Three Techs Exposed to Japan Earthquake

ppteam

We believe the tech -supply chain will be impacted to some degree by the earthquakes and tsunamis in Japan; however, the severity remains to be seen and we expect more details as the week proceeds.

We expect the biggest impact to occur to companies serving the consumer-electronics industry, as Japan has greater exposure to this vertical versus infrastructure. We expect the impact to be both direct and indirect, providing some companies with a convenient excuse for disappointing first-quarter 2011 results and/or second-quarter 2011 outlooks.

The liquid crystal display (LCD) glass industry has facilities in Japan, but more important, in South Korean and Taiwan. LCD glass makers typically locate operations near the LCD panel makers. There are panel plants in Japan with suppliers such as Sharp, but majority of the panels are produced in Taiwan and South Korea.

Corning (ticker: GLW) (rated at Sell) announced on Friday morning that no damage to supply occurred at its Shizuoka or Sakai City LCD glass plants; however, the situation in Japan has worsened over the weekend and this may have changed. Either way, we do not expect a material impact.

Monday morning, Asahi Glass indicated that damage to its LCD glass facilities has been limited to small/mid-sized LCD glass substrates and the overall impact to its flat panel glass business will be "limited". Nippon Electric Glass is yet to make an announcement regarding its LCD glass facilities.

Netting this all out, we expect some disruption in the LCD-supply chain, including impact from passive components and chips used in the final assembly process across LCD TVs, notebooks, desktop PCs and handheld devices.

We expect passive components (e.g., capacitors, lithium ion batteries) and semiconductors (e.g., NAND flash, etc.) supply to be impacted, while leading original equipment manufacturers (OEMs) such as Sony (SNE), auto makers and others have announced plant shutdowns.

With less component supply, pricing is likely to be impacted, negatively impacting margins. We expect more color as the week proceeds; however, our initial reaction is that tech-supply-chain companies with the highest consumer-electronics exposure are most at risk, including Flextronics International (FLEX) (rated at Sell), Molex (MOLX) (rated at Neutral) and Nam Tai Electronics (NTE) (rated at Neutral).

Nam Tai has heavy exposure to Japanese OEMs at approximately 80% of sales by our estimates, but most of the production is for global demand, while Molex has enjoyed a strong position in Japan over the years. Apple (AAPL) (rated at Buy) is a big consumer of passive and active components, which could constrain supply for the company; however, we would expect Hon Hai Precision [of Taiwan] to make every effort to procure components for its most important customer.