Global Semiconductor Industry - more demand downside
* More signs for demand weakness - our latest industry study suggests that Chinese Android smartphone manufacturers and a global leading smartphone OEM appear to cut 2022 smartphone shipment targets by 4-12% recently. We expect another 5-15% order cuts for Android smartphone manufacturers’ 2022 shipment targets in 2Q22/2H22. This should be driven by market share loss to Apple and increasing macro risks. In addition, PC OEMs may continue to reduce their rolling forecasts for 2022, which could lead global PC units to fall 8-12% YoY in 2022 vs. consensus estimates of 3-6% YoY declines.
* A challenging outlook for Android smartphone chip vendors - we remain conservative on MediaTek/Qualcomm’s smartphone chip business. We expect MediaTek to lower its 2022 sales guidance of 20%+ YoY sales growth by 3-5% in 2Q/3Q22 and foresee 3-5% downside risks to our forecast of 14% YoY sales growth for 2022. MediaTek could encounter ASP/margin contraction for its smartphone chips and rising competition from Qualcomm which more foundry capacity support in 2022/26 (please see our note - “MediaTek - structural de-rating risks ahead”, dated on 2022/03/14).
* Tier-two foundries should see more demand headwinds in 2Q22 and beyond - tier-two foundries could face more order downside risks from 2Q22 onwards due to demand weakness in smartphone/PC/consumer chips and their lack of a high exposure to HPC (high-performance computing) and automotive chips. We expect tier-two foundries’ utilization rates of 8-inch mature-modes and 12” 28nm to drop to 85-95% in 2023 from 100%+ in 1Q22. Tier-two foundries’ customers may push out more orders in 2023 despite LTA (long-term agreement). In contrast, TSMC has high exposure to HPC/automotive segments (46%/48%/50% of sales in 2022/23/24) should be less vulnerable to demand downside of smartphone/PC/consumer segments in 2022/23. For instance, MediaTek’s recent order reduction at TSMC has been offset by AMD’s (7nm APU for game consoles) and Nvidia’s (5nm GPU ramp-up) order increases recently. We maintain our forecast of 25% YoY sales growth for TSMC in 2022 vs. the guidance of 25-29% YoY sales growth and consensus estimates of 25-31% YoY increase.
* De-rating risks for tier-two players and Android smartphone supply chain - we expect 30%+ stock downside risks for tier-two foundries (UMC, SMIC, Hua Hon, and GlobalFoundries) and Android supply chain (MediaTek - Android smartphone chips and PMIC; Novatek - Android smartphone display driver ICs) in 18 months. Notably, it could be challenging for these companies to substantially penetrate HPC/automotive IC markets in 2022/26. This could stem from high entry barriers and their limited R&D progress in these areas. TSMC should be defensive and has less cyclicality in a potential inventory adjustment cycle in 2022/23 than the previous cycles. We attribute this to its better dominant position in advanced nodes and high sales portion of solid growth areas.
MediaTek (2454 TT) - structural de-rating risks ahead
* Emerging negative signs - our latest industry study suggests MediaTek appears to cut 5G smartphone chip ASP recently. We expect more price reduction in 2022. In addition, the company could ship 170-180m units of 5G smartphone chips in 2022 vs. our previous estimate of 200m units. GM may peak out in 1Q22 or 2Q22 and trend down gradually in 2H22 and 2023/26. This supports our conservative view that the company should see challenges include 1) demand weakness in Android smartphone chips and 2) rising competition from Qualcomm which should have more wafer capacity support from 2H22 onwards. We expect demand downside for Android smartphone chips in 2022/26. We attribute this to Apple’ continuous market share gain thanks to better price performance and power efficiency of iPhones vs. Android smartphones.
* Substantial growth deceleration in 2022/23 and earnings declines in 2024/26 - we now expect EPS to grow 15%/2% YoY in 2022/23, below our previous estimates of 18%/7% YoY growth, consensus estimates of 20-25%/15-20% YoY growth. We now expect EPS to fall 8-10% YoY in 2024/26 vs. our previous estimate of 5-7% growth. This could lead to -6% EPS CAGR in 2022/26, below our previous estimate of 13-18% CAGR and consensus estimates of 15-20% CAGR. This could stem from 1) Android smartphone unit decreases in 2025/26 with Apple’s share expansion and a high 5G penetration; 2) Apple’s more aggressive strategies for the mid-end smartphone market; 3) Apple's continuous leadership in smartphone chip PPA (performance, power, and area). Apple should continue to take the lead in the adoption of TSMC’s advanced wafer fabrication and packaging solutions to maintain smartphone chip PPA leadership in 2022/26. MediaTek could continue to lag behind Apple in smartphone chip PPA improvement in 2022/26. Android smartphone manufacturers (MediaTek’s smartphone chip customers) cannot afford high-cost smartphone chips based on the most advanced nodes and packaging solutions due to low margins for their Android smartphones.
* Limited automotive sales portion in 2022/26 - we estimate MediaTek’s automotive product sales portion to reach 1%/5% in 2022/26. It could be challenging for the company to substantially penetrate Chinese vehicle manufacturers for its automotive IC products due to the localization trend. Our surveys indicate that Chinese vehicle manufacturers may prefer Chinese vendors’ automotive analog IC solutions (Silergy, SG Micro, JoulWatt, and 3Peak) in 2022/26. In the mean time, global vehicle manufacturers may prefer TI/ADI/MPS’ automotive IC solutions rather than MediaTek’s in 2022/26 due to the requirements of superior performance and high entry barriers of mid/high-end automotive analog ICs.
* De-rating risks in 2022/26 - the stock traded at 11.7x/11.5x/12.5x of our 2022/23/24E EPS estimates. We expect the stock to trade at 7-8x 2023/24E EPS estimates in 18 months given -6% EPS CAGR in 2022/26. This implies 30-40% downside risks for the stock in 18 months. Catalysts include margin contraction, Android smartphone demand downside, and more smartphone chip ASP declines in 2H22 and beyond.
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