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Ticonderoga on Networking & IT Hardware: Highlights From Day 7 of Our China-Taiwan Tech Trip

April 15, 2011 8:29 AM EDT
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Ticonderoga on Networking & IT Hardware: Highlights From Day 7 of Our China-Taiwan Tech Trip by Brian White

White said, "Even Without Japan, Surging Raw Material Prices in the Supply Chain - Today, we met with various connector and PCB vendors at a China electronics trade show. The key theme was the surging price of raw materials experienced in just the first few months of this year that is having a significant impact on margins, while companies are also grappling with rising labor costs in China and employee retention. Regarding Japan, most of the connector and PCB companies we spoke with have not yet experienced a negative impact on material supply out of Japan; thus, any future shortage would likely drive another leg up in material prices."

"Connector & PCB Industries at Risk on Material Price Hikes - Per our conversations with connector makers, the average material increase this year has been approximately 20%, driven by rising prices for copper, gold and plastic resins; however, price increases to customers have been scare thus far and any future price hikes are not expected to cover the cost increase. Clearly, we believe this will be a headwind for our connector coverage, which includes Amphenol (NYSE: APH)(Buy-rated) and Molex (Nasdaq: MOLX)(Neutral-rated). For the PCB industry, the material price increases were similar to slightly higher than connectors, with one company highlighting a 35-40% surge in prices this year. Similar to the connector industry, PCB companies do not expect to raise prices at the same rate as the cost increases, but some have at least started the process. Although the material content for lower-end PCBs in China is higher vs. the higher-end products used in more complex electronic equipment, we expect the entire PCB industry to be impacted to some extent. In our EMS coverage universe, Flextronics (Nasdaq: FLEX)(Sell) is the only company that fabricates PCBs. Independent PCB vendors include TTM Technologies (Nasdaq: TTMI)(NotRated) and Viasystems (Nasdaq: VIAS)(NR). EMS provider Sanmina-SCI (Nasdaq: SANM)(NR) also fabricates PCBs."

"Panel Makers Hiking Prices Further on Japan - Our meeting with a leading China-based LCD TV maker indicated that LCD panel prices from a Taiwan-based panel maker were raised meaningfully yesterday for 42-inch panels, well above the $5 price hike we indicated earlier this week. Essentially, the Taiwan panel maker told this customer that the situation in Japan has driven material shortages and thus panel availability will be less. Another smaller LCD TV ODM indicated that the Japan situation has driven shortages of components such as certain ICs and camera lenses. Although the panel makers will benefit from rising panel prices, if Japan is driving shortages of materials, then the unit volume is likely to be disappointing. At the same time, the overall trends in the LCD TV and PC markets have been weak this year. As such, we continue to believe our LCD universe of AU Optronics (NYSE: AUO)(Neutral), Corning (NYSE: GLW)(Sell) and LG Display (NYSE: LPL)(Sell) will remain challenged."


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