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Daily Intelligence Briefing
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Tuesday, November 19, 2019
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Identifying Change-Driven Investment Themes – Five sections, explained here.
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We bring you our Daily Intelligence Briefing courtesy of McAlinden Research Partners. The report is provided to Hedge Connection members for free. Below is snapshot, login to view the full report. Not a member? Join today. McAlinden Research Partners is offering a complimentary one-month subscription to receive the Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by contacting Rob@mcalindenresearch.com and mentioning “Sent by Hedge Connection”
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I. Today’s Thematic Investment Idea
A deep dive into a market driver with alpha generating potential.
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Semiconductor Trade Tensions Set to Shock US and China Tech Sectors →
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Summary: China’s semiconductor industry has always been the Achilles heel of the country’s booming tech sector – and the US is now exploiting it with tariffs and blacklists that threaten to drag Chinese innovation in 5G, AI, and supercomputing to a halt. While China scrambles to ramp up development of indigenous semiconductor capacity, telecom giant Huawei, blacklisted from almost all business interactions with US tech firms, is already running low on their preferred chips for 5G technologies and may have to start utilizing their own, lower quality components by the end of this month. While self-sufficiency will be a long-term positive for Chinese tech, nobody knows exactly how rocky this road may become. Additionally, investors should also be prepared for the recoil effect US chipmakers might feel in coming quarters if trade tensions do not subside. Read more +
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II. Updates of Themes on MRP’s Radar
Follow-up analysis of key market drivers monitored by MRP.
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Food Delivery: Americans Spend Billions on Takeout. But Food Delivery Apps Are Still a Terrible Business.
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Dollar: Dollar May Be Doomed As Trump Does His Worst In 2020
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Banks LONG: Google Checking Accounts May Give Banks an Edge in Deposit Wars
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Cannabis: All the excuses cannabis companies are making for an ugly crop of earnings
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5G: China is outspending the US on 5G infrastructure, expert says
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Oil: U.S. Shale Producers Slash Spending Once Again
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IV. Active Thematic Ideas
MRP’s active long and short themes, with an archive of follow-up reports.
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See Them Here →
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V. Macroeconomic Indicators
Key data releases relevant to MRP’s Active Thematic Ideas.
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See Them Here →
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Semiconductor Trade Tensions Set to Shock US and China Tech Sectors
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Summary: China’s semiconductor industry has always been the Achilles heel of the country’s booming tech sector – and the US is now exploiting it with tariffs and blacklists that threaten to drag Chinese innovation in 5G, AI, and supercomputing to a halt. While China scrambles to ramp up development of indigenous semiconductor capacity, telecom giant Huawei, blacklisted from almost all business interactions with US tech firms, is already running low on their preferred chips for 5G technologies and may have to start utilizing their own, lower quality components by the end of this month. While self-sufficiency will be a long-term positive for Chinese tech, nobody knows exactly how rocky this road may become. Additionally, investors should also be prepared for the recoil effect US chipmakers might feel in coming quarters if trade tensions do not subside.
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China has long been the world’s biggest chip importer and currently lacks much of the infrastructure necessary to break that dependency. According to the Wall Street Journal, the country imported $312.1 billion in semiconductors in 2018, more than the $240.3 billion in crude oil imports, Chinese customs data showed.
Back in 2015, the Chinese government attempted to remedy this issue, creating targets of 40% and 70% self-sufficiency in semiconductors over the following 5 and 10 years, respectively, as part of their “Made in China 2025” initiative. Now, on the cusp of 2020, China has reached only about 15% self-sufficiency, according to the Nikkei Asian Review. Christopher Thomas, a managing partner at McKinsey, recently told Fortune that “there’s been no structural changes in the industry in the last five years”.
That shortcoming has been especially damaging to the country in the wake of their trade war with the US. Successive rounds of tariffs levied from the U.S. and China put a strain on technology companies in both countries that rely on semiconductors as related equipment got caught in the tit-for-tat. That led to higher prices, and firms like Intel have even begun shifting supply chains away from China.
Back in May, the Trump Administration took even more destructive steps, enacting an outright ban of US tech sales to Huawei, a Chinese telecom giant with hundreds of billions of dollars in global revenue and major purchaser of foreign semiconductor supplies. While Huawei has obtained a so-called temporary general license, which allows U.S. firms to continue making limited number of transactions with the Chinese vendor, chip supplies are thinning out quickly. Although the company furiously stockpiled U.S. semiconductors and other parts it needed to keep producing telecom network equipment and smartphones prior to the ban, analysts cited by the Washington Post in October noted that remaining components, especially those significant to their 5G ambitions, would only last a few months more or less. Certain components may even end up exhausted by this month, forcing Huawei to switch over to their own, lower quality parts.
