ML：Handset/TFT LCD/Banks/Chinatrust/Epistar

austin

Today's Research & Sales Desk Ideas

• Global Handset Sector: When and how does inflation bite? Cutting down 08/09 growth
• TFT LCD sector update: No good news in the near term
• Banks: additional concerns on corporate loans
• Chinatrust (2891TT): June earnings
• Epistar (2448 TT): June sales down 16% MoM, 2H remains unclear
  

News items

• UMC reported June sales of NT$8,105mn which was 5.8% lower than May and 7.3% lower than June-07.
• ASE reported June sales of NT$8,584m which was 0.6% lower than May and 7.6% higher than June-07.
• Vanguard reported June sales of NT$1,541mn which was 0.6% higher than May and 16.3% YoY higher than June-07.
• China media reported Pakistan government lifted the ban against selling all China brand handset due to problems caused by black China handset.
• Media reported panel makers are cutting orders to driver IC companies by 10-15% in average.
• Quanta June consolidated revenue NT$62bn, down 4% MoM, in line with market expectation.
• Syntax-Brillian (Olevia), a leading U.S. LCD TV brand, filed for bankruptcy.
• Philips announced to sell its monitor BU to TPV (903 HK).
• Delta (2308 TT) June sales of NT$12.1bn were down only 1% MoM and the mgmt remains confident on 2H08 based on current order forecast.

 

Research & Sales Desk Ideas
Global Handset Sector: When and how does inflation bite? Cutting down 08/09 growth

• We are cutting global handset unit forecasts for 2008 and 2009 to 7%( from 12%) and 4%( from 10%) as replacement rates are falling in developed markets and flattening out in emerging markets. Rising inflation would further  reduce emerging market demand in 2009.
• Smart phones become more material and growing to 16% ( or 213mn units) of market demand in 2009 from 11% in 2007. Apple would become top 5 handset brands in value terms next year with 8.6% value share( based on 32mn units assumption).
• We retain cautious view on TWN handset supply chain and retain U/P on FIH, Merry, CCI , Mediatek & neutral on Silitech, Largan, HTC. Further slowdown in emerging market could be especially negative to Mediatek( 16.5x 08E).

TFT LCD sector update: No good news in the near term (Jeff Su)

• AUO’s disappointing June sales of NT$36.7bn, down 17% MoM, supported Jeff’s cautious view on TFT sector. Total AUO's 2Q sales of NT$123.4bn were down 9.6% QoQ and 5% below MLe.
• For Jeff's check, 1H July monitor panel ASPs showed a sharper drop of US$9-12 (down 6-8% MoM) and NB dropped US$4-5 (~4% MoM) and 32-inch TV down 3% MoM, mainly driven by weak demand on TV side. As a result, while we still expect 3Q "hot" season driven by TV pickup and monitor demand, the magnitude will likely be smaller than before and window of opportunity is shorter, while 1H09 oversupply risk exists.
• Jeff expects July momentum for panel makers to remain weak given hesitation in customer orders in face of fast-falling panel ASPs and uncertainty over end demand strength in 2H08. If end demand situation continues to deteriorate, Jeff believes panel makers such as AUO and LGD will be willing to reduce/lower utilization to try to manage supply side and ASP fall.
• Jeff highlights ASPs don't jus drop for a single month going by historical trend, and the weaker ASP outlook for 2H08 will now run into the over supply concerns for 1H09 and hence posing limited upside catalysts for these stocks.
• Jeff put Neutral on AUO with PO of $56 and Underperform on CMO with PO of $32 after having cut 08/09e EPS by 15%/17% for AUO and by 19%/19% for CMO on June 23. Note AUO's historical trough is 1x while CMO is 0.6-0.8x since AUO has a much stronger TV customer base.

 

 

Banks: additional concerns on corporate loans (Sophia Cheng/Katherine Hu)

• Syntax-Brillian (SBC; BRLC US), the major LCD TV distributor for Taiwan Kolin (1606 TT) filed chapter 11 on July 8. We are concerned on Kolin’s recovery from its ~US$200mn A/R with SBC, and expect this event to add short-term concerns on Taiwan banks’ corporate loan asset quality deterioration, following Everskill (6232 TT) default last week.
• Taiwan Kolin: assets NT$28bn, equity NT$10bn. LCD TV sales contributed to 80% of its 2007 revenue, thanks to SBC penetrating to US retail channel.
• Save Olevia brand: SBC has decided to sell its brand and liabilities to another newly formed company Olevia Int’l Group (OIG) to spin off Olevia brand (top 10 in US). OIG will assume the A/P to Taiwan Kolin, according to Kolin, but no disclosure on whether 100% recovery is ensured.
• Major lenders: Taiwan Kolin has total bank debt of NT$9bn. Bank of Taiwan, China Development (2883 TT) and Hua Nan (2880 TT) are major lenders.
• Impact from this news: (1) Taiwan Kolin needs local banks supports not to call back loans otherwise could be financials stretched, (2) We do not expect big corporate NPL for banking industry but this news should distract short term interest in government banks which tend to respond more slowly in economic downturn, and (3) we only consider SinoPac safer investment while see long-term value in Fubon and Chinatrust.
  

