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M Equipment Such As Base Stations and FO Devices x Country 1 July 2019 Pan-Asia Tech Rating: Positive Implications on tech sector from the G20 meeting: back to square one MEMO Rick Hsu Summary: While seemingly no concrete outcome was seen after the president Trump-Xi (886) 2 8758 6261 talk at the G20 Osaka Summit, our takeaways appear to be a likely easing of the Huawei [email protected] ban, which should help appease recent market jitters, although we have not seen much Elina Lin order cuts in the supply chain after the Huawei issue started on 16 May. That said, it looks (886) 2 8758 6262 to us that tech fundamentals are back to square one after this period of turbulence; as [email protected] such, we continue to flag the 4 secular trends leading to 6 investment themes as our guideline for 2019 tech investment, where we expect the Huawei supply-chain players to rally especially in the near term due to the recent tumble in their share prices. What’s the impact Likely easing of the Huawei ban. With the G20 Osaka Summit ending on the weekend, and still no concrete outcome from the president Trump-Xi talks regarding the trade-negotiation progress, our takeaways appear to be on a possible easing of the export ban against Huawei, which should lead to a resumption in the supply of key chips/components/software/technology to the Chinese telecom-equipment giant from US companies and bodes well for the related supply chain, including for 5G and 3D build-outs. That being said, we will await official announcement of the lifting of the ban before drawing our final conclusion because we understand the action is still conditional, and Huawei remains on the Entity List. Back to square one. Our market research since the Huawei issue blew up on 16 May has suggested that, despite some order adjustments in the smartphone supply-chain (see Assessment of rising volume risk due to China-US trade tensions, 27 May 2019), most companies under Daiwa’s tech coverage have not seen much order cuts since 16 May, as most have adopted a “wait-and-see” approach despite US tech firms suspending their shipments to Huawei in order to be in compliance with Trump’s executive order. Now with the likely easing of the ban, we expect most of the orders to go back to square one, with the order flows in the supply chain set to return to their normal level as we saw earlier in the year, if not at higher levels. Multi-cam, 3D, AI, 5G, FO and memory still our focus. Assuming the Huawei issue is behind us, we continue to flag the 6 themes under the 4 secular trends we had outlined in our 2019 Tech Outlook report of HMI, AI, bandwidth and density: multi-cam and 3D laser sensing in the smartphone space for human-machine interface (HMI) enhancement, AI high-performance computing (HPC) xPU for computing upgrades including the cloud and edge compute, 5G cellular migration kicking-off for wireless bandwidth upgrades and constant fiber-optics (FO) bandwidth upgrades to facilitate wireline telecom and datacom capacity expansion, as well as memory upgrades in both NAND and DRAM for density enhancement post the current inventory correction. As such, we reiterate our 2019 global chip revenue forecast (ex-memory) of up a low- single-digits YoY, smartphone shipment forecasts of down low-single-digits YoY and iPhone shipment forecast of 188m units, down 10% YoY. No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa Capital Markets and accordingly this report and any part of its content may not be distributed or made available by any means within Malaysia. Important disclosures, including any required research certifications, are provided on the last three pages of this report. Pan-Asia Tech 1 July 2019 What we recommend Assuming that fundamentals are back to square one on the back of the easing of the Huawei issue, we continue to be a Buyer of the 16 stocks identified in our 2019 tech investment portfolio (see table below), with significant exposure in the Huawei supply