Technology
Overweight
July 6, 2000
Research Express Note
Asia Semiconductors: Maintain Bullish Outlook
A U.S. competitor recently downgraded the U.S. semiconductor sector, citing concerns over slowing cellular handset demand, as well as mounting fears of oversupply in the flash memory and passive (capacitor) markets. While U.S.
semiconductor valuations are at the higher-end of historical ranges and we believe selected areas like flash memory pose some risk over the next 6-12 months, we believe a broad-based negative call on the sector is unwarranted.
We continue to be constructive on Asia semiconductor plays, particularly the DRAM and foundry providers.
We believe the semiconductor market is still mid-cycle. There is little concrete evidence to suggest that we are anywhere near a cyclical top in the chip market. Inventories appear well under control, prices firm, and
capacity utilization high. Strong capital spending this year will likely not contribute meaningfully to global capacity for another 12-18 months.
Indeed, based on data collected in our recent tour through Asia, we believe the DRAM market may see only 60-65% bit growth in 2001, the lowest level in about a decade.
Asia Pacific chip valuations among the lowest. We estimate that the U.S.large cap semiconductor valuations are trading at around 50.4x 2001 estimates, compared to about 23.5x for Taiwanese chip companies and 7.1x for Korean chip companies. Importantly, we believe earnings estimates will
continue to have a strong upward bias, not downward or even flat. Unlike the prior cyclical peak where earnings revisions slowed, we expect to see continued upside revisions to estimates over the next few quarters.
No evidence of easing flash supply in the near-term. Based on our channel checks and various interviews with Taiwan flash makers in the last 3 weeks, we are not seeing any sign of weakening prices in the flash market. We have
said in the past and continue to be concerned that the flash memory market may be the first to see oversupply this cycle. However, we believe material
oversupply is unlikely over the next 3-6 months. One more point worth noting is that the flash memory market represented only about 2% of total semiconductor revenues last year (although could rise to 3-4% this year), so
this market should hardly be viewed as the de facto indicator of the health of the global semiconductor market.
Importantly, the DRAM and foundry markets are likely to stay well under-supplied over the next 12-18 months. Significant DRAM capacity investments have just begun this year, which will likely not be productive for another year-and-a-half. In fact, we are currently expecting to see a
marked deceleration in DRAM unit supply next year (slowing from the 75%-range to the low-60% range in 2001). All of the major foundry players also continue to report strong demand and firm-to-rising prices. Indeed, UMC
3203.TW;NT84;NR) recently commented that the company is booked-out until mid-2001. We believe similar visibility and a tight capacity scenario is being seen across the entire logic foundry segment.
Capacitors are NOT semiconductors. Many investors have been focused on the passive/capacitor shortages for the last year. These multi-market components go into nearly everything that uses power and thus can create significant
bottlenecks for system manufacturers in times of shortage. Based on our discussions with various Taiwanese OEMs, we believe that system manufacturers are currently seeing an increasing supply of capacitor product, although pricing remains relatively strong. However, the fact that
supply for these commodity parts may be easing should not directly correlate to a turn in the semiconductor cycle. In fact, to the extent capacitors have been a gating item for system manufacturers, an easing supply scenario would
actually be a positive development as it would allow more systems (and thus more semiconductors) to be sold.
We continue to be bullish on Asia semi stocks and constructive on selective downstream names. We continue to recommend Samsung Electronics (0593.KS;W363,000;RL) and TSMC (2330.TW;NT146;RL), among others in the
Asia semi sector. Looking downstream, we continue to favor stocks with reasonable valuations that would benefit with easing passive supply and an eventual turn in the flash memory market. To that end, we highlight Acer Peripherals
(2352.TW;NT87;RL). This company appears well-positioned to benefit with the secular shift in outsourcing of cellular handset production and should benefit with better component availability. |