The US government has even reportedly begun pushing Taiwan to restrict its biggest chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), from producing semiconductors for Huawei, and to institute stricter controls on technology exports to China. TSMC has been somewhat of a backdoor for Huawei to continue purchasing high quality semiconductor supplies and, according to the Financial Times, the country now accounts for about 20% of TSMC’s revenue. While some are skeptical that the US will force the Taiwanese government’s hand, Huawei is undeniably on thin ice with the country already. Just last week, Taiwan suspended sales of three Huawei smartphone models that refer to Taiwan as part of China.
Any disruptions in the smartphone supply chain could be especially damaging to China’s plans for dominance in the upcoming 5G revolution. Dave Burstein, a telecom analyst at STL Partners and publisher of Huawei Report, has noted that Chinese consumers are expected to buy up to 200 million 5G phones next year, with 40% of those sales expected to go to Huawei’s phones. GSMA, a London-based trade body for mobile network operators, estimates that by 2025, that Chinese 5G subscribers might climb to 600 million ― or about 40% of the expected global subscribers by that time.
China’s weakness in the semiconductor industry could be an impediment to other major tech advances on the horizon if major developments are not reached soon. US firms that supply Chinese supercomputer manufacturers like Sugon, including chipmakers Advanced Micro Devices, Intel Corp. and Nvidia Corp., have all been barred from continuing business with the company, along with 8 major Chinese AI firms who’ve also been recently blacklisted. China’s AI ambitions could be especially hard-hit, considering Nvidia dominates global development and production of graphic processing units, the most popular chip for powering deep-learning algorithms.
To their credit, China has begun stepping up their efforts in the semiconductor space. At the end of last month, the country’s government formally created a $29 billion state-backed fund to invest in the semiconductor industry.
In September, Yangtze Memory Technologies Co. took a major step forward and begun mass producing a type of advanced memory chip, called 64-layer 3D-NAND flash. However, this project serves as an example of how long it can take to get semiconductor developments to market. Yangtze’s advanced chip was the result of investments made 5 years ago; part of a $9 billion semiconductor fund China launched all the way back in 2014.
Huawei did introduce their own new AI-powered chip to the market in August to help process large data, followed by Alibaba’s September announcement that it had developed its own AI-as well. While these early developments are encouraging, most analysts still say China remains years behind the higher quality chips offered by international semiconductor firms.
Obviously, China’s tech sector is set for uncertainty in the short term, but the pain of trade restrictions goes both ways. US blacklisting now threatens to dent revenues for domestic companies with major lines of business in China. Restrictions on selling to Huawei alone could cost its US suppliers billions of dollars a year, considering Huawei’s top 19 US suppliers had a combined US$14.2 billion in revenue from their Chinese business partner last year. According to CNBC, chip stocks such as Qualcomm, Micron, and Broadcom generated more than 50% of their revenues from China in 2018. On top of lost revenue from blacklisting, tariffs are whacking US chip producers with plants in China, who may start spending even more to shutdown and shift production to other markets in Southeast Asia.
We have yet to see a huge hit to company’s earnings from tariffs and blacklisting, but unusual strength in some company’s earnings may actually be a sign of pain to come. $200 million of Intel’s third-quarter revenue, for instance, came from Chinese data center owners purchasing chips sooner than they otherwise would have, fearing another US crackdown. Summit Insights Group, cited by Reuters, believes much more of Intel’s results were driven by sped-up buying because of tariffs and that could slow sales during the fourth quarter of 2019 and first quarter of 2020.
In the longer-term, these developments are ultimately beneficial to China’s tech sector. The country had long felt little urgency to take chipmaking seriously. Now that the Rubicon has been crossed, China’s government and tech firms now understand how essential it is to avoid this bottleneck in the future. It will take time, but China’s chipmakers might be set to explode in coming years.
Investors can gain exposure to China’s tech sector via the Invesco China Technology ETF (CQQQ).
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China Tech (CQQQ) vs Semiconductors (SOXX) vs China Semiconductors (603986.SS, 002129.SZ) vs S&P 500 (SPY)
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Source material for today’s market insight…
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China Tech
US security concerns about Chinese tech could push research offshore
In May, US President Donald Trump signed an executive order to prohibit US infrastructure from using Chinese products and services. Separate from Trump’s executive order, the Commerce Department in the same month also placed Huawei and dozens of its affiliates on a so-called Entity List that banned US suppliers from selling components to them without government approval.
