Semiconductor companies in the Greater China region that depend heavily on smartphone demand are expected to see increased inventory risks in the coming quarters, Morgan Stanley said in a report on Thursday last week, which cut ratings on several companies, including Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), and added to concern over an industry downcycle.
The report came after Morgan Stanley said in an earlier report that manufacturers in the regional supply chain of Apple Inc iPhones could face a potential inventory digestion from next month and throughout the first half of next year.
The earlier report also adjusted downward earnings estimates for companies such as Hon Hai Precision Industry Co (鴻海), Catcher Technology Co (可成) and Pegatron Corp (和碩).
“Globally, we have seen weakness in automotive, industrial and cloud semiconductors over the past few months. Now we are starting to see bad news in the smartphone supply chain as well and that will broaden the impact of this semiconductor downcycle,” Morgan Stanley analysts led by Charlie Chan (詹家鴻) said.
The US investment bank cut its rating on TSMC from “overweight” to “equal-weight” and lowered its target price on the stock from NT$253 to NT$239, reflecting an expected reduction in smartphone demand next year.
Morgan Stanley said it was previously positive on TSMC on several fronts, including rising semiconductor content in Apple products, outsourcing to the Taiwanese chipmaker from Advanced Micro Devices Inc and increasing demand for artificial intelligence (AI) chips.
“However, some of the key concerns we raised at that time have emerged more quickly than we anticipated,” the analysts said, citing weakness in iPhone shipments, competition from Intel Corp and a lack of new, “killer” AI apps.
Coupled with the across-the-board inventory issue, TSMC’s revenue growth momentum might slow, at least until the first half of next year, they said.
Morgan Stanley downgraded MediaTek Inc (聯發科) from “overweight” to “underweight” and cut its target price from NT$290 to NT$205.
“With chipset inventory piling up and stalling demand, we expect MediaTek’s smartphone chipset shipments to drop by 20 percent quarter-on-quarter in the first quarter of 2019,” the analysts said. “We think MediaTek’s margin expansion story — one of our key reasons to be overweight — could end soon.”
The US bank downgraded Novatek Microelectronics Corp (聯詠) and United Microelectronics Corp (UMC, 聯電) to “underweight” from “equal-weight” and trimmed target prices to NT$115 and NT$9.6 from NT$133 and NT$13.3 respectively.
The bank retained its “overweight” rating on ASE Technology Holding Co (日月光投資控股), but reduced its target price by 12 percent to NT$75.
Morgan Stanley also maintained its “underweight” rating on Semiconductor Manufacturing International Corp (SMIC, 中芯國際), but slashed its target price on the Hong Kong-traded chipmaker by 23 percent to HK$5.8.
“Compared to US semiconductor companies, Greater China’s semi players depend more on smartphone demand. For example, TSMC generates 45 percent of its revenue from smartphone semiconductors, while MediaTek has 40 percent revenue exposure to emerging-market smartphone demand,” Morgan Stanley analysts said.
“We are concerned that recent iPhone supply chain order cuts could be just the first wave. If next year’s iPhone doesn’t have attractive features, weak orders from Apple could be a new normal for TSMC,” they said.
TSMC’s American depositary receipts (ADRs) fell 4.28 percent to US$36.87 in New York on Friday after the company’s shares dropped 2.16 percent to close at NT$226 overnight in Taipei.
UMC’s ADRs declined 2.76 percent to US$1.76 in New York, in tandem with the stock’s 1.7 percent fall to NT$11 in Taipei, while ASE’s ADRs edged down 0.79 percent to US$3.79, despite shares rising 1.34 percent to NT$60.3 overnight in Taipei.
Shares in MediaTek fell 4.97 percent to close at NT$220, Novatek shares were unchanged at NT$129, while SMIC increased 2.39 percent to HK$6.86 in Friday trading.
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