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HLBank Research Highlights

Author: HLInvest   |   Latest post: Tue, 25 Jun 2019, 10:37 AM

 

Technology - US Embargo on Huawei

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After President Trump signed the executive order, Commerce Department has added Huawei to its “Entity List”. Subsequently, both US hardware and software suppliers have cut ties with the telecom giant, potentially disrupt its supply chain. We view this negatively as this will result in a lose-lose situation. The impact is severe due to Huawei’s global leaderships in both infrastructure and smartphone markets. Samsung may be the winner but unlikely to stimulate suppliers outside of Korea. Reiterate NEUTRAL and Frontken is now a HOLD.

NEWSBREAK

National emergency. Last week, US President signed an executive order to bar the use of telecommunication equipment made by companies that are deemed a threat to national security and Commerce Department followed up by adding Huawei and 70 affiliates to its “Entity List”. With this inclusion, the telecom giant will be banned from buying parts and components from US companies without government’s approval.

Google. The maker of the world’s most popular smartphone OS was forced to suspend business operations with Huawei with immediate effect. While it has later clarified that current Huawei phones will continue to be supported, this announcement has created major uncertainties and risks on the world’s second largest smartphone supplier who equipped its products entirely on Android.

Others followed suit. It was reported that chipmakers including Intel, Qualcomm, Xilinx Broadcom, Micron and Western Digital have suspended their shipments to Huawei until further notice. Intel is the main supplier of server chips to the Chinese company, Qualcomm provides processors and modems for many of its smartphones, Xilinx sells programmable chips used in networking and Broadcom is a supplier of switching chips, another key component in some types of networking machinery.

HLIB’s VIEW

Lose-lose situation. The escalation of this conflict is harmful to the whole tech sector, in our opinion. While this may disrupt Huawei’s supply chain, the trade restriction will equally hurt US companies which increasingly rely on China market for growth and profitability. Lumentum has slashed its next quarterly earnings forecast by 23% (mid-point) in view of this ban.

Unlike ZTE. Although this is the same treatment towards its competing sibling in 2017, we think Huawei’s case would send more impactful ripple effect due to its world leading positions. Huawei is world’s largest telco infrastructure vendor and runner-up in smart-phone supplier with circa 19% market share in 1Q19, according to IDC.

Possible winners. Apple may see limited benefit due to iPhones’ high price points and potential nationalistic retaliation by the Chinese, who are still a significant market for Apple (16% of Apple sales in 1H19). Samsung is likely to have the upper hand in this dispute thanks to its wide spectrum of products and end-to-end in-house capability. Hence, the spill over effects towards non-Korean suppliers are usually hardly felt.

Maintain NEUTRAL. This development has created more doubts in the already dull global semiconductor sales and capital spending projections, we reiterate our cautious stance in the absence of near-term catalyst. We also take this opportunity to downgrade Frontken to HOLD (from Buy) with unchanged TP of RM1.55, pegged to 25x of FY19 EPS due to limited upside (<10%) as well as unfolding of this spat. However, it is still our preferred pick in the sector.

Source: Hong Leong Investment Bank Research - 21 May 2019

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