Three Stocks Facing China Mobile Volatility

May 12, 2016 11:03 a.m. ET

MKM Partners

We completed our first China Consumer Tech Devices Survey in conjunction with Wendy Farina and our MKM Intelligence Community Team.

We focus on smartphone takeaways, which are: 1) China is an increasingly important semiconductor market, as gadget ownership and upgrade frequency is far higher than for U.S. respondents; 2) Big differences in the brand of purchase intention versus current ownership suggest dramatic original equipment manufacturer (OEM) share shifts, semiconductor suppliers can expect periods of volatility and inventory work-down; and 3) While smartphone adoption appears more saturated than in the U.S., more purchase plans are intended for new household users.

We think dramatic swings in the China OEM market share adds volatility to the growth trajectory, and we note Qorvo's (ticker: QRVO QRVO -2.4135681669928246% Qorvo Inc. U.S.: Nasdaq USD44.88 -1.11 -2.4135681669928246% /Date(1463078093107-0500)/ Volume (Delayed 15m) : 964290 P/E Ratio N/A Market Cap 6305458983.6357 Dividend Yield N/A Rev. per Employee 389661 More quote details and news » QRVO in Your Value Your Change Short position ) China exposure is now about 40% of mobile revenue or about 32% of sales. That said, Qorvo is favorably exposed to Huawei [of China] as a 10% customer. Other suppliers exposed to China OEMs are Skyworks Solutions ( SWKS SWKS -5.542808484285493% Skyworks Solutions Inc. U.S.: Nasdaq USD61.0099 -3.5801 -5.542808484285493% /Date(1463078094300-0500)/ Volume (Delayed 15m) : 2810533 P/E Ratio 11.879377431906615 Market Cap 12287472149.0918 Dividend Yield 1.7032427120864724% Rev. per Employee 506373 More quote details and news » SWKS in Your Value Your Change Short position ) [about 20% of total sales] and Synaptics ( SYNA SYNA -2.8584323755077476% Synaptics In c. U.S.: Nasdaq USD64.57 -1.9 -2.8584323755077476% /Date(1463078092120-0500)/ Volume (Delayed 15m) : 842897 P/E Ratio 22.33737520295713 Market Cap 2537349576.84326 Dividend Yield N/A Rev. per Employee 1384530 More quote details and news » SYNA in Your Value Your Change Short position ) [upper teens percentage of total sales].

Differences in brand purchase intention versus current ownership suggest big share shifts. China consumers switch brands often, as 38% of new purchase intentions are for a previously unowned brand. Potential share gainers are Apple ( AAPL AAPL -2.7025186466327966% Apple Inc. U.S.: Nasdaq USD90.0099 -2.5001 -2.7025186466327966% /Date(1463078102764-0500)/ Volume (Delayed 15m) : 54278262 P/E Ratio 10.014471635150167 Market Cap 506716580382.682 Dividend Yield 2.5324863573404897% Rev. per Employee 2050050 More quote details and news » AAPL in Your Value Your Change Short position ) (38.7% intention versus 24.3% ownership), Huawei (24.9% intention versus 22.4% ownership), and LeTV [of China] (1.8% intention versus 0.5% ownership). While Apple appears to have significant runway on share gains, we suggest derating Apple purchase intentions to reflect strong brand awareness and image. The potential share losers are Xiaomi [of China] (9.3% intention versus 15.7% ownership), Samsung [of South Korea] (14.1% intention versus 17.9% ownership) and Lenovo [of China] (0.8% intention versus 3.7% ownership).

Chinese consumers are even more gadget-friendly relative to American consumers. Ownership is higher across smartphones, PCs, and tablets in rank order. Smartphones in China appear highly saturated at 96.8% ownership (versus 84.3% ownership in the U.S.). At 60.2% of respondents, smartphone-purchase intentions in the next three to six months suggest that many China consumers refresh at least once a year (well above U.S. purchase intentions of 24.8%).

While China smartphone ownership appears saturated, purchase intentions are more driven by new or incremental household users at 25.4% (versus 7.5% of U.S. respondents). In other words, smartphone penetration in China is driven by greater adoption within an existing household (children, elderly, etc.). Features/factors in purchase: The most attractive features that drive purchase decisions are wireless charging (66.2%) and fingerprint sensing (63.1%). Smartphone purchase decisions are driven more by brand (68% of respondents versus 43% in the U.S.) and less on cost (33% versus 61% in the U.S.).

-- Ian Ing

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