We believe recent US further restriction on Huawei will lead to disruption to tech supply chain and smartphone landscape shift. The new rule will require all US/non-US companies to obtain a license when using US EDA software for Huawei’s chip design and US semi equipment for Huawei’s chip manufacture. Given 120-day grace period and Huawei’s 6-month inventory, we expect direct impact on Huawei’s Hisilicon chip design and Huawei’s semi foundries (e.g. TSMC, SMIC) to emerge in 4Q20E. Overall, we expect supply chain will be under pressure in near term, including Sunny Optical (2382 HK, HOLD), AAC Tech (2018 HK, SELL), BYDE (285 HK, BUY), Q-tech (1478 HK, BUY) and SMIC (981, NR).
- New Huawei restriction to target EDA software and semi equipment. The new rule has more far-reaching impact than market expected, as it expanded US license requirement from “original entity list with 25% threshold for products sold to Huawei” to “all US/non-US companies using US software/semi equipment for Huawei products”. Huawei currently relies on US EDA software (80% global share from Cadence/Synopsys/Mentor) for Hisilicon’s semi design, while Huawei’s major foundries, TSMC and SMIC, purchase US semi equipment (40% global share from Applied Materials/ Lam Research/ KLA,) for chip manufacture.
- 120-day grace period and 6-month Inventory could be near-term buffer. We expect new Huawei ban will have limited impact on supply chain in next 6 months, given Huawei’s 6-month component/semi inventory and 120-day grace period for Huawei’s existing orders. However, if US does not grant EDA/semi-cap licenses to Huawei and its suppliers/foundry (SMIC, TSMC) in coming 120 days, we expect significant negative impact on Huawei’s telco equipment and smartphone supply chain in FY21E.
- Smartphones impacted more than telco equipment. While we believe Huawei achieved 95%+ replacements of handset/telco equipment semi, its handset semi still has high reliance on TSMC’s advanced technology (5nm). Overall, we believe Huawei secures enough component inventory to achieve BTS/smartphone shipment targets in 2020, but we see increasing risks for its business outlook and global 5G network deployment delay in 2021.
- Avoid names with high Huawei exposure in near term. In near term, we believe market focus will remain on US-China trade/tech war escalation, and China’s potential retaliation on US’s companies will continue to weigh on the sector. We recommend to stay cautious on Huawei supply chain (e.g. Sunny Optical), and cherry-pick component suppliers with strong industry position, secular growth and market share gain (e.g. Luxshare).
