Handset demand remains robust, as does that for plasma televisions, but PC demand seems to be lagging in the pre-holiday build season, say analysts at Goldman Sachs Group Inc.
Financial analysts for the Wall Street firm recently spent a week in Asia touring semiconductor and semi process equipment companies. Goldman Sachs found during visits to Korea, Taiwan and Japan that most of the "extremely robust" handset unit demand is at the low end of the market, but that 3G demand, while disappointing, is better than expected.
Also extremely robust is plasma-TV demand, driven by lower cost and higher panel sizes relative to LCD-TVs, Goldman Sachs analysts reported. "While the market is clearly delineated, with plasma dominating 40-inches and above and LCD more prevalent below 40-inch (32 inch is the sweet spot), the data points on plasma demand were clearly robust while the data points on LCD were decidedly more mixed," analyst James Covello stated in a research note.
TV makers and ODMs reported that LCD unit sales, although still healthy, were lower than expected in August and September. They described the weakness as temporary, however, Goldman Sachs reported.
"White-hot markets like LCD-TVs aren't supposed to have even temporary slowdowns," Covello remarked. "This is a market that bears close watching over the coming months. It could turn out to be nothing, as most expect or, in retrospect, it could turn our to be our first warning sign that consumer demand is slowing due to the well documented issues potentially hurting the U.S. economy, which according to our checks on the trip, is currently accounting for about 30 percent of flat panel TV demand."
Market research iSuppli Corp. recently suggested that the LCD TV market is facing the beginning of an oversupply situation, at least for large size panels.
While the LCD and plasma TV markets remain healthy, at least for the moment, one television market where the data points were clearly negative was DLP, according to Goldman Sachs; apparently DLP TVs are losing traction to both LCD and plasma.
DLP, or digital light processing technology, is a technology supplied by chipmaker Texas Instruments for projection systems and other displays. While other chipmakers have recently made forays into this market, most notably Intel, which holds the bulk of the market for this type of semi technology.
"This business could prove challenging for some time going forward for Texas Instruments, post what was likely a solid CQ3 for TI, due to channel fill ahead of the holiday season," Covello suggested. "Based on the demand commentary in DLP, we expect that TI is likely to suffer from an excess inventory slowdown in CQ4 and H1'06 in this business, which accounts for about 6% of semi sales (projectors and TVs).
The other areas where the data points aren't as strong as one would expect during the holiday build season are PCs, Goldman Sachs reported. Both DRAM companies and LCD monitor companies both suggested that they have recently seen order cuts from PC OEMs, according to the Wall Street firm.
"Three possibilities here are that: 1) this is a blip and that good demand growth will resume over the coming months, 2) that both major PC OEMs are pursuing more of a profit driven strategy, which means lower unit growth, which would obviously effect the supply chain, or 3) that demand is slowing down (as could be the case for TV's as we mentioned above)," Covello said. "Similar to our TV-related comments from above, this bears even closer watching than normal over the coming months."
Asia Bearish on 2006 Capex Outlook
While there are a few bright spots for capital equipment providers in the near term, 2006 capex overall looks to be down, Goldman Sachs concluded, reiterating its previous bearish stance.
Korea's Samsung – the largest chipmaker behind Intel – is likely to set its 2006 capex budget essentially flat to up slightly in terms of DRAM, while system LSI capex will be flat to down slightly, analysts said
"Samsung believes that the DRAM market is going to be difficult in H1'06, which would support the 2006 capex forecasts that we learned from earlier on our trip from Elpida, down 50% year over year, down 40% year over year, and Powechip down 50% year over year," he continued. "While Samsung expects the market to be difficult, the company believes it should continue to be relatively aggressive on capex in order to continue to distance itself from competitors and, as such, will keep 2006 spending roughly similar to current levels, as opposed to the decreases it expects to see from most competitors."
On the other hand, according to the company that builds clean rooms for Hynix, its 2006 capex is likely to be up a healthy amount in 2006. Goldman Sachs estimates it to be close to $3 billion, up nearly 30% year over year, driven by the M6 fab in Korea and investment in the new China fab.
Taiwanese foundry United Microelectronics, meanwhile, is likely to significantly increase its 2006 capex budget from $1 billion in 2005 to $2 billion in 2006, Goldman Sachs said. Moreover, UMC is significantly increasing orders to its process tool suppliers in Q3 and will increase orders sequentially, again, in Q4, the Wall Street firm suggested.
