"Our channel checks show that Taiwan foundries' PC customers are showing the strongest demand of all sectors. We believe that PC unit shipment growth is mainly from emerging markets, which are less vulnerable to the risk of slowing consumer demand, in our view," Lehman Brothers said in its report on Taiwan's tech industry.
"As a result, DRAM and LCD prices are stabilizing and firming up. We therefore favor PC-related stocks in the belief that large-cap, flagship motherboard and notebook assemblers will take the Taiex to the next level."
Looking at July revenues, Lehman Brothers said Taiwan tech sector revenues, as a whole, increased 22 percent year-on-year and three percent month-on-month due to the higher base in June. The strongest growth came from the notebook sector, which was up 99 percent year-on-year, followed by memory modules, LCDs, LEDs and Fabless, it noted.
Notebook original design manufacturers have outperformed their guidance for four quarters in a row which is "a rare occurrence."
"Sector visibility lasts through to October, one of the longest visibilities among all IT products. We have raised our third-quarter quarter-on-quarter unit shipment growth estimate for (notebooks) from 15.4 percent to 18.8 percent, despite the high second-quarter base. However, we have seen some component shortages, namely for batteries, LCDs and analog ICs," Lehman Brothers said.
There have been concerns about the potential downside risks associated with U.S. consumer demand, in light of the rising credit risk.
"We do not expect this to present a significant threat to overall PC demand since the main driver behind new PC growth is the emerging markets, which will likely account for 44 percent of demand in 2007, compared to 33 percent in 2002. We also expect emerging markets to account for 51 percent of all PC demand in 2011," said the bank.
In terms of stock preferences, Lehman Brothers said it prefers large-cap PC names such as Acer, ASUS, Wistron and Compal.
"We like the high PC exposure of upstream stocks such as Nanya PCB, PPT and DRAM packaging/testing stock, Powertech. Finally, we also look favorably on low valuation foundry UMC and raw materials supplier Topco (which we expect to see increased exposure to the China market)," it added.
In terms of its "dislikes," Lehman Brothers said it is not hot on handset-related companies, especially Motorola-related vendors.
