Google, Intel, and Qualcomm could join US ban on Huawei
The US Commerce Department announced on May 16 that it is adding Huawei and its 70 affiliates to its “Entity List” which will make it hard for them to buy parts from US suppliers. Following the announcement, foreign news outlets have reported that: 1) Google (GOOG) will not provide Play Store or Gmail apps to new Huawei smartphones; and 2) major semiconductor companies like Qualcomm (QCOM) or Intel (INTC) will not supply their parts and components to Huawei and its affiliates. Some had been hopeful that the curbs would be limited to networking equipment and server/storage products, the parts that are closely related with information security, but any such hopes have since been dashed on the possible participation of Google and Qualcomm. Huawei is the world’s second-biggest smartphone maker by volume and its inability to use US parts could negatively affect global smartphone assembly volume. Furthermore, with Huawei being the world’s biggest telecommunication equipment maker, it could also slow down the commercialization of 5G technology. However, we believe the Huawei issue creates a great opportunity for Samsung Electronics (OTC:SSNLF) and its affiliates to gain market share.
For smartphones in particular, Huawei has been the major reason behind Samsung’s market share decline in emerging markets and Western Europe. On the other hand, North America and China will likely remain unaffected because Huawei’s market share in North America is only 0.3% and Samsung’s market share in China is just insignificant, even if the Chinese boycott against Apple (AAPL) gains steam. Meanwhile, if Huawei smartphones are no longer able to offer US apps like Play Store, Oppo/Vivo will probably gain market share in emerging markets, excluding China. This could also mean opportunities for Samsung and its affiliates because Oppo/Vivo’s dependence on Samsung and affiliates is huge. If Samsung and Oppo/Vivo take more market share outside of China, it will have positive impacts on the Korean semiconductor and parts industry. As for 5G equipment, even if Huawei is unable to buy from US suppliers, it would still be able to mostly solve the problem with its own modem and RFIC. Having said that, other network equipment companies like Samsung and Ericsson will likely benefit, albeit partly, since Huawei has been the biggest player in this space. In all, the Huawei issue could weigh on sentiment in the short term but we believe it has more positive implications for the Korean IT sector than negative, since Huawei has used very few parts made by Samsung and its affiliates.
Server DRAM demand to recover in 2H, corrections offer a great entry point
That Huawei uses SK Hynix’s (OTC:HXSCL) memory chips in its smartphones could be negative for sentiment but still, the biggest swing factor of memory semiconductor demand are hyperscale data centers. Huawei represents 15% of Tencent’s server demand, and the biggest supplier for Tencent (OTCPK:TCEHY) is Inspur with a 48% market share. In addition, the major server suppliers for Alibaba (BABA) and Baidu (BIDU) are Inspur and Inventec. As such, even if Intel does not supply Huawei with its server CPU, it would have little impact on the data center investments of Tencent and Alibaba. In 1Q19, Inspur and Taiwan-based Wiwynn (supplies Microsoft (MSFT) and Facebook (FB)) saw a QoQ decline in sales. However, data center investments are expected to pick up in earnest from 3Q19 as Intel’s Cascade Lake CPU becomes available in 2Q. We especially expect Amazon (AMZN) and Microsoft to scale up investments in 3Q19. Aspeed, the world’s biggest maker of baseboard management controllers (OTCPK:BMCS) with a 80% market share, saw a 13.4% QoQ increase in sales in 1Q19 and its monthly sales in April also rose 5% MoM, signaling a recovery of demand in 2H19. Taken together, we advise investors to use price corrections caused by the US ban on Huawei as a bargain-hunting opportunity.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.