Restrictions on selling to Huawei will cost its US suppliers billions of dollars a year. One leading provider, Micron Technology, the Boise, Idaho-based memory chip maker, generated 12 per cent of its revenue in its fiscal 2019 – about US$2.8 billion. Yet it had to suspend most of its shipments after the blacklist.
NeoPhotonics, a semiconductor company in San Jose, California, has perhaps the biggest exposure to Huawei-related risks. In 2018, its sales to Huawei accounted for 46 per cent of its total revenue.
A spokesperson for Huawei, which drew nearly US$7 billion in revenue from the Americas last year, said the company managed to swap out all US components for its 5G infrastructure products in its most recent quarter.
Read the full article from Abacus +
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China Tech
Japan chip industry heavyweight joins China’s Unigroup
Tsinghua Unigroup, one of China’s leading chipmakers, has hired Japanese semiconductor industry veteran Yukio Sakamoto as a senior vice president and also head of the company’s Japan unit. Sakamoto led Elpida for over a decade, from 2002 to 2013, successfully listing the company’s shares on the first section of the Tokyo Stock Exchange in 2004.
Unigroup is an offshoot of Tsinghua University, Chinese President Xi Jinping’s alma mater, and plays a major role in the country’s pursuit of greater self-sufficiency in semiconductors. Its 2013 acquisition of then Nasdaq-listed mobile chip supplier Spreadtrum Communications accelerated its growth.
In an interview with Nikkei this year, Sakamoto said it was imperative for China to develop its own chip technology, rather than poaching engineers from South Korea or Taiwan with high salaries.
Read the full article from Nikkei Asian Review +
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Semiconductors
Intel data center rebound eases U.S.-China trade war worries
Intel Corp beat Wall Street estimates for third-quarter revenue and profit and raised its full-year revenue forecast.
About $200 million of Intel’s third-quarter revenue came from Chinese data center owners purchasing chips sooner than they otherwise would have, likely out of trade concerns, Chief Financial Officer George Davis said.
But analyst Kinngai Chan of Summit Insights Group said he suspected much more of Intel’s results were driven by sped-up buying because of tariffs and that could slow sales during the fourth quarter of 2019 and first quarter of 2020.
Read the full article from Reuters+
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China Tech
China to Funnel $29 Billion Towards its Chip Ambitions
China is the world’s biggest chip importer, and the long-awaited 204 billion yuan ($28.9 billion) fund will fuel Beijing’s efforts to forge its own semiconductor supply chain from chip design to manufacturing.
Beijing’s effort to reduce its reliance on American chips is taking on greater urgency as the Trump administration adds more Chinese names to its export blacklist, cutting off the flow of chips to targeted companies from Huawei Technologies Co. to SenseTime Group Ltd.
Beijing is trying to reduce the country’s reliance on semiconductor imports worth about $200 billion annually. It fears such dependence undermines national security and hampers the development of a thriving technology sector.
Read the full article from Bloomberg +
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China Tech
Next few months may show if Huawei can thrive without U.S. tech sales
In May, immediately after the Trump administration banned the sale of U.S. technology to Huawei, most Western companies halted all sales to the Chinese company. The ban applies to technology made in the United States, and to products made overseas that derive more than 25% of their value from U.S.-origin technology.
Some industry watchers believe Huawei will soon run out of vital parts it needs to build 5G wireless equipment, which underpins the super-fast internet and telecom networks many countries are building. Of particular importance is technology from Xilinx Inc., of San Jose, Calif., that allows 5G base stations to be re-programmed from afar.
“I’m still forecasting them to run out of Xilinx FPGAs in November and to change over to their own parts,” Madden said. That shift could make Huawei’s 5G equipment less attractive for buyers around the world because Huawei’s technology isn’t likely to be as advanced as Xilinx’s, Joe Madden, principal analyst at the research firm Mobile Experts, said.
Huawei says it is racing to re-engineer its products to avoid U.S. chips and software. In an effort to protect its smartphone and device sales from the possible long-term loss of Google’s Android operating software.
Read the full article from The Washington Post +
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Select a theme to see when and why we added it. Also included is a link to all recent Market Insight reports we’ve written about that theme, allowing you to track its progress.
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US NAHB Housing Market Index Declines Slightly
The NAHB Housing Market Index in the United States fell to 70 in November 2019 from 71 in the previous month and below market expectations of 71.
Meanwhile, the gauge for home sales over the next six months rose to 77 from 76.
