Bottom-up Strategy for IT Hardware Stocks
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and michlshim94@shinhan.com, respectively. -- Ed.
Concerns over a decline in tech product sales
Our forecasts for tech product shipment growth for 2022 have been revised down continuously because of a high base of comparison. Sales of major tech products (laptops, TVs priced over USD1,500, tablet PCs, etc.) increased by 20-50% in 2021 compared to pre-pandemic levels. Sales may drop by more than 10% YoY for some products this year. Considering uncertainty over the timing of an upturn in demand, we recommend focusing on IT components and parts suppliers that can counter the current weakness in tech product sales.
Bottom-up strategy for IT hardware stocks
1) Foldable devices: Differentiation in shipment growth
A clear directionality is the biggest momentum for the IT sector. Samsung Electronics is expected to maintain its lead until this year. Global manufacturers including Chinese companies should ramp up their sales from 2023. In addition, foldable devices will likely diversify with slidable, double-bending, and wide screens going forward. We see strong growth potential for the foldable device market.
2) DDR5: Price hike of 30-55%
The unit price of DDR5 had been projected to rise by 20-30% considering a 20% increase seen for DDR4. But the price hike turned out to be much higher than anticipated, driving earnings momentum in 2022 that will last four years. With server-use DDR5 components slated to be shipped from 3Q22, related parts suppliers should see a rise in ASP levels on improving product mix.
3) MR (AR/VR): Upcoming release of Apple Glasses
Sales of mixed reality (MR) devices should increase in volume, along with those of foldable devices. Apple is expected to introduce Apple Glasses in 1H23.
4) Product mix diversification: Supply of new components
Regardless of the slowdown in tech product demand, some parts suppliers will be changing the directionality of their business in 2H22 with shipments of new components. We pay attention to companies poised for a turnaround in earnings in 2H22 or 2023. Significant technological advancements are being made in camera, automotive electronics, and communication parts.
Investment strategy: Focus on beneficiaries of technological advancements
We recommend taking a selective approach to companies that stand to benefit from technological advancements, with focus on supply of new components, market share gains, and products that are under supply constraints. These stocks should become more attractive during correction. Those in our favor are as follows:
-Foldable devices: Fine Technix, KH Vatec, Interflex, Segyung Hitech
-DDR5: TLB (highest sales share of 55% derived from printed circuit boards for DDR5)
-Sales contribution from new businesses: Jahwa Electronics, Sekonix, WiSol
(BH, LG Innotek, Simmtech, Isu Petasys, and Abco Electronics have been excluded from our list as they have gained more than 100% since the release of our previous reports.)