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Tech Thoughts Newsletter – 14 April 2023.

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14 April 2023 - Our weekly market round-up with our public market team: Inge Heydorn, Partner; Jenny Hardy, Portfolio Manager; and Nejla-Selma Salkovic, Analyst. This week covers TSMC, Infineon, and the latest on semiconductor demand. Subscribe to our Tech Thoughts Newsletter for weekly updates on our latest news and insights.

Market: CPI and wholesale inflation data was the big news of the week, coming in lower than expected and driving markets (and tech). The market is in wait and see mode ahead of results, which kick off next week. We’ve spent time this week picking through the very early reporters and March monthly sales numbers out of Taiwan.

After broad weakness late last year and the start of this year, we’re looking for signs of stabilisation of demand and signs that destocking is starting to come to an end – and in a broadly mixed set of numbers there are a few positive signs which we point to below. Key in the earnings reports when we get them will be whether we see a firm decline in inventory values across the supply chain, which will indicate that the weak sales numbers we’re seeing reported in the monthly releases are declining faster than the end demand. As a reminder days of inventory last year reached all time highs (higher than 2000 and 2008). While it’s true that some companies will want to maintain structurally higher inventory levels to mitigate potential supply chain disruptions (like autos after COVID), current inventory levels are really too high, which is why we’ve seen many firms reduce utilisation rates. We think hardware inventories may largely now be back to normal levels (but there are still uncertainties around end-demand), while we expect broad semi inventories will need a few more quarters to normalise (not true everywhere – supply remains tight in specific auto and industrial product areas – that’s where we try to focus our exposure within the portfolio). 

One of the big question marks around end demand in 2023 is China. The expected recovery in demand after the COVID reopening is slower than we might have hoped for, and the economic data has been mixed. It looks like companies have been reluctant to hire and consumers in turn have been reluctant to spend. Further easing (after the unexpected RRR cut in March) could still be on the cards. 

Portfolio: we made no significant changes to the portfolio this week. 

TSMC revenue for March a bit light – potential weakness around Apple and cloud capex (ex AI)

  • TSMC (owned) revenue for March came in weaker than we expected, down 11% mth/mth, 15% yr/yr and brought Q1 revenue up 4% yr/yr (still within the guided range – in NT$ terms)
  • We think the PC/notebook weakness (particularly Apple) and a hyperscaler pause in spend (ex the AI build out) are being amplified by continued inventory digestion. 
  • Nevertheless, in the context of the broader market (see PC numbers below, Mediatek, UMC etc), TSMC – showing growth yr/yr – is remaining resilient. 
  • It will report its full numbers next week, where we’ll get a clearer picture around inventory and end-demand stabilisation – and any colour on AI related orders. 
  • We think a pause in cloud capex spend amongst the hyperscalers is probably happening, related to product transitions (DDR5) and the workload optimisation at public cloud customers which they all highlighted over the last couple of quarters 
  • We expect overall cloud capex to slow in 2023, though we think some AI demand and build out is likely to pick up the baton – we focus our exposure on those businesses (AMD, Nvidia – and both make their chips at TSMC) which are likely to see demand around specific products related to specific AI workloads. 

Portfolio view: we own TSMC and while we definitely acknowledge risk around short-term Apple weakness and pauses in hyperscaler capex, we continue to believe it remains very well placed to capture value around many of the long-term technology shifts we are seeing around AI (Amazon’s annual letter spoke of its own AI “Trainium” chips which are still made at TSMC). 

On cloud, we expect we’ll continue to see spend optimisation as a feature in this coming quarter’s reporting from Microsoft, Amazon and Google. Note Amazon’s annual letter to shareholders also highlighted “short term headwinds” in AWS given more cautious customers – again, nothing new post comments surrounding the last couple of quarters. 

