China Will Have To Construct 20-Plus Nuclear Power Plants For Electricity Generation Unless They Use LEDs For 30% Of Their Lighting Infrastructure, Says Senior Analyst At Oppenheimer
December 14, 2011 - The Wall Street Transcript has just published Semiconductors Report offering a timely review of the Semiconductors sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Srinivasan Sundararajan, Ph.D., is an Executive Director and Senior Analyst at Oppenheimer & Co. Inc. covering the specialty semiconductor and emerging technology sectors. Mr. Sundararajan most recently was at Barclays Capital, where he covered the semiconductor equipment, solar and LED sectors. Before Barclays, he worked at Citigroup Inc. and CIBC World Markets Inc. on the semiconductor equipment teams. Mr. Sundararajan also brings extensive industry experience working at Hermes Microvision, Inc., as a Senior Marketing and Applications Director; Schlumberger/Applied Materials, Inc., as a Senior Product Manager; KLA-Tencor Corporation as a Product Manager; and Novellus Systems, Inc., as a Technologist/Integration Program Manager. He holds a B.S. and M.S. in chemical engineering from the Indian Institute of Technology, a Ph.D. in chemical engineering from the University of New Mexico, and has completed postdoctoral work at the University of California at Berkeley.
TWST: Right now, what is the status of the sector, and what are the most important factors driving the sector? What about challenges for the sector?
Dr. Sundararajan: Let's divide them by subsector. The semiconductor equipment sector troughed in terms of orders in CQ3 of 2011 and will trough in terms of revenues in CQ4 of 2011. Due to a foundry arms race for making application processors for tablets and mobile phones, 2012 is shaping to be better than expected. While consensus expectations are perhaps 10% to 20% down y/y for capex, I actually think that the semiconductor capex will be flat y/y in 2012, unless Europe gets worse.
My reasoning is that 2011 second half experienced a large deceleration in orders and revenues and next year should be better, especially in terms of comparisons. Furthermore, companies such as Intel and TSMC spent a lot of their capex on buildings, and Samsung is set to increase capex next year both for its foundry, NAND and OLED offerings. For the memory-related chip companies, after enjoying a reasonably good 2010, this year was marred by freefall price drops in both DRAM and NAND. However, NAND players reacted quicker and curtailed their capex and production increase plans and communicated that to the market. Hence, the NAND market was the first to improve. Lately, DRAM companies have also cut production and DRAM ASP drop is not as severe as it used to be in the earlier part of the year.
The flat panel subsector is suffering as demand for both TVs and PCs has been less than forecasts earlier in the year due to general economic macro weakness. However, companies are cutting production, fab utilization and capex.The LED subsector is also weak. LEDs currently are used for backlighting in TVs and there is an overcapacity for LED production. Meanwhile, TVs are not selling well, and people have not been inclined to pay a premium for LED backlight TVs. In addition, TV makers have learned to make do with fewer LEDs for the backlighting. This sector will recover when LEDs start to serve the general lighting application even more, but that may be six months to two years away to gather full steam.
And also, in general, Chinese overcapacity in MOCVD will have to be consumed. OLEDs should be a growth sector as OLEDs have generally better contrast and lower power consumption than LEDs - could be useful as screens for mobile devices such as tablets and smartphones would go to OLEDs and starting next year, Samsung, LG (066570.KS) and AUO have plans to make OLED TVs. But a lot more manufacturability improvements have to be done. Human interface semiconductors includes Synaptics and Omnivision. Synaptics has a new CEO and is in the midst of a transition from selling modules - higher ASP, lower gross margin - to chip and tails - lower ASP, higher gross margin. The stock has run up based on both the reputation of the CEO - he was part of senior management at ATI (ATI) that was acquired by AMD (AMD). Omnivision is suffering from apparently losing its slot as the CMOS image sensor vendor for iPhone 4S' camera.
TWST: What are the biggest growth drivers right now?
Dr. Sundararajan: For the semiconductor equipment sector, the foundry arms race between Samsung, TSMC and GLOBALFOUNDRIES will increase spending from the foundries. Added to this, these foundries are making an application processor using ARM Holdings' (ARMH) design. So added to this foundry arms race is Intel. So as Intel is trying to get into the mobile space and ARMH is trying to getting into the PC and server space, equipment companies should benefit. In addition, NAND is slowly but surely replacing hard drives.
These NAND solid-state drives, SSDs, can perform at a higher input operations per second, IOPS. In addition, with the right design and the requisite controller and the interfaces, the cost of ownership of a NAND-based solid-state drive is better than a hard drive. Finally, DRAM production cuts this year and introduction of Ultrabooks and Windows 8 should be a big positive. In memory, DRAM should turn around with production cuts and pickup in the PC market. NAND is in a secular growth mode, which should not slowdown till 2015. Production cuts and pickup in TV and PC sales should be growth driver for flat panel display. The banning of incandescent bulbs in various countries should help LEDs.
In addition, buying an LED for lighting usually results in a sticker shock. With price drops, more elasticity will create further penetration. In fact, it is suggested that China will have to construct 20-plus nuclear power plants for electricity generation unless they use LEDs for 30% of lighting. The OLED technology is very expensive compared to LED for lighting purposes. In the case of mobile phones, there is a competing technology called IPS-LCD that is able to achieve higher resolution. However, next year will see companies such as Samsung, AUO and LG invest more heavily in OLEDs. That should improve the yields and reduce the costs. For both Omnivision and Synaptics, their growth drivers are basically getting qualified for mobile phones, tablets or PCs.
TWST: Who are your "outperform" stocks right now and why?
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