US firms lobbying against Huawei ban; Huawei postpones product launch
There is a massive outpour of news regarding Huawei recently. In June, foreign media reported that Huawei suspended Foxconn's production line for its laptop computer MateBook. There was also a rumor that the Singaporean production line of Flextronics (FLEX), a company that provides EMS for Huawei's low-end products designed for overseas markets, stopped operating. Huawei also confirmed that it cancelled the launch of its MateBook laptop due to the US ban and it is likely that the launch of the foldable Mate X will also be postponed because of a quality issue. The media have also been reporting since last week that US tech giants such as Google (GOOGL), Intel (INTC) and Qualcomm (QCOM) are quietly lobbying the US government to ease the Huawei ban.
As for Huawei's production suspension, we need to examine it closely to better understand the situation. The MateBook laptop is not the company's flagship product, and Intel's notebook CPU is chronically undersupplied. Given the tight CPU supply and Intel's plan to release the 10nm notebook Ice Lake CPU at end-2019, Huawei has little to gain from launching a new product in haste. Foxconn's (OTC:HNHPF) suspension of the MateBook production line has to be viewed in this context. As for Flextronics' smartphone production line in Singapore, we note that Flextronics is a US company, and the line probably stopped running in order to consume existing inventory as uncertainties over Huawei smartphones grow in overseas markets. It would be logical to assume that the suspension of production in both cases were strategic decisions rather than a frantic move triggered by a shortage of parts in inventory. Huawei produces flagship models such as the Mate and P Series itself, and only 40% of its production volume is outsourced to EMS providers such as Foxconn, BYD (OTCPK:BYDDF), and Flextronics. Huawei has been trying to beef up its smartphone parts inventory since the beginning of the year so its current inventory will last until September. However, RF parts made by US suppliers such as Qorvo (QRVO), Skyworks (SWKS), and Broadcom (AVGO) may be depleted after September. Therefore, Huawei will probably concentrate its marketing efforts on its home soil which is more favorable to the Huawei brand, and manage its inventory of key parts more conservatively. Typically, smartphone manufacturers have four to six weeks of smartphone parts inventory to avoid the risk of excess inventory. With the US ban on Huawei announced on May 16, it is unlikely that Huawei has more than four months' worth of inventory, regardless of whether it worked to build up its inventory beforehand. As such, the middle of September will likely provide a crucial point to determine Huawei's inventory.
TSMC's Nanjing plant and Novatek's sales worth watching; Hynix shares to bottom out in September
Meanwhile, TSMC (TSM), which generates 10% of its sales from Huawei subsidiary Hisilicon, has still not changed its 2Q19 guidance. TSMC's sales rose 7.7% MoM while dipping 0.6 YoY in May. Its 1Q19 sales were 3.4% short of guidance due to a production disruption at the Tainan plant but the company has kept its 2Q19 sales guidance (+7% QoQ) intact. Considering the typical lead time of the foundry industry, we expect TSMC to feel the impact of the Huawei ban from 3Q19 onwards. The utilization rate of TSMC's Nanjing plant is declining, and the Hisilicon-bound volume forecast is estimated to have come down more than 25%. As such, the wafer input at its Nanjing plant is expected to decline from 15K to 10K. We believe it is also worth watching the monthly sales trend of Novatek, a supplier of display drivers.
Aspeed, which has an 80% global market share in hyperscale server BMC, saw its sales fall 14.6% MoM in May. Its YTD sales in May also slid 0.7% YoY. Unless sales pick up dramatically YoY in 2H19, it will be hard for the company to meet its 2019 sales growth guidance of low10%. However, Inventec said that demand for servers would increase from July as Microsoft (MSFT) and Amazon (AMZN) migrate to Cascade CPUs; and Quanta Computer (OTC:QUCCF), which generates 30% of its sales from servers, enjoyed a 21.1% YoY sales jump in May. Accordingly, it is still likely that server demand will increase HoH in 2H19. While there are mounting concerns about SK Hynix (OTC:HXSCL) due to a potential order cliff from Huawei, we believe Hynix will be able to dissipate earnings concerns in the mid to long term by improving its product mix (e.g., increasing server DRAM's share of sales) and increasing the supply of mobile DRAM to other clients. We believe the stock price rally seen at the beginning of the year was driven by expectations for higher earnings in 2H19 and growth in AI demand in the mid to long term. In that regard, we should keep in mind that DRAM demand recovery led by 5G and AI is an ongoing story.
We continue to present Samsung Electronics (OTC:SSNLF) as our semiconductor sector top pick. The Huawei ban could weigh on semiconductor prices further but it has only a limited impact on Samsung's shipment volumes. In the midterm, a bigger smartphone market share will have a positive effect on semiconductor shipments. As for Hynix, we believe the shares will bottom out in September when uncertainties over the orders from Huawei are expected to disappear.
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.