Semiconductors - Global

Industry Overview Equity | Global | Semiconductors 02 April 2014

Cycle has legs picks: TSMC, ASE, RFMD, SWKS, MTK, ARM, & add ASMPT  Top We see a nice set-up for semi stocks going into the results season with most companies likely to beat expectations and guide favorably. Our latest global supply chain survey coupled with our three-day Asian technology conference (March 1821st) lead us to believe that demand is good while inventory is very low.

Inventory decline sharply QoQ We have captured 142 firms’ 4Q13 inventory after a slew of Taiwan hardware companies released consolidated financial results 31-March (reporting deadline). Aggregated inventory held by OEM, EMS distributors, and semicon companies declined by 6% QoQ which is the low-end of the last four years (Chart 1). Inventory measured in days decline form 95 days in 4Q12 to only 90 days in 4Q13.

Downstream DOI turns below-seasonal in 4Q13

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Inventory data aggregated from 49 hardware (downstream) firms showed a decrease of 6.1% QoQ in dollar terms to US$67.2bn (in 4Q13). This was slightly above the five-year average of down 6.3% QoQ. DOI decreased 7.5 days QoQ to 28.4 days, below the five-year average of 33.5 days. All the subsectors’ DOI were below the five-year seasonal average, except for PC. DOI of the PC supply chain came back to seasonal after three sequential above-seasonal quarters. Wireless posted a well below-seasonal DOI in 4Q on strong demand, mainly led by Apple. There was a major inventory decline at EMS that came from Hon Hai (down 13.5% QoQ), Celestica (down 7.3% QoQ) and Jabil Circuits (down 5.9% QoQ).

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Chart 1: Total reported tech inventory dollars

Semis inventory decreased 4.3% QoQ; DOI down 4.5 days Global semi inventory of 93 firms was down 4.3% QoQ to US$22.9bn in 4Q13 after a 3.0% increase in 3Q13. The change was well below the five-year average of up 0.7% QoQ. Furthermore, days of inventory (DOI) decreased 4.5 days QoQ, also far more than the five-year average of up 0.9 days. Additionally, absolute levels (66.6 days) were 2.1 days below the 5-yr average (64.5 days). Inventory held by global communication semi companies fell by 12.4% substantially below the typical 2.2% increase in 4Q13 driven by the strong demand for smartphones in China/EM.

Apple supply chain likely to drop sharply in 1Q14

Source: Company reports; BofA Merrill Lynch Global Research estimates, updated as of 31 Mar 2014

Report links: 3Q13 global inventory report (Nov 2013) 2Q13 global inventory report (Sept 2013) 1Q13 global inventory report (Jun 2013)

Global hardware revenue in our survey grew 18.4% QoQ in 4Q13, which was above the five-year average of up 9.7% QoQ. All subsectors recorded above-seasonal growth, except wireline. Wireless companies recorded strong growth of 34% QoQ versus the five-year average of 26% QoQ. Our global team has modeled wireline sales growth to exceed seasonality in 1Q14 but forecasts PC, wireless, distribution and EMS to be sub-seasonal.

This research report provides general information only. No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or other persons without the express written consent of BofA Merrill Lynch. >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 11373975 Refer to important disclosures on page 12 to 14. Link to Definitions on page 10.

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Overview

Chart 2: 4Q global inventory dollars

Absolute DOI is below seasonality except for PC

PC Supply Chain

We captured 49 out of 50 downstream companies, which account for about 99% the value of our global survey of OEM, EMS and distribution firms.

