Folks;
Following from a report by Gillian Munson, analyst with Morgan-Stanley:
KEY POINTS
- Last week we toured Japan and met with Japanese companies in the
PC Hardware and Peripherals market. We also visited with Japanese
investors to discuss the PC Hardware and Peripherals stocks.
- We visited with Toshiba, Sony (SNE, $82, Strong Buy, Covered by
Takatoshi Yamamoto), Hitachi (HIT, $62, Neutral, Covered by Takatoshi
Yamamoto), Fujitsu (FJTSY, $51, Outperform, Covered by Takatoshi
Yamamoto), NEC (NIPNY, $44, Neutral, Covered by Takatoshi Yamamoto),
Minebea (MNBEY, $19, Outperform, Covered by Masayuki Mochizuki), Alps,
Dell - Japan (DELL, $92, Outperform), TDK (TDK, $74, Outperform,
Covered by Noriko Oki), Aiwa, Hoya and Ibiden.
- We are cautious about the Japanese domestic PC market, the impact
Japanese companies could have on U.S.-based PC Hardware and
Peripherals companies (owing to the feedback we received on the trip),
and the economic issues facing Japan.
- The Japanese PC market is facing tough times. While most expect
roughly 5% growth in units for FY98 (ending March '99), unit shipments
declined by about 10% Y/Y in the first months of the year.
Interestingly, ASP pressure does not appear to be as aggressive as it
is in the U.S., as Japanese customers tend to prefer somewhat higher-
end PCs and portables. However, many in the market are having an
increasingly difficult time determining what might revive growth. We
continue to maintain the view that PC unit growth is slowing and that
it will not materially accelerate for quite some time.
- On a component basis, there appears to be a little evidence to
think positively about re-ordering rates of PC Hardware components
(from large U.S.-based manufacturers). However, the data points are
not consistent and we do not believe that they determine a trend. In
fact, it appears as though most of the buying is for very specialized
products and/or products with no ASP pressure, such as keyboards. We
think that this is a moderate positive with regard to overall channel
inventories. It appears that there is a bit more inventory clearing
needed before a meaningful seasonal uptick in orders occurs.
- Overall, disk drive component order flow continues to be depressed
with little indication of an upturn. Some companies and products are
doing better than others.
- We believe that large Japanese players are creating a very serious
issue for U.S. PC and peripherals companies. Many management teams in
the U.S. argue that economic issues will constrain efforts by these
companies to gain share. However, we think that this view is
shortsighted. After spending time with a number of these players and
the investors that support them, we continue to believe that they
represent a serious long-term threat. Japanese management teams
appeared to be very committed to gaining share in the PC Hardware and
Peripherals market in order to gain economies of scale. Moreover, we
believe that these teams are very patient.
- The Japanese economy is in a recession. We are very concerned
about what this means for Japanese consumer and corporate IT spending.
- Sony is getting closer to figuring out how to drive the convergence
of PCs and TV/consumer electronics.
- The fluctuations in the Yen will likely be important to watch.
Most companies indicated that the Yen was having little impact on
sales because of hedged Dollar-denominated exports at around 130 Yen
to the Dollar and because of ASP deterioration. However, if the yen
remains at current levels, it could cause an uptick in revenue for a
number of Japanese companies over time.
- We don't believe that the Year 2000 issue is totally solved in
Japan. Across the board, we were told that the Year 2000 issue was
solved in large corporations and for their customers. However, we
were given few details on the exact solutions and we worry that Year
2000 issues are being a bit underestimated.
- Anecdotally, we found Japanese investors quite cautious and
conservative with regard to investing in the technology space. We
have a very conservative view on portions of the PC Hardware market.
Typically this meets with some backlash from U.S. investors. In
Japan, we found investors were even more cautious than we were.
10 TIDBITS FROM OUR MEETINGS (In no particular order):
1) Seagate appears to be increasing orders for spindle motors and
some recording heads - we think this is a good sign.
2) Overall, HDD spindle motor orders are still weak (we talked to two
companies that represent the vast majority of the market) - we think
this supports our conservative view on the disk drive market.
3) TDK (14% share in recording heads) thinks it can almost double
unit output (with good demand) by March '99 versus March '98, and Alps
(<5% share in recording heads) thinks it can almost double unit output
(with good demand) by March '99 versus March '98 - this is possible
because both have the MR technology that customers want, however this
could also cause recording head pricing to be quite aggressive in late
C1998/early C1999 and be a negative for US players and the recording
head market.
4) Fujitsu is determined to gain share in PCs and disk drives.
5) Toshiba feels good about mobile disk drive demand - this is a good
sign for portable PC demand.
6) Hitachi is trying to expand in enterprise storage - it is too soon
now, but EMC shareholders should watch this carefully.
7) In the first few months of FY98 (ending March '99), PC unit
shipments in the Japanese market fell 10% Y/Y - if this continues
and/or Europe slows, it could be an issue for overall PC demand.
8) The Sony portable VAIO 505 is hot - this is the wave of the future
in portables.
9) Dell is doing well in Japan (in line with our thinking and our
model) but is clearly still trying to figure out how to appropriately
approach the market for exponential growth. For now, the focus is on
consumers and small businesses. We believe that over time the company
will figure out how to gain market share in larger corporate accounts.
10) At Ibiden (a semiconductor packaging company), orders for new
types of semiconductor packages used for high-end PCs are somewhat
weak - this may mean that the roll-out of new technologies is going
slightly slower than expected.
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