SanDisk, Orbotech and Orckit: The Ties That Bind With Japan

by: Shlomi Cohen

Trading this week will no doubt be influenced by events in Japan, events which are still unfolding. Nearly every high tech company has ties of some kind with Japan, but some of the companies held in my portfolio tracked by "Globes" have very tight connections.

Outstanding example are SanDisk Corporation (Nasdaq:SNDK), which has two large facilities in Japan and a third one in the process of being built, in collaboration with Toshiba (OTCPK:TOSBF); Orbotech Ltd. (Nasdaq: ORBK) which is the leading supplier of inspection systems for the biggest LCD screen makers in Japan; and Orckit (Nasdaq: ORCT), which owns about $200 million worth of equipment across Japan, as the landline telecommunications infrastructure for KDDI, the second largest telecommunications operator in the country.

NAND flash chips are the exclusive data storage solution for all of Apple's (NASDAQ:AAPL) iPods, iPhones, and iPads, and their rivals. The facilities of Toshiba and SanDisk, which are located outside the center of the earthquake in Japan, are responsible for the supply of 40% of the entire NAND market. Since this market was at equilibrium before the catastrophe, and since Toshiba already said there will be logistical problems in getting the chips from Japan, in addition to the loss of output at an unknown extent as a result of electricity outages which hit the production lines on Friday, the prices of the chips are expected to rise significantly, following a shortage expected to develop in the next several months.

The disaster in Japan caught the NAND market exactly on the launch day of the iPad 2, as Apple prepared to increase production at sub-contractors with the goal of meeting demand that is expected to reach tens of millions this year. Toshiba is expected to be a major supplier, along with Korea's Samsung (OTC:SSNLF). In addition, all of Apple's competitors are planning launches of tens of tablet computers over the course of the year, all of which are expected to rely on steady supply of NAND chips.

It will be interesting to follow the effects of the expected shortage on shares of NAND makers, especially SanDisk, for whom that is its entire business. In contrast to Toshiba, SanDisk packages the final processors - a raw chip and its unique controller - in Shanghai in China, not in Japan.

Toshiba shares fell 16% at the beginning of the week, not because of the chips but because it is a big supplier to nuclear reactors for the production of electricity, a market whose future is not clear in light of the disaster. In contrast, Samsung's share price rose 4% in Korea because it will benefit from the rise in memory prices.

Good, even excellent, years ahead for Orckit

After five very tough years, it appears that Orckit is looking at five very good years, which can become dreamy years if its potential orders materialize into orders and sales. Small investment banks outside Israel sense something, and two of them -- Rodman & Renshaw, and Roth Capital -- put out a "Buy" recommendation on the share.

As far as KDDI, already last year it was supposed to replace the 2,200 Orckit CM100 systems, developed in 2000, with the CM4000, which was planned in line with KDDI requirements and those of the market at a time of heavy video traffic on broadband, but KDDI pushed off the investment due to budgetary considerations. KDDI's new budget year begins at the end of the month, and it is not clear what it will decide, but I have no doubt that the catastrophe that occurred in Japan will force it to renew big parts of its network immediately, and Orckit will again be the supplier, because its equipment has satisfied the Japanese for many years already, including apparently through the current crisis.

Published by Globes [online], Israel business news - - on March 15, 2011

Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011