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2009 - Stocks contract and investors
search for the bottom
Last year – from peak optimism to extreme pessimism
Last year was an unforgettable year full of extreme surprises, causing
stock market sentiment to collapse, going from peak optimism to
extreme pessimism. Starting in May of last year, we began revising
down earnings estimates for our downstream coverage; however, the
subsequent share price corrections exceeded even our already bearish
expectations. We have been concerned about weakening demand since
the subprime issues first emerged in August 2007. The situation
worsened in 2008, especially in 4Q08 when emerging market
currencies started to sharply depreciate against the U.S. dollar.
We expect the weakness in 4Q08 demand to roll over into 1Q09,
owing to lower seasonality, inventory clearance after Christmas and
rising unemployment. Given the slow start in 2009 and the fact that
there is no quick turnaround in sight, we forecast PC shipments will
decline 4% YoY in 2009 and that handset shipments will decline 13.6%
YoY in 2009. This would be the first decline in PC and handset demand
in seven years. Based on the consensus estimate that U.S. GDP will
return to growth in 3Q09, we expect PC/handset demand to bottom
out in 2Q09. Therefore, we believe 1H09 would be a good time for
investors to start bargain hunting.
The low-price trend will continue to dominate in 2009
We see no new themes in 2009 to drive market demand. The biggest
demand catalyst, in our view, will be the launch of Microsoft’s Windows
7 operating system. Windows 7 looks like Windows Vista, but it is
faster, and features multi-point touch screen capabilities. It offers a
brand new user experience, such as dragging and resizing pictures on
the screen, navigating between windows, and navigating/zooming
global 3D maps. Windows 7 does not require advanced hardware
specifications, and is designed to also operate netbooks with the
1.6GHz ATOM CPU. As such, it is possible that Windows 7’s touchscreen
feature will stimulate demand for PCs. The launch date for
Windows 7 has not yet been finalized, although our supply chain
checks point to late 2009 as an early possibility.
We expect 2009 to be a year of contraction, especially in terms of
electronics product pricing, given the slowing economy and weakening
consumer purchasing power. Even so, tech companies that can offer
popular low-price products will benefit, such as Acer (2353 TT; BUY)
and Asustek (2357 TT; BUY) for netbooks. In addition, companies that
can manufacture products on a lower cost basis should also benefit,
such as Hon Hai (2317 TT; BUY).
Table of Contents
PC Industry – Outlook for the Year of the Ox................................... 4
Top-down analysis ...........................................................................................7
Operating analysis ...........................................................................................9
Scatter plot analysis ......................................................................................11
2009 BOD elections........................................................................................15
Valuation ........................................................................................................16
PC Components – Outlook for the Year of the Ox.......................... 18
Sub-sector grouping methodology ................................................................20
Top-down analysis .........................................................................................23
Operating analysis .........................................................................................24
Scatter plot analysis ......................................................................................33
2009 BOD elections........................................................................................37
Valuation ........................................................................................................38
Handsets and Handset Components – Outlook for the Year of the
Ox.................................................................................................... 41
Top-down analysis - Handsets.......................................................................43
Top down analysis - Handset components ...................................................48
Top down analysis - Handset PCB.................................................................49
Operating analysis - Handsets.......................................................................50
Operating analysis - Handset Components...................................................52
Operating analysis - Handset PCB ................................................................55
Scatter plot analysis ......................................................................................58
2009 BOD elections........................................................................................62
Valuation - Handsets......................................................................................63
Valuation - Handset Components..................................................................64
Valuation - Handset PCB (Unimicron) ...........................................................65
Networking– Outlook for the Year of the Ox.................................. 66
Top-down analysis .........................................................................................68
Operating analysis .........................................................................................70
Scatter plot analysis ......................................................................................72
2009 BOD elections........................................................................................76
Valuation ........................................................................................................77
Telecoms– Outlook for the Year of the Ox..................................... 78
Top-down analysis .........................................................................................80
Operating analysis .........................................................................................83
Scatter plot analysis ......................................................................................86
2009 BOD elections........................................................................................90
Valuation ........................................................................................................91
Important Disclosures.................................................................... 93
As pricing pressure is so strong, we favor branded companies over
ODMs/component companies, as the former are passing pricing pressure back
through the supply chain to the latter.
Also given the low price trend, we view the smartphone sector as being risky.
Smartphones are high-priced products, retailing at around US$600 on average.
Rising competition on the hardware side and for platforms (e.g. Google Android
and Palm’s WebOS) is inevitably catering to the low price trend for smartphones,
likely driving the average retail price to US$300. All smartphone makers, including
HTC (2498 TT; SELL), will feel pricing pressure in 2009, in our view.
Bargain hunting - PCs in 1H09, handsets in 3Q09
For 2009, we forecast PC shipments to decline 4% YoY and handset shipments to
decline 13.6% YoY; we also expect handset demand to recover later than PC
demand. As such, we recommend investors BUY into PC stocks first, then handset
stocks. In the near term, we expect to see some inventory replenishment from
February to March, but given this serious global demand slowdown, we believe any
uptick in demand in 1H09 will lack strength.
On the back of the structural trend for notebooks to replace desktop PCs, we
expect PC demand to start to pick up moderately from 2Q09. The launch of
Windows 7, which could happen as early as the end of 2009, could serve as good
share price catalyst for PC stocks in 2H09. As such, we encourage investors to BUY
into leading PC-related stocks in weakness. Handset seasonality historically arrives
later in the year than PC seasonality, and we expect this year to be no different.
Investors should not expect a meaningful uptick before mid-August, in our view.
All said, when investing in tech sectors, investors will have to be very selective as
not all companies will do well when the market recovers. The tech sector has
matured over time.
Our conviction calls in downstream coverage
In the downstream technology space, we favor the PC sector over the handset
sector owing to the latter’s relatively weaker demand situation. In the PC space, we
favor branded companies over ODM/component plays. We like Acer, Asustek,
Wistron (3231 TT; BUY), Hon Hai, and Chicony (2385 TT; BUY), for their exposure
to popular netbooks and/or advantages of low-cost production. On the other hand,
we are negative on Quanta (2382 TT; SELL) due to rising competition from EMS,
and also negative on Simplo (6121 TT; SELL) and Dynapack (3211 TT; SELL), due to
severe oversupply in the laptop battery cell space which is dragging down pricing.
We are negative overall on the handset space and would not encourage investors to
take ownership now. We have a SELL rating on HTC (2498 TT) on account of our
concerns of rising pricing/margin pressure.
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