Korea IT H/W: Lessons Learned From History Help Find Opportunity

Summary

• Coronavirus fears are exacerbating worries about the potential disruption of the global supply chain and faltering demand.
• Taiwanese PCB makers based in Hubei are seeing a recovery in utilization; CSOT obtained a special permit to continue production.
• Foxconn is running at increasingly higher utilization rates after offering a CNY6,000 bonus to encourage employees to return to work.
• The 2008 collapse of Lehman Brothers provides a valuable lesson; memory chip and MLCC price hikes should not be overlooked.

Chinese plants' run rate recover to over 60%; memory chip and MLCC prices poised to rise

As the coronavirus spreads to more countries, there are mounting worries about a disruption of the global supply chain and slowdown of demand. As the number of new cases spike in Korea, concerns are deepening over the operation of fabs in Korea, a dominant player in the global DRAM market. After SK Hynix's (OTC:HXSCL) Icheon fab and Samsung Electronics' (OTCPK:SSNLF) smartphone factory in Gumi confirmed that one of their employees was coronavirus patient, some worry that it could hamper the global supply chain. However, production is as usual at the two plants, and the Gumi plant accounts for less than 5% of Samsung's smartphone production and shipments out of the plant are steady as employees work overtime. Having experienced many power outages, Korea-based semicon plants have various contingency plans and since employees wear cleanroom garments anyway, we do not expect any production shortages. Meanwhile, memory chip consumers around the world are escalating efforts to build inventories as uncertainties loom over Korea, and this has had a positive impact on prices. PC DRAM spot prices have rebounded after slight corrections, and NAND MLC prices are soaring. Taiwanese MLCC makers are taking advantage of the situation by raising the utilization rates of plants based outside of China and preemptively raising their MLCC prices. Meanwhile, in Hubei, Taiwanese PCB makers as well as Chinese LCD and semicon players are operating. Tripod, a maker of PCBs for DIMMs and SSDs, is running at 20% capacity but is trying to overcome production losses by bolstering the Wuxi plant's utilization, which represents 60% of its total production capacity. Dynamic Electronics is keeping its utilization steady at over 70%. CSOT, another company with operations in Hubei, is keeping its LCD production line running after obtaining a special permit but BOE has postponed the ramp-up of its plant by one quarter. Taiwan-based MLCC makers such as Yageo and Walsin have cranked up the utilizations of plants outside China to over 100% while gradually raising the utilizations of their Chinese plants. In all, we may see a decline in shipments in 1Q20 on seasonality but for commodity products, higher prices and favorable FX will help offset the shipment declines. Meanwhile, Foxconn (OTCPK:FXCOF) is making efforts to normalize the operation of its factories by offering a special CNY6,000 bonus, accommodations, and transportation for employees returning to work.

Lessons learned from the 2008 financial crisis; Overweight the Korean semiconductor sector

That the spread of the coronavirus the world over has the potential to dampen worldwide demand is a cause for concern. Indeed, the 2008 financial crisis hurt consumption greatly as consumers were reluctant to travel or dine out. However, contrary to expectations, LCD TV demand in 1Q09 surprised everyone by surging 27% YoY. Instead of taking trips elsewhere or dining out, it appears that consumers took pleasure in buying LCD TVs. We do not believe the decrease in demand will 100% be carried forward to the future but IT devices are more likely to benefit from deferred demand compared with other consumer products and services. Above all else, 2020 has a rich lineup of products to be released, including 5G and foldable smartphones. The termination of Microsoft (MSFT) Windows 7 updates is also positive.

Additionally, we expect the spread of the coronavirus to accelerate the movement of production and consumption toward the online space. Demand will increase for unmanned deliveries, unmanned stores, and smart factories and as a result the importance of the 5G infrastructure and data centers will be further stressed. The Korean semiconductor sector will see demand drop in 1Q20 but the impact will be partly offset by price hikes and a weaker KRW. Most importantly, since the outbreak of the disease could be a catalyst for demand in the mid to long term, we advise investors to see corrections as opportunities to add to positions.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s 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.

Hyundai Motor Company is a passive shareholder in our bank.

Comments

[johndkopta]

Thanks good HMIS.

Fine piece of work, as always.

Peace.