The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
China’s IT factories coming back online; 1Q demand outlook by value chain
China’s IT production has started to recover in March and should mostly return to normal in April. Capacity utilization rates are clearly on an uptrend at ODMs, though unlikely to reach full operation by end-March as previously planned. IT demand in China will likely continue falling YoY but rise MoM in March.
Suppliers in the value chain of Chinese companies have suffered a severe drop in parts orders so far in 1Q. They may see a stronger rebound in demand in 2Q vs. those supplying to Samsung Electronics and Apple, backed by recovery in clients’ capacity utilization. As for the Samsung value chain, we expect sluggish demand for low-end parts but relatively solid demand for high-end ones in 1Q. Meanwhile, Apple value chain suppliers have seen limited reduction in parts demand, despite disrupted production in China. Apple is increasing parts orders with production resuming for a new smartphone dubbed iPhone 9 and 2019 iPhone models in March.
IT demand projections adjusted downward for2020
The impact of slowing demand in Europe and North America should be reflected in IT companies’ earnings from 2Q. For full-year 2020, relatively strong demand is expected for servers and PCs vs. sluggish demand for smartphones, tablet PCs, TVs, and other home appliances.
With uncertainties growing for 2H, we revise down our shipment projections for 2020. Smartphone shipment growth (YoY) is now forecast at -15% vs. previous projections of +3% (made at the year’s start) and -7% (March 11 report). TV shipment growth (YoY) is estimated at-13% vs. +1% and -4%.
Investment strategy: Focus on Apple value chain and package substrate suppliers
We recommend making investment decisions considering uncertainties in 2H demand outlook. LG Innotek, BH, and Simmtech are our top picks in the handset/electronics sector in view of: 1) 2H outlook for smartphone sales volume and suppliers’ relative earnings performance; and 2) undemanding valuations even when assuming demand slowdown in 2H.
We focus on the Apple value chain as Apple is expected to launch most aggressive marketing efforts among smartphone makers in 2H. Package substrate suppliers are also in our favor, given stronger growth momentum vs. peers with price hike expected on improving supply/demand conditions and performance upgrade.