Wireline Equipment Supply Chain Wireless Supply Chain Distribution

30%

EMS

35%

12% 13% 10% Source: BofA Merrill Lynch Global Research, updated as of 10 Mar 2014

Chart 3: 4Q inventory days vs 5-year average 60

Inventory Days

50 40 30 20 10 0 PC

Wireline

Actual

Wireless

Distributors

EMS

Seasonality

Source: Company reports, BofA Merrill Lynch Global Research estimates, updated as of 13 Feb 2014

Total inventory value (dollars) for the reported technology companies decreased 6.1% QoQ to US$67.2bn during 4Q13. The QoQ change was in-line with the fiveyear seasonal (average) decrease of 6.3% QoQ. However, Inventory, as measured in days (DOI) for downstream companies, decreased by 7.5 days QoQ to only 28.4 days, which was well below their five-year seasonal average of 33.4 days. While foundry orders appear to be strong going into 2Q14, we expect semi sales to come in relatively strong for 2Q/3Q14 which should absorb much of the production. Our breakdown of DOI across different subsectors were all below the seasonal average, except for the PC supply chain, for which DOI has been above seasonality for seven sequential quarters due to continuously weak demand. Communication (wireline and wireless) companies reported surprisingly low DOI. Our continuously bullish view of China/EM mobile device demand is wellsupported by this data. We recognize that many private OEMS in China are not included in this data set but distributor and semi inventory will capture China/EM attributable to strong smartphone demand especially in emerging markets. DOI at distributors and EMS providers was also below seasonality. (Chart 2)

Strong wireless, ultra-low inventory (inc. Apple) Revenue for reported downstream tech companies grew 18.4% QoQ in 4Q13, on strong mobile demand and new product launches, which is above their five-year average of 9.7% QoQ. For 1Q14, these names are expected to see a 16.6% decline, below the five-year average of down 12.2% QoQ on seasonality. Only wireline is expected to grow (by 2% QoQ) in 1Q14 while other subsectors are expected to record QoQ declines.

Exhibit 1: Total downstream inventory days

Exhibit 2: Total downstream inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

Source: Company reports, BofA Merrill Lynch Global Research estimates

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Semiconductor inventory We have captured 93 semi companies in our quarterly inventory survey. Both semiconductor inventory dollar and DOI declined in 4Q13. Global semiconductor inventory decreased by 4.3% QoQ to US$22.9bn in 4Q13, after a 3.0% increase in 3Q13. The decline was greater than the five-year average of up 0.7% QoQ. However, semi inventory, measured in days, decreased by 4.5 days QoQ, well below the five-year average of up 0.9 days. Additionally, the absolute level of inventory (66.6 days) was 2.1 days below the 4Q's five-year average.

Communication semi companies looking very lean

Table 1: Semi 4Q inventory analysis Dollars Q/Q (%) Inventory Days Days Q/Q

4Q13A

4Q Ave

-4.3% 66.6 (4.5)

0.7% 68.7 0.9

Source: Company reports, BofA Merrill Lynch Global Research estimates

Exhibit 3: Semiconductor inventory days

Source: Company reports, BofA Merrill Lynch Global Research estimates

Among all subsectors, only PLD and Analog/mix signal posted an increase QoQ in 4Q13. PLD noted a 8% QoQ increase in inventory on both Altera (up 3.4%) and Xilinx (up 12.5%). Its DOI increased by 7.8 days to 103.8 days. Analog/mixed signal is another subsector to report an inventory increase with 0.5% QoQ. DOI increased 2.4 days to 103.6 days. Foundry reported flat QoQ in inventory and DOI increased by 1.5 days to 46.4 days. OSAT companies reported a 1.5% QoQ decline in inventory while DOI dropped by 4.4 days to 47.4 days. Memory companies declined 4% QoQ in inventory while DOI decreased dramatically by 8.9 days to 71.3 days on strong revenue from Micron, but still above the five-year average of 66.0 days. PC-related companies saw a decrease of 6.9% in inventory from Intel (down 8.0%) and Realtek (down 17.9%). Their DOI decreased 9.5 days to 72.3 days. Communication semi companies reduced inventory by 12.4% vs the typical 2.2% increase due to strong demand for wireless products. MediaTek’s inventory largely decreased by 29.1% QoQ, and its DOI also decreased by 14.9 days to 38.9 days. Inventory held by Qualcomm and Broadcom dropped 18.3% and 3.0% QoQ, respectively. RFMD/Marvell noted a 5.5/8.6% inventory decline. Exhibit 4: Semiconductor inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