Elsewhere, it’s been a mixed set of revenue numbers from the Taiwanese semis and components players (month on month numbers largely helped by the short February)

  • UMC monthly sales finally started to see some stabilisation – up slightly (4%) month on month but still down 20% yr/yr. 
  • Mediatek March revenue was up 42% mth/mth, bringing Q1 revenue down 12% qtr/qtr and -33% yr/yr, just short of guidance. 
  • Novatek revenue for March was up 20% mth/th, but still down 26% yr/yr. Q1 revenue ended down 34% yr/yr. Novatek is the leading display driver IC (DDI) supplier, with broad end market exposure across handset, PC, autos and display/TV. 
  • Sunny Optical’s March smartphone components (camera module and lenses) shipment continues to track below forecasts/ company’s guidance. March camera module and lenses shipment saw 24% and 30% YoY decline; 1Q shipment saw 27% and 36% YoY decline, respectively. Company expected smartphone demand in 3Q will start to turnaround. Auto lenses volumes continued to see robust growth (23% YoY in March and 28% in 1Q) on the increasing demand of cameras in cars. 
  • Largan’s Q1 ended -36% qtr/qtr and -10% yr/yr. The company expects shipments in April and May to be weaker than March with high end demand (Largan supply into both Android and iPhone) continuing to be weak. 

Portfolio view – we don’t own any of these broad semi suppliers given their consumer exposure. While we’re seeing signs of light at the end of the tunnel in the consumer semis inventory correction (likely Q1 or Q2), the reality is that consumer exposed semis will still struggle to perform if consumer end demand remains weak (and where, as above, China remains a big factor). Consumer is an area particularly sensitive to supplier discipline, because so much consumer semi content is commoditised or fungible.

Taiwanese electronics ODM/contract manufacturer March numbers stabilising (again month on month optically helped by a short February)

  • The Taiwanese electronics ODMs (whose customers are the likes of Lenovo, HP, Dell, Acer, Asus, Apple) all reported slightly better March notebook shipments than expected, all showing strong month on month sales from February. Though for context, Q1 shipments are all still down significantly yr/yr. 
  • Quanta notebook shipments were up 48% mth/mth; Compal notebooks +50% mth/mth and Wistron notebooks +33% sequentially
  • We’re now lapping 3 years of COVID so there is some speculation in the market that we might be at the beginning of a refresh cycle (schools/workplaces). 
  • Again, to be clear, overall numbers for Q1 are still weak – and down significantly yr/yr – IDC has overall PC shipments down 29% yr/yr, most notably Apple shipments down 41% yr/yr. As we covered above, this could well be below end-demand, and related to a clearing of inventories. 

Portfolio view – as long as inventory isn’t stuffed in the retail channel (which we don’t think is happening – Walmart etc all spoke to addressing building inventory issues mid way through last year) there are signs of more normal inventories across the electronics/hardware space, but we continue to limit any direct exposure (we do own a position in Apple) given continued uncertainties in end-demand, particularly as it relates to China. 

Samsung chip production cut should help ASPs 

  • Samsung reported its preliminary Q1 results just before Easter. It guided for operating profit to drop by 96% yr/yr, which would be the lowest level of operating profit since 2009. While the divisional details won’t get released until later this month, it’s clear given the scale of each of its business lines that its memory business is the biggest culprit of the fall. 
  • NAND and DRAM prices have been in free fall, really since the start of 2021. As we commented on Micron results before Easter, this memory downturn is the worst the market has seen in over 10 years. While much of this is the result of extraordinary circumstances (pandemic, inflation), some of it is also the nature of the industry where market participants typically boost supply to gain short term market share, ultimately destroying the pricing dynamics. 
  • Staying in memory, Nanya’s reported Q1 was weak, with revenue declining 19% qtr/qtr with ASPs and shipments both down high single digits qtr/qtr and ASPs more than halving yr/yr. The slightly positive was take was that March revenue was up month on month and, unlike Micron, they have so far managed to avoid any inventory write down.  

Portfolio view: we don’t have any direct exposure to the memory sector, which we view as commoditised. For us, any stabilisation in DRAM ASPs is positive – historically a declining ASP environment has tended to lead to weaker memory spend – for our semicap names.