Click here to access the data +
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China FDI on the Rise
Foreign direct investment into China rose 6.6 percent year over year to CNY 752.41 billion in January-October 2019 or 2.9 percent to USD 110.78 billion in January-October 2019. For October only, FDI went up 7.4 percent to CNY 69.2 billion. Foreign investment is expected to remain stable over the full year, the Ministry of Commerce said.
Click here to access the data +
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Russia Industrial Production Rises Less than Expected
Industrial production in Russia increased 2.6 percent year-on-year in October 2019, easing from a 3.0 percent rise in the previous month and slightly below market expectations of 2.7 percent. It was the smallest gain in industrial activity since May.
On a monthly basis, industrial production jumped 5.5 percent, following a 2.7 percent gain in September.
Click here to access the data +
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Nigeria October Inflation Rate at Near 1-1/2-Year High
Nigeria’s annual inflation rate increased to 11.61 percent in October 2019 from 11.24 percent in the previous month, reaching the highest since May of 2018. Prices rose mainly for food, due to the ongoing closure of the country’s land borders and the impact of unusual heavy rainfall on harvest.
Annual core inflation, which excludes price of volatile agricultural products, eased slightly to 8.88 percent from 8.94 percent in the previous month.
On a monthly basis, consumer prices went up 1.07 percent, after rising 1.04 percent in the preceding month.
Click here to access the data +
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MARKET INSIGHT UPDATES: SUMMARIES
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Food Delivery
Americans Spend Billions on Takeout. But Food Delivery Apps Are Still a Terrible Business.
Grubhub reported $1.4 billion in third-quarter gross food sales, $322.1 million in revenue, and $53.8 million in adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, a measure of cash flow. Uber would love those kind of results; its food-delivery service, Uber Eats, pulled in $645 million in revenue in the latest quarter, but that translated to an adjusted Ebitda loss of $316 million.
Grubhub and everyone else are in a tough position when one rival is willing to lose hundreds of millions of dollars.
Despite the troubles, the private party continues for the delivery companies. This past week, Bloomberg reported that DoorDash raised another $100 million on top of the $2 billion it already raked in from venture investors including Kleiner Perkins, Sequoia Capital, and, yes, the SoftBank Vision Fund, which also has big bets on Uber and WeWork.
The latest cash infusion at DoorDash reportedly comes at a valuation of close to $13 billion. Postmates has raised $900 million, with a reported valuation of $2.4 billion at the last round. The huge losses at Eats, meanwhile, are putting pressure on Uber’s shares, with the stock hovering near a post-IPO low, down more than 40% since its May public market debut.
Read the full article from Barron’s +
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Dollar
Dollar May Be Doomed As Trump Does His Worst In 2020
The exchange rate has been a particular Trump obsession since his 2016 campaign. In January 2017, just before taking office, Trump complained that “our currency is too strong” and “killing us.” Twelve months later, Treasury Secretary Steven Mnuchin declared dead America’s 23-year-old strong dollar policy.
It has been more than eight years since the U.S. Treasury intervened in currency markets. That was to cap the yen, which soared after the giant March 2011 earthquake. Now, the odds favor Trump directing Mnuchin’s team to talk down the exchange rate ― and perhaps formally sell dollars versus the yen and euro.
A swooning dollar is arguably Japan Inc.’s biggest nightmare heading into 2020. Already, the trade war has Asia’s No. 2 economy skirting recession.
Read the full article from Forbes +
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Banks
Google Checking Accounts May Give Banks an Edge in Deposit Wars
Google said last week it’s exploring how it can partner with banks to offer checking accounts through its Google Pay app. Citigroup Inc. and a California credit union signed on as initial partners for the effort — a move that could help them pick up extra customers as the industry contends with slowing growth in deposits.
Deposit growth at the biggest U.S. banks slowed to 2.2% last year, the lowest level since 2010, according to data compiled by Bloomberg Intelligence.
Citigroup has been making a push for consumer deposits after it debuted its national digital bank and restructured its U.S. consumer operations last year, bringing Anand Selva from the firm’s Asia business to lead the new unit. Average deposits in the firm’s U.S. retail banking arm have climbed 2.9% this year to $186 billion.
Read the full article from Bloomberg +
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| There is much more to this report! McAlinden Research Partners offers Hedge Connection members weekly access to the Daily Intelligence Briefing research for free – click here to view. (You must be logged in first). Not a member? Join today. McAlinden Research Partners is offering a complimentary one-month subscription to receive the Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by contacting Rob@mcalindenresearch.com and mentioning “Sent by Hedge Connection” |
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