WSJ Heard in Asia - Analysts Hang Hopes for Chips On Growing Non-PC Demand
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By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- To the doomsayers, the disappointing growth in Intel's third-quarter revenues, announced last month, is an omen for the entire electronic-component and chip industry. But some analysts here are betting that the share prices of some of Japan's component makers will hold up because a growing number of parts are being used in more than just personal computers.
Just ask Scott McNealy, the chairman of Sun Microsystems, why he spent last week touring Asia, with stops in Taiwan, South Korea and Japan.
"I've been up and down the Pacific Rim begging for parts, and I'll be begging again in Japan tomorrow," he said in an interview. "We're out there begging for disk drives, SRAMs, DRAMS, ASICS and monitors."
Mr. McNealy's shopping list is just one sign that the share prices of suppliers of certain kinds of chips and other components could stay strong despite predictions of slowing PC sales around the world. Mr. McNealy said Sun, a leading maker of workstations and large Unix server computers, is growing like gangbusters as customers increase investment in Web sites, which use Sun's servers. Mr. McNealy says Sun's problem with obtaining parts stems from its fast growth -- a 33% jump in revenues last year versus its forecast of 19%.
Mr. McNealy's comments followed news from Sony Computer Entertainment that it won't meet Christmas demand for its vaunted PlayStation2 game machine. It blamed the production shortfall on unspecified component shortages. Sony won't comment on what component is involved, but one person familiar with the company says the culprit is a Sony-built graphics processor.
Unix servers and game machines are just two examples of an expanding universe of computer and electronics wares that are pulling demand for chips and other parts. While the PC still accounts for the bulk of chip sales as well as a host of other devices from hard drives to flat-panel screens, the growth of non-PC devices will play an increasingly important role in sales of components. That's a stark contrast to just a few years ago, when the PC was nearly the only game in town.
Over the past year surging sales of cell phones, Internet music players, digital cameras and other consumer electronics have been driving demand for flash memory and DRAM memory chips as well as more basic components such as crystal oscillators and ceramic capacitors, which are used in phones.
Makers of those products, many of them Japanese, could enjoy strong growth over the next six months or so, say analysts. Flash-memory chips, of which Japan is a major source, are still in shortage. Shipments of cellular phones, which use flash memory chips to store telephone numbers and other information, should reach 425 million units world-wide this year, up from 275 million units in 1999, according to Nikko Salomon Smith Barney in Tokyo.
"The cellular market is still healthy ... it's still growing around 20% annually so it will have a positive impact on the cellular component companies like Kyocera, TDK and Murata," says Akira Minamikawa, director of semiconductor research at WestLB.
Nikko Salomon, in a recent report, said Japanese electronic-component makers have clearer prospects for earnings growth than their counterparts in other industries. In the report, Nikko Salomon analyst Hisanori Shimoi noted that the market capitalization s of 18 major electronic-components stocks in Japan had fallen around 20% since the end of 1999, leaving "an excellent buying opportunity for investors with a horizon of 12 months or longer."
Specifically, a few of the stocks Mr. Shimoi and his colleagues pointed out:
Rohm: This maker of chips for communications equipment has aggressive capital-expenditure plans that belie a conservative earnings forecast. Nikko Salomon's target price: 42,000 yen ($388). On Tuesday Rohm closed down 4% at 28,350 yen.
Taiyo Yuden: This is a maker of ceramic capacitors used in cell phones. Nikko Salomon expects fresh capacity to "push profits to new levels." The firm's target price is 8,500 yen. Tuesday the shares closed down 3.28% to 5,180 yen.
Murata Manufacturing: This is a leading maker of capacitors and other parts used in cellular phones. Nikko Salomon expects 25% earnings growth a year in the middle term. Target price: 30,000 yen. Tuesday it closed down 4.11% at 14,230 yen.
To be sure, the PC remains the single most important driver of parts sales. Another Nikko Salomon analyst sent technology share prices plummeting on Monday when he revised down his target prices for three big Japanese chip vendors. Citing the impact of falling PC prices on DRAM sales, Hiroshi Yoshihara cut target prices of Fujitsu and NEC each by 1,000 yen to 2,800 yen and 3,100 yen respectively, and Toshiba by 200 yen to 1,700 yen.
"The PC market is still the biggest in terms of semiconductor consumption," says WestLB's Mr. Minamikawa. He estimates that in value terms, 35% of all semiconductor sales go to PCs while cellular phones make up a small, albeit growing, 10% chunk.
Even so, Goldman Sachs following Intel's news said the problem was "company specific." In a report, analysts explained that the PC market should grow by a strong 15% this year over last. |