chain particularly our conviction Buys given their recent tumbles in their share prices, including the SCM players TSMC (2330 TT, TWD239, Outperform [2]) and ASE Technology Holding (3711 TT, TWD61.5, Buy [1]), RF vendors WinSemi (3105 TT, TWD199, Buy [1]) and VPEC (2455 TT, TWD79.9, Buy [1]) and Inari (INRI MK, MYR1.6, BUY), FO supplier LMO (3081 TT, TWD261.5, Buy [1]), and multi-cam vendors Sunny Optical (2382 HK, HKD80.7, Buy [1]) and Largan (3008 TT, TWD3855, Buy[1]). Daiwa’s 2019 tech stocks picks Price PER (x) PBR (x) ROE (%) Earnings growth (%) Stock Ticker (LC)* Rating 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E Add Bandwidth: 5G/FO MediaTek 2454 TT 314.00 Buy 24.0 20.6 14.8 1.8 1.8 1.7 7.8 8.8 11.8 -15.2 16.4 39.3 Inari*** INRI MK 1.60 BUY 19.5 22.9 17.4 4.7 4.6 4.3 25.7 20.1 24.7 6.6 -14.7 31.6 SEMCO 009150 KS 97,800 Buy 11.1 12.0 9.1 1.5 1.3 1.2 14.5 11.9 13.8 305.7 -7.0 31.6 SEC 005930 KS 47,000 Buy 6.3 12.4 9.1 1.2 1.1 1.0 19.9 9.2 11.7 0.6 -48.9 36.4 Delta Electronics 2308 TT 157.50 Buy 22.5 19.4 17.0 3.1 3.0 2.8 14.3 15.9 17.3 -1.0 16.0 14.3 LMO 3081 TT 261.50 Buy 34.1 26.9 15.7 5.9 5.3 4.3 18.0 20.8 30.4 5.9 26.9 71.2 Murata** 6981 JP 4,840.0 Outperform 15.8 13.8 12.3 2.0 1.8 1.6 13.5 14.0 14.1 41.6 14.9 11.5 Advantest** 6857 JP 2,965.0 Outperform 10.4 16.0 12.6 3.0 2.8 2.4 35.3 17.9 20.4 214.8 -35.1 27.0 HMI: 3D/multi-cam WinSemi 3105 TT 199.00 Buy 27.0 33.4 19.4 3.3 3.4 3.1 12.3 10.0 16.5 -21.0 -19.2 71.9 Globetronics*** GTB MK 1.67 BUY 15.9 15.1 13.1 3.7 3.9 3.7 24.1 24.1 31.5 37.1 5.6 15.4 Sony** 6758 JP 5,648.0 Buy 7.8 14.5 13.2 1.9 1.7 1.5 27.3 12.5 12.2 86.7 -45.9 9.4 Largan 3008 TT 3,855.0 Buy 21.2 17.1 14.2 4.8 4.0 3.3 24.4 25.5 25.6 -6.2 24.1 20.3 Sunny Optical 2382 HK 80.70 Buy 31.2 21.5 15.9 8.4 6.3 4.8 29.6 33.4 34.2 -14.2 44.7 35.2 AI: HPC ASE 3711 TT 61.50 Buy 16.7 16.8 11.1 1.5 1.4 1.3 7.9 8.4 12.0 70.7 -0.7 51.9 TSMC 2330 TT 239.00 Outperform 17.6 17.9 14.7 3.7 3.4 3.1 22.0 19.9 22.2 2.3 -1.2 21.2 Density: memory SK Hynix 000660 KS 69,500 Buy 3.3 12.4 7.4 1.1 1.0 0.9 38.5 8.3 12.6 46.0 -73.7 67.7 Avoid HTC 2498 TT 36.55 Sell 2.5 na na 0.7 0.8 1.1 26.7 -24.3 -30.3 na na na TPK 3673 TT 49.55 Sell 90.0 44.2 58.7 0.5 0.5 0.5 0.6 1.2 0.9 -91.6 103.7 -24.7 Realtek 2379 TT 228.50 Sell 26.7 20.3 20.1 4.7 4.4 4.1 18.7 22.3 21.2 27.8 31.3 1.4 UMC 2303 TT 13.95 Underperform 23.9 22.4 30.8 0.8 0.8 0.8 3.4 3.6 2.6 -25.4 9.6 -27.4 AsusTek 2357 TT 223.00 Underperform 39.1 13.4 13.1 1.0 1.0 1.0 2.5 7.5 7.5 -72.8 192.2 1.8 Source: Daiwa forecasts, FactSet Note: * Local currency based on share price as of 28 June 2019, ** March year-end for Sony, Murata and Advantest, ***June year-end for Inari (covered by Daiwa alliance partner Affin Hwang) 2 Pan-Asia Tech 1 July 2019 Huawei: global tech supply chain Semiconductor** SCM Component*** Storage INTC Molex BOE Micron AMD Huber+Suhner Tianma SK Hynix TXN (<5%) Amphenol Samsung Nanya Tech 2018 revenue: USD108bn* TSMC (~10%) ADI (~8%) Luxshare Huntkey Macronix Enterprise & Amperex Tech other IFX Jonhon Fujitsu 11% Consumer NVDA (Mellanox) Shennan Circuit Panasonic Toshiba 48% XLNX (>10%) Compeq AAC (>10%) Seagate UMC (<5%) NXP Unimicron Goertek Western Digital Lens Tech MediaTek (<5%) ASE Tech TTM Tech Carrier Holding (~10%) 41% Novatek (teens) Wus Printed Circuit Biel Crystal ODM/OEM Kinsus TXC Realtek (teens) Amkor (teens) FIH (20-30%) STM Zhongli Sci-Tech O-Film Flex AVGO (s.digit) JCET (teens) Sumitomo Electric Sony Huaqin QCOM (<5%) Nexans Murata SMIC (~10%) Wingtech Marvell (~5%) YOFC Largan (25-30%) DBG Tech HiSilicon (100%) Furukawa Sunny Optical Zowee Goodix (teens) WinSemi (teens) (25-30%) Hengtong Optic Chino-E Comm SWKS (10%+) O-Net QRVO (~15%) VPEC (~10%) BYD Test & measurement LITE (>10%) H-Brights Keysight II-VI (FNSR) Rohde & Schwarz Accelink (~30%) LMO (~15%) MELCO NeoPhotonics Source: Company, Daiwa Note: * Consumer business includes smartphone, STB, DTV, etc.; Carrier includes telecom equipment such as base stations and FO devices.
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