"Also, UMC would need to make additional orders in H1'06 to support a $2 billion budget," Covello said.
UMC rival Taiwan Semiconductor Manufacturing Co. meanwhile won't be ordering new equipment in this calendar year, likely tempering any near-term recovery in orders. "That said, we do believe that TSMC will begin to increase their order patterns in 2006 based on what we learned, both about their business and the strategy that they are communicating to their equipment suppliers," Covello said.
Japan's Toshiba is also very likely to raise its fiscal year 2005 capex budget from about $1.55 billion to about $1.8 billion, to pull forward previously announced capacity expansion plans for NAND flash, according to Goldman Sachs. Toshiba has already ordered all of this incremental capacity, however, and the higher fiscal year 2005 capex means lower fiscal year 2006 capex according to the company, down likely about 15%, the Wall Street firm said.
Taiwan's Winbond is making significant orders to the equipment suppliers in Q3; Goldman Sachs estimates those orders to be around $300 million. But, like Toshiba, this positive point is balanced by the fact that the chipmaker will reduce its 2006 capex budget by about 40% year over year to $400 million in calendar year 2006.
"Tokyo Electron is quite upbeat about its order patterns for CQ3 and CQ4," Covello said. "While the company didn't provide an official update to its flattish original guidance, it seems as if the 5 percent to 10 percent sequential order improvement, which Applied Materials suggested for CQ3, is a reasonable estimate for TEL's CQ3 order book as well.
"TEL is also hopeful that 2006 capex will be higher but they admitted that this is not based on analysis, just 'gut.' As we suggested above, we believe 2006 capex will be flat to down year over year," he said.
In support of that bearish thesis, Goldman Sachs offered up several negative data points.
First and foremost are the aforementioned 2006 capex reductions from Elpida, Winbond and Toshiba.
Elpida's 2006 capex commentary is the first sign that DRAM companies' capex is actually dependent on the DRAM environment, Goldman Sachs suggested. "The Elpida CEO explicitly stated that the company now needs to prioritize balance sheet improvement after 3 years of spending capex to build 300mm capacity and gain market share," Covello said.
"The CEO was extremely clear that 2006 capex would be equal to the company's operating free cash flow, which the company estimates at $600 million to $700 million," he continued. "This datapoint is extremely significant given the vast number of analysts who have insisted for the last two years that DRAM companies would spend 'no matter what' because 'they have to build 300mm.'
"Elpida further suggested that they won't be making any orders at all to the equipment suppliers anytime soon," Covello said. "Elpida's 50% capex reduction in 2006, along with a roughly similar percentage cut at Winbond should refocus investors on the risks to 2006 street estimates based on DRAM capex," he concluded.
The world's largest chipmaker, Intel Corp., which typically spends capex counter-cyclically, will likely drop capex year over year in 2006, according to several of its equipment suppliers, Goldman Sachs reported.
"Recall that the 4 year rolling average capex/COGS slide that the company showed at its spring analyst meeting and that it has used over the past 5 years to communicate their preliminary thoughts on its out-year capex suggested that 2006 capex would be down 10% to 15% year over year," Covello stated in Goldman Sachs research noted. "While we hesitate to overemphasize that slide, that slide has been the best predictor of out-year capex that we know of and that, in conjunction with what we learned from some of the SPE suppliers on this trip suggests that investors should likely be taking a more cautious approach to Intel's capital spending."
Finally, Goldman Sachs observed that the lithography tool vendors, which have the longest lead times for delivering equipment orders, remain cautious. Both Nikon and Canon, based in Japan, suggested that 2005 and/or 2006 estimates for global litho units are too high and both believe that 2006 capex will be flat or down, the Wall Street firm said.
"If the companies with the longest lead times are still cautious, why should we overemphasize the commentary of many of the U.S. semi equipment companies who are bullish just beyond their stated visibility," Covello reasoned. "For example, AMAT has about three month lead times and Tuesday night, they suggested at a competitor conference that the recovery they called for on their last earnings call would be pushed out to late H2'05 or early H1'06. With only approximately three month lead times, we question how clear any outlook that extends beyond that period is?"
