Chip makers and related companies set to benefit from internet connectivity boom, analysts say
Government-led technology development is expected to boost opportunities alongside growing consumer demand
The outlook for China’s semiconductor manufacturers and mobile parts makers is beginning to look up, thanks to rising consumer demand and government backing for more internet connectivity in lifestyles, even as a tough competitive environment remains, analysts say.
Mobile phone handset shipments in China rose 5 per cent year-on-year in January to 49.4 million units, according to statistics published by the Ministry of Industry and Information Technology.
Of those, smartphone shipments were up 10.3 per cent to 44.59 million. In December, the monthly net increase in LTE subscribers exceeded 30 million for the first time, reaching 386 million in total.
“It appears that the switchover from 2G/3G to 4G (LTE) has begun to accelerate in earnest,” wrote Nomura analysts in a note last week, forecasting smartphone shipments of 40 to 45 million units per month in 2016 versus 38 million in 2015.
The benefits of market growth haven’t flowed directly through to smartphone component manufacturers. Jefferies analyst Ken Hui points out that smartphone makers Huawei and Xiaomi have added pressure to an already competitive market with increased insourcing and in-house development.
“We expect in-house development to mostly impact [Taiwan-based] Mediatek, which shipped around 20 million chips to Xiaomi in 2015,” Hui said, citing Xiaomi plans to develop a chip based on technology licensed from Chinese semiconductor maker Leadcore Technology.
The outlook is better for other manufacturers, with Hong Kong-listed Semiconductor Manufacturing International Corporation (SMIC) attracting “buy” and “outperform” ratings from Jefferies and Daiwa respectively.
SMIC beat fourth quarter projections by growing revenue 7 per cent quarter-on-quarter to US$610 million (HK$4.74 billion), although its gross margin was below consensus due to research and development costs and price competition.
“2016 looks to be a transitional year for SMIC, which is shifting focus from profit to sales growth,” said Daiwa analyst Rick Hsu. “We expect SMIC’s earnings to rebound sharply in 2017, after the transition.”
Jefferies described SMIC as an “invest for the future” company based on its aggressive capacity expansion plans and acquisitive stance, along with successful product lines like its fingerprint sensor.
But with China’s smartphone market maturing, analysts covering the communications chips sector are turning their attention to the bigger opportunities promised by the “internet of things”, the network of physical objects, including devices, vehicles and buildings, that contain electronics, software, sensors and connectivity, enabling them to collect and exchange data.
The trend was described by former premier Wen Jiabaoas an “emerging strategic industry”. The Ministry of Industry and Information Technology forecasts the market value of China’s internet of things to reach 1 trillion yuan (HK$1.19 trillion) by 2020, up from 200 billion yuan in 2010.
“Logistics companies, utilities and manufacturers, in particular, are increasingly harnessing the real-time information provided by connectivity to increase efficiency, lower costs and better manage infrastructure,” said a report from mobile operators industry group GSMA.
The technology also has applications in the healthcare and food safety sectors, and Beijing plans eventually to extend it into remote locations nationwide, supported by bandwidth aggregation and device platform sharing among the big three mobile operators.
“We expect some China government bodies to announce a massive plan later this year to build an internet of things infrastructure overlaying the existing mobile network in the next few years.” Hui said.
“The internet of things network will gradually give birth to terminal devices, thus creating demand for a lot of chips. Although these chips, transmitting at about 200Kbps, have lower values, the market is incremental with huge volume potential.”
According to Jefferies, Shenzhen semiconductor maker HiSilicon, ZTE Corporation’s microelectronics arm and US firm Qualcomm have already begun development. It also said Hong Kong-listed ASM Pacific Technology and SMIC are poised to benefit.