Chinatrust (2891TT): June earnings (Sophia Cheng)

• Chinatrust reported June net profits of NT$1.2bn. 1H08 net profits was NT$9.3bn, 53% of our full year forecast and slightly above street estimates. Gains/cash dividends from Mega and Visa IPO profit sharing were sufficient enough to offset the NT$1bn extra provisions for Everskill. We are reviewing our earnings models but see limited downside risk to our forecast.
• Among NT$2.5 credit exposure to Everskill, Chinatrust has already provisioned NT$1bn in June, and company sees its general provision reserves are sufficient to cover the remaining possible loss. Chinatrust has filed lawsuit against Everskill for fraud.
• Chinatrust is trading at 1.5x 2009E P/B for LT ROE 14%, nearing the low end of historical p/b. Near term market sentiment is poor, but we see the long term value for the stock at current level. 
  

Epistar (2448 TT): June sales down 16% MoM, 2H remains unclear (Jeff Su)

• Epistar reported June sales of NT$846m, down 16% MoM. We continue to see weak momentum due to tepid handset and digital frame demand, while the penetration into NB BLU remain slow. Most 2Q08 shipment are driven by low-margin Christmas light orders, thus we expect GPM to be lower than ML’s 25.1%.
• 2H08 visibility is unclear as its major driver China handset market remain slow. Longer-term competition will intensify as AUO and CMO are already approaching and are in discussions with Japanese LED makers for cross license.
• We believe the poor fundamentals does not support Epistar’s high valuation of 20x 08E and remain negative on the stock.
  

Sales-Trader comments
Yesterday's expected rebound postponed to today. Should see a technical bounce but 7k will prove difficult to hold. The 6,700 to 6,800 levels could trigger significant margin calls. The question is whether the NSF will try to absorb the bulk of the calls if we get there. Take opportunity to trim on strength.

 

• TFT-LCD rumor that order cancellation due to weak demand will impact bottom line. Component makers also impacted. -ive for AUO, CMO, Novatek etc.        
• Compal expecting flat MoM June sales to be announced later today.
• TSMC to announce Thurs & also expecting a relatively flat MoM for June.
• Chinese made handsets sales suspension in Pakistan could spread to other countries. This is -ive for Mediatek.
  

News

• UMC (2303 TT, Underperform) reported June sales of NT$8,105mn which was 5.8% lower than May and 7.3% lower than June-07. This was worse than our forecast of NT$8,710mn (+1.2% MoM) and June seasonality of +2.8%. Unaudited revenue for the full quarter (2Q08) increased 6.1% QoQ to NT$25.2bn which is better than consensus of NT$25.0bn and our NT$25.0bn (+4.0% QoQ). The data suggests UMC likely exceeded its guidance of up approximately 3-5% (implied by guidance of wafer shipment up 10%, ASP down 2%, and down 3-5% impact on revenue from currency fluctuation). UMC is scheduled to release its 2Q08 financial results on July 30th 2008.
  
• ASE (2303 TT, Neutral) reported June sales of NT$8,584m which was 0.6% lower than May and 7.6% higher than June-07. This was worse than our forecast of NT$9,050mn (+4.8% MoM) and June seasonality of +5.4%. Unaudited revenue for the full quarter (2Q08) increased 3.7% QoQ to NT$25.6bn which is in-line with consensus of NT$25.5bn but worse than our NT$26.1bn (+5.6% QoQ). Unaudited 2Q08 revenue is in-line with company guidance of up 3-5% QoQ.
  
• Vanguard (5347 TT, unrated) reported June sales of NT$1,541mn which was 0.6% higher than May and 16.3% YoY higher than June-07. June revenue growth was below the seasonal average of up 3.2% MoM. Unaudited 2Q08 revenue of NT$4.58bn (+1.1% QoQ) is at the high-end of company guidance of NT$4.35-4.65bn (down 4% to up 3%) and in-line with consensus of NT$4.57bn (+1.0% QoQ). Management attributed the sales momentum to continuous growth in wafer shipments. Vanguard is scheduled to release its 2Q08 financial results on August 4th 2008.
  
• China media reported Pakistan government lifted the ban against selling all China brand handset due to problems caused by black China handset. Market expects negative impact to Mediatek (2454 TT). (Commercial Times) ML View:  Demand looks flat before Olympics so we don't see any near-term catalysts. The 3-6 month headwinds for MTK's handset business are (a) its high market share in China, (b) slowing growth (pricing pressure too), (c) potential share gains from global brands, (d) baseband pricing competition, and (e) a demand lag in the market before 3G systems are deployed and handsets actually ship (early 2009). Laura Chen Dan Heyler
  
• Media reported panel makers are cutting orders to driver IC companies by 10-15% in average and driver IC companies might not have high season in 3Q due to weaker end demand. Novatek (3034 TT) said visibility towards 3Q is low due to the slower end demand. (Commercial Times) Laura Chen Dan Heyler
  
• Quanta (2382 TT) June consolidated revenue NT$62bn, down 4% MoM, in line with market expectation. Its 2Q NB shipment was 8.7mn units, up 9% QoQ. (Economic Daily) Tony Tseng
  
• Syntax-Brillian (Olevia), a leading U.S. LCD TV brand, filed for bankruptcy. (Commercial Times) Syntax-Brillian sourced most of its LCD panel from CMO, but it only accounts a small portion of CMO’s TV panel shipments and should have limited impact. Jeff Su
  
• Philips announced to sell its monitor BU to TPV (903 HK). (Economic Daily) Jeff Su
  
• Delta (2308 TT) June sales of NT$12.1bn were down only 1% MoM and the mgmt remains confident on 2H08 based on current order forecast.
  

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