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Computer hardware inventory back to seasonal PC supply chain inventory decreased 5.1% QoQ to US$23.6bn in 4Q13, slightly above the five-year average of down 5.5%. DOI decreased by 3.5 days QoQ to 27.7 days, which was lower than the five-year seasonality of down 2.0 days. The 27.7-day level was slightly higher than the seasonal avg of 26.9 days in 4Q. After remaining at a high level for three quarters, DOI has declined to a seasonal-level due to the holiday shopping season and new product launches while the overall demand across the PC supply chain is still weak. Exhibit 5: PC supply chain inventory days

Source: Company reports, BofA Merrill Lynch Global Research estimates

Exhibit 6: PC supply chain inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

Communications - DOI continues sub-seasonal Inventory held at 10 wireline-related hardware vendors was flat QoQ to US$6.7bn in 4Q13. That’s above the five-year average of down 6.5% QoQ. The inventory dollars have been stable in the past several quarters, indicating strong inventory management capability by these companies. DOI decreased by 5.4 days QoQ to 51.4 days, 9.1 days below the seasonal average of 60.5 days. Exhibit 7: Wireline equipment supply chain inventory days

Source: Company reports, BofA Merrill Lynch Global Research estimates

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Exhibit 8: Wireline equipment supply chain inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

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Wireless – DOI extremely low Wireless inventory decreased 12.7% QoQ to US$8.7bn, which was below the five-year average of -8.3%. Major decreases came from Research in Motion (73% QoQ) and Nokia (-45% QoQ), but were partially offset by Apple (+20% QoQ). Overall, DOI decreased 8.5 days to 16.5 days (vs five-year seasonal average of down 7.5 days). This level was significantly below the five-year average of 26.2 days in 4Q and reached a new low in the past several years. The extremely lean DOI level implies that demand in the overall handset market remains strong, especially in China and emerging markets, albeit some softer demand in the high-end market. Exhibit 9: Wireless supply chain inventory days

Source: Company reports, BofA Merrill Lynch Global Research estimates

Exhibit 10: Wireless supply chain inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

Distributor inventory – DOI below seasonal Inventory held at distributors decreased by 2.1% QoQ to US$8.0bn during 4Q13. This decrease was in line with the five-year seasonal average of -1.7%. DOI decreased 6.3 days to 36.8 days, below the five-year seasonal average of down 1.5 days. The lower-than-seasonal DOI implies room for channel restocking. Exhibit 11: Distributor supply chain inventory days

Source: Company reports, BofA Merrill Lynch Global Research estimates

Exhibit 12: Distributor supply chain inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

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EMS – DOI lowest in five years EMS inventory dollars were down 7.6% QoQ to US$20.1bn in 4Q13, in-line with the five-year average of down 7.6% QoQ. DOI at EMS vendors decreased 13.3 days to 31.6 days, which is the lowest in the past five years and below the fiveyear seasonal average of down 7.2 days. There was a major inventory decline that came from Hon Hai (down 13.5% QoQ), Celestica (down 7.3% QoQ) and Jabil Circuits (down 5.9% QoQ). Exhibit 13: EMS supply chain inventory days

Exhibit 14: EMS supply chain inventory dollars

Source: Company reports, BofA Merrill Lynch Global Research estimates

Source: Company reports, BofA Merrill Lynch Global Research estimates

Apple’s supply chain inventory – low Apple reported purchase commitments of US$16.1bn for the December quarter, representing a 13.4% QoQ decrease (five-year average is down 14.8% QoQ). The inventory on its balance sheet was US$2.1bn with inventory days, including purchase commitment, at 46.5 days, or 3.1 days below the five-year average of 49.6 days. Chart 4: Apple’s inventory plus purchase commitments 70

100

60

80 60

US$bn

40 30

40

20 20

10

Inventory + purchase commitments Inventory days (incl. commitment) Source: Company reports, BofA Merrill Lynch Global Research estimates

