In this briefing:
- Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued
- This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans
- LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
- ASML. Safe Harbor In A Semi Storm.
- Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping
1. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued
- Tokyo Electron (8035 JP) is a semiconductor equipment manufacturer based in Japan. The company has been operating in the semiconductor space for several decades and generates nearly 90.0% of its revenue from the sale of semiconductor equipment.
- The company revenues are highly correlated with worldwide semiconductor revenues. The current softness in the semiconductor market has already caused a decline in company earnings for 3QFY03/19 and we expect the company earnings to deteriorate further as the market has just begun witnessing the demand decline.
- Even though IoT, cloud, big data, 5G and AI are expected to drive semiconductor revenues and make up for the declining demand from smartphones, tablets and PCs, we do not expect this to drive a significant change in semiconductor demand for another few years as the technologies are still not fully developed.
- Based on our valuation, the company share price is still overvalued despite the stock losing more than 20% to-date since the market started decelerating in mid-2018. As the current semiconductor cycle nears its worst, we feel the company share price will dip further with the earnings outlook deteriorating.
2. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans
LINE Corp (3938 JP) is one of the top Japanese names in our “Watchlist” of listed companies in Japan and South Korea that are adopting blockchain technologies or have exposure to cryptocurrencies.
Since being added to the “Watchlist” in May last year (2018), LINE has launched a cryptocurrency, a cryptocurrency exchange, and a blockchain venture fund. In this note, we revisit LINE’s blockchain and cryptocurrency plans.
In our opinion, potential synergies between LINE’s cryptocurrency business and its other business ventures are quite enticing. LINE could very well lure “millions” of its existing messaging and LINE Pay users to be a part of its blockchain eco-system.
3. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price. Following weak results, an easing of 5G enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook.
4. ASML. Safe Harbor In A Semi Storm.
Dutch lithography bellwether ASML is unique among its WFE peers in forecasting 2019 as yet another growth year for the company, making it eight such years in a row. While the likes of Applied Materials and Lam Research anticipate YoY revenue declines in the mid-to-high teens, ASML is sheltered from the worst excesses of the downturn by virtue of its technological moat, namely its EUV lithography tools. Customers like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Intel are critically depending on ASML to deliver thirty of those tools in 2019 in order to ramp their latest process nodes.
On the latest earnings call, ASML underscored its confidence in the company’s prospects by proposing a 50% increase in dividends to €2.10 per share. Currently trading at a 17% discount to its 52-week high, ASML is a safe harbor in the current semiconductor storm.
5. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping
- Our analysis of how Spotify Technology Sa (SPOT US) turned profitable in 4Q18 reveals three key ingredients: critical mass in sales, GM progression, and core business diversification.
- With sales reaching critical mass, this would allow fixed costs to be spread out in such a way that opex/unit is lower than GP/unit.
- Progression in GM and core business diversification strategy are worth monitoring.
- Implication: Meituan Dianping’s (3690 HK) core business is ahead of iQIYI Inc (IQ US) in terms of profitability inflection point timeline.
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