The following report on chemical industry is provided by Woori Investment & Securities. -Ed.
△ Concerns have risen over global handset and LCD TV demand
1Q global handset shipments climbed 19% y-y, beating consensus, while global LCD TV shipments grew 50% y-y, also coming ahead of consensus. However, concerns have risen over global handset and LCD TV demand as: 1) major handset makers recently canceled orders from Taiwanese component makers; 2) LCD TV sales during the Chinese Labor Day holiday appear to be less than expected; and 3) concerns are growing over slowing IT demand in the eurozone due to credit risks from the European fiscal deficit.
△ Maintain global IT demand forecast on favorable demand factors
However, we maintain our global handset and LCD TV demand forecasts. For one, we expect a mismatch between demand and inventory in 2Q as demand in 1Q was much stronger than expected despite low seasonality. Though IT demand steadily ebounded in 2009, it should be noted that there were periods when inventory levels temporarily increased. Second, LCD TV demand remains strong in emerging markets (except for China). In particular, LED TV demand exceeded supply during the Chinese Labor Day holiday. Third, sales at Taiwanese handset PCB and foundry makers, which serve as a one or two month leading indicator for global IT demand, both rose 4% m-m in April, hitting a post-Jan 2009 record. Overall, we maintain our 2010 global handset and LCD TV demand forecasts given favorable demand conditions (we expect 2010 global handset and LCD TV demand to grow 12% y-y and 30% y-y, respectively)
△ SEC's 2Q handset shipments to miss guidance; LGE's handset operating margin
to miss our estimate
We expect SEC's 2Q handset shipments to miss the company's guidance given luggish April handset exports. We believe inventory destocking is required at distribution hannels for fullfledged sales of the "Galaxy S" and "Wave," which will be rolled out in end-May. As noted in our May 3 report, we maintain our 2Q SEC handset shipment growth forecast at 4%, lower than consensus of 7% q-q (guidance 66.5mn units).
Meanwhile, LGE's 2Q handset operating margin is likely to miss our estimate of 2.2% on: 1) a lack of profitable feature phones; and 2) higher-than-expected marketing and R&D expenses (marketing spending required for establishing distribution channels in emerging markets and R&D costs for upgrading smartphone software).
SEC and LGE plan to release the Galaxy S and Ally (first smartphones to be equipped with Android 2.1 version), respectively, in May, targeting the North American market. The market response to these models will be key in predicting 2H smartphone shipments at SEC and LGE.
△ TV makers’ margins likely to be lower than expected in 2Q, due to serious
shortage of LED TV components
Meanwhile, global TV makers such as SEC, LGE, Sony, and Sharp are all expected to meet shipment volume targets in 2Q, but margins are likely to come lower than expected as: 1) the faster-than-expected won/euro forex rate decline due to growing credit risk in the Europe is weighing on TV makers’ costs; 2) price competition in the high-margin LED TV market is likely to intensify in line with the rising number of LED TV makers; and 3) the serious LED TV component shortage makes TV makers hard pressed to ask for sharp price cuts. In particular, among LED TV components, there is a serious shortage of LEDs (ingot, wafer, chip), glass, LGP (light guide panel), and driver ICs.
△ Component makers more attractive than set makers; focus on LED TV
component makers as supply shortage continues
Given that margins at TV and handset makers are likely to fall short of estimates for the time being, investment merit should be higher for component makers, especially LED TV component makers (LED (ingot, wafer, chip), glass, LGP, driver IC), than set makers. Thus, we maintain SEMCO, and LG Innotek (LED), A-tech Solution, (LGP), Nepes and LG Innotek (driver IC) as our top picks.
In particular, in the LED industry, amid the continuous ingot and wafer supply shortage, Taiwanese LED chip makers are planning 5~10% LED chip price hikes. We predict that the LED component supply shortage will continue till 2H, considering that stronger-thanexpected demand for LED TVs and 3D LED TVs continues and it takes about 6~12 months from LED ingot and wafer production equipment order placement to actual delivery. Thus, till mid-3Q, earnings forecast upgrades on SEMCO and LG Innotek should outpace their share price rise.
△ Components makers whose penetration rates are rising are also attractive
Meanwhile, component makers whose penetration rates are rising also look attractive. Given that AM-OLED, which SEC and Nokia used for their handset displays, is expected to be adopted for LGE’s Ally, a smartphone running on android 2.1, Samsung SDI looks attractive. In addition, Simmtech also looks to have strong investment merit, considering that the DDR3 BOC (board on chip) sales contribution is increasing in line with rapidly rising DDR3 portion in the DRAM market. As the portion of touch panel handsets continues increasing and tablet PC should contribute to growth momentum of touch panel makers, ELK appears attractive.
△ Korean IT component makers to outperform Japanese and Taiwanese peers; but conservative approach recommended for set makers and component producers with heavy exposure to Europe
Korean IT producers, particularly LED TV parts makers are likely to outperform peers in
Japan and Taiwan. As we pointed out in our report published on Apr 15, Korean set makers should enjoy faster market share growth compared to peers in Japan and Taiwan, thus, they should benefit more compared to Japan and Taiwan’s IT parts makers; and utilization rate is still low for Japan and Taiwan’s parts makers and they lack funding for capacity expansion.
Thus, supply growth should be slower compared to domestic IT parts makers.
The share performance of domestic, Japanese, and Taiwanese IT parts makers over the past week confirms our forecast.
However, we recommend a conservative approach toward companies with heavy exposure to European markets as the won/euro rate is likely to fall rapidly due to the credit crisis.
By Kevin Lee(kevin.lee@wooriwm.com)
Sophia Kim(Sophia.kim@wooriwm.com)
Dennis Shin(dennis.shin@wooriwm.com)