Ahead of semicap reporting, expect continued weakness in memory but for leading edge logic capex to hold up 

  • VAT Group, who sells valves into the memory tools space, reported its Q1 trading update. Sales held up ok, down 12% yr/yr and at the top of their guidance, but order intake more than halved yr/yr – a big drop but not unexpected in the context of the memory market. 
  • Their comments were in line with what we’d expect, namely weakness in memory but relative strength in logic: “The decline was strongest in consumer-related areas, such as memory chips used in smartphones, tablets or PCs, reflecting macroeconomic uncertainties related to interest rates, inflation and GDP growth. Demand was further dampened by the escalation of trade restrictions by the US and other administrations on integrated circuits and related manufacturing equipment for China. Investments in leading-edge logic chips used for data processing remained at a healthy level.”

Portfolio view – next week with ASML (owned) and TSMC (owned) reporting will be key for the market outlook in semicap – we expect to see order books down yr/yr across the board as we start to approach the trough, with an expected recovery in H2. 

Indian IT services – demand holding up 

  • TCS reported Q4 revenue in line with consensus +11% yr/yr cc ( and reported a strong order book with book to bill at 1.23x at the end of March, showing still strong demand
  • Infosys reported +9% yr/yr cc growth, slightly below consensus and issued its outlook for 4-7% cc growth. 
  • While the market took Infosys results quite badly on the day (-10%), we thought the numbers were pretty “ok”, and Infosys comments were really no different than we’ve heard for the past several quarters around reprioritisation of spend: “Q4 came in lower than expected due to some specific client ramp-downs in discretionary spend and delayed client decision-making on new deals. In addition, we had some one-off revenue impacts, including project cancellations” 
  • Attrition for both continued to trend down in the quarter – the sector experienced a very tight labour market last year which now looks to be easing

Portfolio view – we don’t own any IT services companies (which are typically later cycle in nature) but they represent a good bellwether for overall tech/digital demand. 2023 will be a slower growth year, for sure, but neither of these represent demand falling off a cliff at all and we view it as a read to a hopefully fairly resilient overall spend environment for software. We would question whether the premium valuations are justified on the Indian IT services names given the lower growth premium and question marks around the sustainability of the 20%s margin. 

ICE to EV transition picked up in March – good news 

  • We’ve been tracking monthly electric vehicle sales numbers for our investments in Infineon and NXP which are driven by the ICE to EV transition and the semi content increase. 
  • US March BEV/PHEV sales +39%/+110% yr/yr and China +31%/+87% – clearly lapping easy comps given last year’s semis supply chain issues where autos couldn’t be shipped but very much showing the ICE to EV transition picking up. We expect BEV/PHEV penetration to reach ~18% in 2023, from ~12% in 2022, with China leading. 
  • We’ve seen a number of price cuts across auto OEMs. Tesla announced its US price cuts in mid-January, and in China there’s effectively a price war in progress.
  • Relatedly, Hon Hai announced it would invest NT$25bn in new EV manufacturing – which we think opens the door to lots of potentially disruptive new competition. 
  • We think the barriers to entry in an EV world are even lower than the traditional combustion engine market, which has historically been a difficult industry in which to make a sustainably high return – we expect to continue to see price wars, especially as companies need to meet their EV production targets. 

Portfolio view – We continue to hold Infineon and NXP where we see their autos businesses remaining largely sold out into 2023 – they benefit from the increased semiconductor content in EV vs ICE. We don’t invest in any Electric Vehicle/auto manufacturers. 

Finally, a surprise profit warning from US telco equipment supplier 

  • Adtran issued a profit warning Tuesday stating that sales will total USD322-326m in 1Q well below guidance of USD355-375m. Broadband customers have adjusted down their inventories during the quarter at the same time as the company had some supply constraints affecting sales negatively. The company expects that the inventory correction will be limited in time and hope to see some improvements already in 2Q.  

Portfolio view – Adtran customers (the telco/broadband providers) are clearly worried about the economic environment – perhaps anticipating churn/pricing pressure – in the short run and are adjusting inventories downwards where they can. We don’t own any telco equipment vendors. 

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Inge Heydorn, Partner, at
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About GP Bullhound
GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to the world’s best entrepreneurs and founders. Founded in 1999 in London and Menlo Park, the firm today has 13 offices spanning Europe, the US and Asia. For more information, please visit

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