By Bruce Einhorn After a host of false dawns, it's understandable that many people in information technology are reluctant to say the sun is finally rising on the recession-battered computer business. But demand is clearly picking up worldwide. Bryan Ma, an analyst with International Data Corp. in Singapore, is especially impressed by the increased sales of PCs in Asia. In the third quarter, unit shipments in Asia (excluding Japan) grew 13% vs. the previous year. "There's reason for optimism," he says. "The numbers are showing some good results."
Excitement is growing among investors, but the chief financial officer of one of Taiwan's largest producers of PC parts is trying to keep calm. "The fundamentals are improving," as economies in the West and Japan pick up, says Ignatius Wei, the CFO of Lite-On Technology. "I'm cautiously optimistic," he says. "September is showing better results. We need to see October and November results [before we can] really say."
Is it too late for investors to get in on the Taiwanese tech rise? Some analysts say it's not. According to UBS, demand for computers will be even stronger next year. The bank predicts that desktop sales will likely increase 4.5% this year, vs. zero growth last year and a negative 7% in 2001. Notebooks are likely to do even better: 20.6% growth this year, vs. 11% last year and 8% in 2001. And UBS expects the party to continue: Its analysts predict that desktop sales will grow 6.1% and notebooks by 21.4% in 2004.
NARROWING GAP. As analyst Sean Debow wrote in a recent report, Taiwan's market share will likely grow at an even faster pace than the overall market. The Taiwanese now have about two-thirds of the notebook market, compared to half in 2001. "Nevertheless, the [notebook] makers are working to increase this global market share as OEMs [original equipment manufacturers] continue to outsource production," Debow writes. "As this takes place, we think that it is likely that the growth seen by the Taiwanese [notebook] makers will exceed the global [notebook] growth in some months."
What's behind the big pickup? One reason is narrowing prices between notebook PCs and desktops. "The gap is getting very close," Debow says. It's now about $200 to $400 for PCs of comparable performance, compared to $500 to $600 a few years ago. Another reason is an increase in corporate purchasing, according to Chen, who points out that the replacement cycle is at long last kicking in. "Corporate purchasing slowed down after the [Y2K] buying in 1999. Most of those PCs now have to be replaced. All the corporate customers are buying now." Chen also credits Intel (INTC) and its promotion of its Centrino chip for driving demand for notebook PCs.
The rebound doesn't mean the Taiwanese will see big increases in profits, though. Margins in the notebook business have been crumbling for years, as the sector becomes increasingly commoditized. That's one reason some people see the Taiwanese tech comeback as a disaster in the making.
END OF THE RUN? Credit Suisse First Boston investment strategist Stewart Paterson had been bullish on Asian tech stocks, but no more. "It's all over," says the Hong Kong-based analyst. He sees Taiwan's tech stocks as "ludicrously priced." Says Paterson: "You just don't want to be in them. To get back to fair value for Taiwanese tech stocks, these would have to halve."
Many Taiwanese companies are ODMs, or original design manufacturers, designing and manufacturing machines, then selling them to the big brand-name players. But, as Paterson notes, the Taiwanese ODMs have tiny profit margins. Moreover, their customers -- the Dells (DELL) and Hewlett-Packards (HPQ) of the world -- aren't about to allow them to widen those margins. If you're a Taiwanese tech executive, "you have no pricing power," says Paterson.
So the Taiwanese will be hard-pressed to enjoy the fruits of this boom. Yet these stocks "are priced as if they're going to sustain very high returns on capital over the medium term." Investors in Taiwanese tech have enjoyed a great run. If Paterson is right, that will be ending pretty soon.
BETTER YET TO COME? Ray Chen, CEO of Compal Electronics, doesn't buy into that view. Compal is one of Taiwan's two largest producers of notebook PCs. ODMs such as Compal account for more than half of the notebooks sold worldwide. Compal's customers include Dell, HP, and Toshiba, which recently announced a big increase in the amount of work it was outsourcing.
Chen has no doubt the recovery is genuine. "Demand pickup is very strong," he says. "This momentum will continue to the first quarter of 2004, and it will be even stronger." While sales growth has been about 12% annually over the past few years, Chen says it's more likely to run from 17% to 20% this year.
All these trends translate into booming numbers for Compal and its major competitor, Quanta Computer. Both recently reported strong sales and earnings for the third quarter. And both stocks have been soaring. Quanta, traded on the Taiwanese exchange, has jumped from TWD$50 a year ago to TWD$95 today. Compal's movement has been even more dramatic: Its stock has leaped from just TWD$28 a year ago to TWD$53 on Oct. 30 -- a 52-week high.
The jury is still out on on whether the stock run-ups can continue. But either way, a long-awaited recovery in tech appears to have finally materialized. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online