundamentals is
usually in sight. Nonetheless, this is only a supply-driven indicator (low capacity
growth implies subsequent tightness in supply), which might not work well in a
demand-driven cycle like today.
Inventory correction will persist, and any restocking demand will be weak
Unit shipments have fallen significantly across the global semiconductor supply
chain in 4Q08, suggesting it could take much longer for the long-awaited
inventory reduction to materialize. Indeed, DOI (days of inventory) have trended up
for almost every global semiconductor company that has reported 4Q08 results
thus far. Therefore, customers will continue to cut orders into 1H09 as a
precautionary step towards inventory management, and the inventory reduction
effect could get even more accentuated with the traditionally slow season in both
PC and consumer markets ahead. Given the extremely low comparable base in
December/January, there could be more talks of “rush orders” in coming weeks
(any sequential improvement in order flow is viewed as “rush” these days). However,
given the gloomy macro outlook, companies will likely keep their inventory levels
below the historical norm, meaning any restocking demand, which is usually the
key driver for a cyclical rebound, could be weaker than seen in the past (i.e. 2002
and 2004).
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