Saturday, October 19, 2019

Market is idiot to treat all semiconductor companies the same


The world's semiconductor market is a $400 billion market. Thank goodness, some of the Malaysian companies and economy is in the play. A large part of the Malaysian semiconductor industry though is dependent on foreign companies such as Intel, Agilent, First Solar, Infineon. The real serious local companies only comprise of not more than 100 companies. The ones that are listed on Bursa Malaysia and seriously in play may not exceed 20.

Just take a look at China's exports below, which electronics have been the largest by far. The trade war is about semiconductor and its related industries (or larger context, technology per se) war. Electronics and electronics related products probably comprise 40% of its exports. 
"The following export product groups categorize the highest dollar value in Chinese global shipments during 2018. Also shown is the percentage share each export category represents in terms of overall exports from China.
  1. Electrical machinery, equipment: US$664.4 billion (26.6% of total exports)
  2. Machinery including computers: $430 billion (17.2%)
  3. Furniture, bedding, lighting, signs, prefab buildings: $96.4 billion (3.9%)
  4. Plastics, plastic articles: $80.1 billion (3.2%)
  5. Vehicles: $75.1 billion (3%)
  6. Knit or crochet clothing, accessories: $73.5 billion (2.9%)
  7. Clothing, accessories (not knit or crochet): $71.4 billion (2.9%)
  8. Optical, technical, medical apparatus: $71.4 billion (2.9%)
  9. Articles of iron or steel: $65.6 billion (2.6%)
  10. Organic chemicals: $59.8 billion (2.4%)"
If US, and probably Europe in the future is to reign on China's strength in technology related sector, a large sum of these businesses is going to move to countries that are to pick them up.

Vietnam is going to be the largest beneficiary. Singapore will not. Malaysia will benefit partially, but we need to know which company will benefit from it. If we look below, we are just playing every company in the semiconductor list. I have seen that the market have been excited about the better pick up in Iphone 11 sales, hence Inari's shares have picked up. Are we looking that short term? Is Inari mainly only produces its chips for IPhone?

Let's look at where in the value chain is Inari. Who does Inari sells to? And to which value chain it is in. Inari sells to Broadcom, Osram largely. These companies a portion of it sells to companies in China or Chinese companies and they are most of the time assembling their products in China. These products are sold to US and many parts of the world. That's why packaging companies are assembling semiconductors in package format. Many of Broadcom's components are not substitutable. If there are, high chance it is another US or European company.

But, China is working very very hard to make themselves. I cannot see Inari to be exciting as they are supporter of American based companies. China, if they can will try to avoid.
Let me put in this perspective. No semiconductor company if they are substantial in size, can be just dependent on one country. I have heard of China, because of the threat from the trade war has asked its companies to support Chinese companies first. Hence, the Chinese manufacturers are looking within then only external. Usually, in this scenario if they can find substitute, they will buy local. Only when there is no substitute, they will have no choice but to buy foreign. On the other hand, foreign companies that have been having products manufactured in China, will want to look for other alternatives.
Why I like box-build companies
Unlike Inari for example, which is dependent largely on Broadcom, many of these box build companies are more spread out when comes to its customers base. They can build for US. They can also build for Europe. When US is threatening to impose 25% tariff, and they have done it, many companies will look beyond China because the final product after VS Industry or PIE Industrial have produced will be shipped to US. That is where the 25% is imposed - after VS has manufactured and put them in the corrugated carton box - and later sent to US.
Today, if I am a big size manufacturer and doing assembly out of China, some of these companies may want to approach me. 
If I am a company that my product is sent to China for it to be assembled, I may be suffering. If I am doing something where my work or product can be replaced by some Chinese companies, I may be suffering as well - since China is working on "Buy Chinese goods first".
Remember, we have to know which part of the value chain our Bursa companies are.

5 comments:

odie said...

Felicity, some local osat players. inari and gtronics for instance having indirect china clients. osat players are gathered in mainly southeast asia so many years for reasons and it's not easy to be taken over in short period of time. In fact, i could see some osat and ate players are gaining more market shares from china and us disputes (main contribution comes from tmsc supply chain as well). However, long term it has to be company moat that leads to winner(there is very few of them, but yes there are). I do agree the market idiots theoretically that paid the crazy rally recently on every related players in the industry. But let us not forgetting that they are expecting world semiconductor market to grow, even with china-us trade war. EMS players, however is only short term beneficiary as you can't compete with china players with fair competition and there are concerns when we are looking long term having said our EMS players were dealing with low margins and will not change in future.

odie said...

and yes, PIE will get orders transferred from china but from mother group...

felicity said...

Our local OSATs with China is small. Gtronics maybe a better bet than Inari. Inari is too dependent on one

odie said...

Can't really compare gtronics with inari as they are doing different products. Most revenue of gtronics came from ams ag's light and gesture sensor, while inari is with broadcom's rf chips. But both end customers goes to apple, huawei, xiaomi and etc. Inari products are higher in value and they are also doing laser devices that used on smartphones and optoLED. Also, our local OSAts with China is small currently because the world supply chain including China used to rely too much on american, few japanese, korean and taiwanese players. However, recent trade disputes have restructured the global supply chain, especially the new supply chain in China. I expect there's a lot of opportunities there. ATEs players like penta, vitriox and mi will be beneficiary as the market has expanded with increased activities. In among, Mi is in very interesting position as their products are in-house and they serve top tiers clients like ASE and Amkor.. worth for a look especially i know you are kinda investor who prefer company with moat.

felicity said...

Thanks, Odie