6

Revenue

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

3Q09

1Q09

3Q08

1Q08

3Q07

1Q07

3Q06

1Q06

3Q05

1Q05

3Q04

0 1Q04

-

Inventory days

50

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Apple to support downstream sales in 4Q13 BofAML's coverage companies in the global tech hardware sector grew 18.4% QoQ in 4Q13, well below the five-year average of up 9.7% QoQ. The deviation from historical trends is mainly driven by wireless (34% QoQ vs five-year average of 26%) and EMS (32% QoQ vs five-year average of 10%). PC and distributor growth also outpaced seasonality, while wireline was below seasonal. The strong growth in wireless was mainly from Apple given new product launch momentum. If excluding Apple, both downstream and wireless companies could have posted a worse-than-seasonal demand. Among the 49 hardware companies that have reported quarterly results recently, 25 are under BofAML’s coverage which accounted for 86% of the value of factory revenue. BofAML global analysts anticipate that the overall downstream will record a worse-than-seasonal decline in 1Q14 on inventory adjustment, especially in wireless, distributor and EMS. Chart 5: Total downstream sales growth (% QoQ)

Chart 6: Total downstream (ex Apple) sales growth (% QoQ) 15%

25% 20%

17%

15% 10%

10%

12% 6%

5%

4% 2%

3%

0% -3%

-10% -15%

-13% -17%

-20%

-13% -17%

2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E

BofAML survey

6%

4%4%

4% 1%

0%

1%

0% -5%

0%

-5% -3%

6%

5%

7%

0%

8% 5%

10%

8%

12%

11% 10%

18%

-1%

-10% -13%

-15%

-13%

-16%

-15%

-20% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E

5-year avg.

BofAML survey

5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

Source: Company reports, BofA Merrill Lynch Global Research estimates

Chart 7: PC supply chain sales growth (% QoQ)

Chart 8: Wireline equipment supply chain sales (% QoQ)

15% 10% 5%

10% 3% 2% 0%

8% 7% 1%

7% 8% 4% 4% 3%

3% 2%

0% -5% -10% -15%

-11%

-12% -14%

-13%

-20% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E

BofAML survey

5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

8% 6% 5%

5% 5%

6%

3%

3% 1% 1%

1% -1%

3% 2%

-1%

-5% -8%

-9%

2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E

BofAML survey

5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

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Chart 9: Wireless equipment supply chain (% QoQ) 37%

40%

15% 10%

20% 10%

11%

6%

5%

0%

5%

1%

-7%

0% -5% -1%

-18%-17% -23%

-18% -20% BofAML survey

-20% -22%

2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E

5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

Chart 12: EMS sales (% QoQ) 40%

20% 14%

15% 7% 4%

32%

30%

8%

7% 5% 7%

-12%

-19% -21%

-25%

BofAML survey

Chart 11: Distributor sales (% QoQ)

6% 4%

5% 5% 2%

22% 15%

20% 10%

7%

12%

12% 8% 5% 4%

10% 7%

0%

0% 0%

-1%

-4%

-5% -9%

-12% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E

BofAML survey

-10% -20%

-15% 5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

8

-2% -6% -12%

5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

-10%

-1% -5%

4%

-20%

2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E

-5%

7% 5%

-15%

-11%

-30%

5%

10%

-10%

-1%

-20%

10%

15%

5%

0% -10%

18% 13%

20%

34% 26%

25%

30%

Chart 10: Wireless equipment (ex Apple) supply chain (% QoQ)

-30%

0%

-1% -7% -15%

-17% -24%

-23%

2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E

BofAML survey

5-year avg.

