China MIIT reported that Jan smartphone shipment declined 37% YoY to 18.3mn, due to CONV-19 impact since mid-Jan. This is within our/market expectations of 30-40% YoY decline in 1Q20 (vs IDC -30%; Strategic Analytics -30%; IHS -33%). Given near-term challenging earnings outlook and potential inventory correction running into 2Q20E, we think it is still early to position for sector rebound in the meantime. We expect further order cuts and earnings downgrades in next few weeks, and China 5G supply chain will remain under pressure, including Sunny Optical (2382 HK), AAC Tech (2018 HK) Xiaomi (1810 HK), BYDE (285 HK) and Q-tech (1478 HK).
- 5G shipment optimism starts to fade; Product launch to delay. This is the first CATR datapoint for China smartphone market since CONV-19 outbreak, and we expect Feb-Mar shipment will decline at similar level of 30-40% YoY. Despite 5G shipment mix reaching 26% in Jan (vs 18% in Dec), we see further downside on consensus of 130-150mn (45-50% mix) for China 5G smartphone shipment in 2020 (vs 127mn our estimate). Our recent check suggested supply chain now expects 70% of production resumption by early-Mar, and return to normal production in 2Q20E. We are cautious on rapid 5G-driven recovery since several product launches in Feb are delayed (e.g. Oppo, Vivo) in light of sales weakness and potential supply shortage.
- Prefer Apple/Samsung names; HOVM to face rising inventory pressure. In terms of demand, we believe Apple/Samsung are better positioned than peers given low China shipment exposure (15%/1% of mix), compared to (60%/60%/65%/32% for Huawei/Oppo/Vivo/Xiaomi). As for production, Samsung has lowest risk with 80%+ capacity outside China (mainly in Vietnam/India), while Apple/HOVM heavily rely on OEM/ODM factories located in China. We are most cautious about high channel inventory (2-3 months) in China, which may lead to more order cuts in next few months.
- Expect further earnings revisions; Recommend to stay on sideline. In view of further earnings downgrade ahead, we expect range bounding for the sector in near term. We recommend to wait for more concrete guidance during March earnings period, which can provide better earnings visibility given that 5G upgrade trend remains intact. In medium term, we would take a more aggressive stance at either lower valuation or bottoming in earnings revisions for sector leaders such as Sunny Optical, BYDE and Q-tech.