Source: Company reports, BofA Merrill Lynch Global Research estimates

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Semis – above-seasonal in 4Q13; in-line 1Q14 According to SIA (Semiconductor Industry Association) data, total semiconductor sales declined by 0.8% QoQ to US$79.9bn in 4Q13, above the five-year average of a 5.8% decline. All subsectors posted above-seasonal growth in 4Q13, except for memory which declined 4.6% QoQ vs the five-year average of down 3.1%. Logic IC grew 1.2% QoQ, above the five-year average of 6.9%. Analog (down 0.8% QoQ vs five-year average of down 7.8%) and MPU (1.3% QoQ vs. five-year average of down 6.3%) were also largely above seasonality. Our current global semi model shows 1Q14 to be in-line with seasonal and 2Q-3Q14 to be slightly sub-seasonal. Chart 13: Total semiconductor billings (% QoQ) 10% 8%

7% 6%

8%7%

Chart 14: Logic billings (% QoQ) 12%

8% 7% 8% 4%

4%

2%

1%

0%

6%5%

5%

6%

4%

3% 1%

2% 0%

-1%

-2%

-1%

-4%

0%

-2%

-2%

-4% -4% -4%

-4% -5%

-6%

-6%

-8%

-8%

1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E Actual/BofAML forecast

-6% -7% -6% 1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E3Q14E4Q14E Actual/BofAML forecast

Chart 16: Memory billings (% QoQ) 11%

11%

20% 15%

7%

15% 10%

3% 2%

1%

11% 9% 9%

5% -2%-2%

-2%

-7%

5-year avg.

Source: SIA, BofA Merrill Lynch Global Research estimates

Chart 15: MPU billings (% QoQ)

1%2%

-6%-6%

5 year avg.

Source: SIA, BofA Merrill Lynch Global Research estimates

12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

10% 10%

8%

6%

-6%

10% 10%

10%

0% -2%

1.8%

1%

3%

4%

6% 2%

0% -5%

-6% -6%

9%

-2% -3%

-3% -5%

-1%

-10%

1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E3Q14E4Q14E Actual/BofAML forecast Source: SIA, BofA Merrill Lynch Global Research estimates

5-year avg.

1Q13 2Q13 3Q13 4Q13 1Q14E2Q14E3Q14E4Q14E Actual/BofAML forecast

5-year avg.

Source: SIA, BofA Merrill Lynch Global Research estimates

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Chart 17: Analog billings (% QoQ) 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

Chart 18: Discrete billings (% QoQ)

10%

4%

9% 5% 5%

5%

5%5%

2%

-1%

0% -2%

-3% -3%

-4%

-8% 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E Actual/BofAML forecast

10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

8% 8%

9%

9% 6%

5%

1%

-1%

-1%

-4%

-4%

-6% -7% -9% 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E

5-year avg.

Actual/BofAML forecast

Source: SIA, BofA Merrill Lynch Global Research estimates

9% 8%

5-year avg.

Source: SIA, BofA Merrill Lynch Global Research estimates

Table 2: Companies mentioned in report Name

Altera Apple ARM Holdings ASM Pacific BlackBerry Broadcom Celestica Inc. Hon Hai Prec. Intel Jabil Circuit Marvell Micron Technology MediaTek Nokia QUALCOMM Realtek RFMD Skyworks Taiwan Semi Xilinx

ML Ticker ALTR AAPL ARMHF ASMVF BBRY BRCM CLS HNHAF INTC JBL MRVL MU MDTKF NOK QCOM RLTQF RFMD SWKS TSMWF XLNX

BBG Ticker ALTR US AAPL US ARM LN 522 HK BBRY US BRCM US CLS US 2317 TT INTC US JBL US MRVL US MU US 2454 TT NOK US QCOM US 2379 TT RFMD US SWKS US 2330 TT XLNX US

QRQ C-1-7 C-2-7 C-1-7 C-1-7 C-3-9 C-1-7 C-3-9 B-1-7 A-1-7 C-1-7 C-3-7 C-3-9 C-1-7 C-1-9 C-2-7 C-3-7 C-1-9 C-1-9 C-1-7 C-1-7

Price

36.24 536.74 998.00 75.65 8.08 31.47 10.95 86.20 25.81 18.00 15.75 23.66 463.50 7.34 78.86 91.60 7.88 37.52 119.50 54.27

Source: SIA, BofA Merrill Lynch Global Research estimates

Link to Definitions Technology

Click here for definitions of commonly used terms.

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