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Orbotech Outlook: Sustained PCB Growth to Be Driven by Underlying Market Recovery, New Consumer Electronics Devices, and Growing China Presence in PCBs
June 9, 2010 |Estimated reading time: 4 minutes
Barclays Capital offers their insights from Orbotech (ORBK) Analyst Day. The following is from Orbotech's PCB division presentation. Management discussed the fact that Orbotech continues to supply PCB systems to all of the major PCB manufacturers worldwide, including Samsung, LT, Compeq, Hitachi, Unimicron, Daeduck, Multek, Toshiba, LG, AT&S. Together, these PCB suppliers account for ~80% of the PCBs used in handsets.
Having established a leading position in supplying PCB inspection equipment and software, management indicated growth in the division in 2010 and beyond will be driven by several key factors, including:1) a strong recovery in the underlying markets;2) the transition to more advanced technologies in handsets and PCs, requiring new capacity with leading edge capabilities;3) the emergence of China as a dominant player in PCB manufacturing. Regarding the first point, with utilization levels in the industry running above 85% and most end markets such as handsets, notebooks, PCs and other consumer electronics devices on track for 10% growth at a minimum this year, this should drive strong demand for PCBs.
Secondly, the demand for more complex devices with smaller form factors such as smartphones is also driving the need for more advanced PCBs with finer lines, fine pitch packages, increasing HDI usage, and increasing adoption of flip chip packaging, all of which complicates PCB manufacturing and fuels demand for advanced AOI systems. Third, while PCB revenues and capacity is on track to grow in all regions, China's focus on increasing its presence in the PCB space is driving even more aggressive expansion, with PCB capacity in the region on track to grow ~15% in 2010 vs.13.5% growth in Taiwan and 9.5% growth in Korea. Based on industry forecasts, China's global share of PCB manufacturing has grown from 8.2% in 2000 to over 31% in 2008 and forecasted to be ~36% of the $48.3B market this year. The growing Chinese focus on PCB manufacturing is highlighted by the fact that there are currently ~1,000 PCB shops in China, with 4 of them (Founder PCB, CCTC, Shennan and Fast Print) already exceeding $100M in revenues). And with Orbotech already having a presence at many of these players given 250 active accounts today and ~400 potential customers (e.g. China accounted for ~60% of the company's sales in 2009 and likely higher in 2010), this should prove to be a strong tailwind for Orbotech's PCB revenues beyond 2010.
Expanding PCB Product Portfolio Adds One More Growth Driver
In addition to the market factors which are fueling strong demand for PCB manufacturing equipment in 2010 and beyond, Orbotech also discussed its expanding PCB product portfolio, including the PerFix automated repair system, the Paragon Laser Direct Imaging system, and the Spring Inkjet Legend Printer. Orbotech piloted the PerFix automated repair system (which repairs any excess copper/shorts on the PCB) 2 years ago, and to date, no other company currently offers a laser-based automated repair solution. The company also recently introduced its Spring Inkjet Legend Printers, which allows PCB manufacturers to print the PCB legends digitally (as opposed to the current slow analog systems). In addition to the current adoption of these inkjet printers for digital legend printing, management believes the systems may also extend to etch resist PCB, soldermask PCB, and other steps in the PCB manufacturing process. Regarding the adoption of the Paragon Laser Direct Imaging product line, following the macro weakness in 2009, Direct Imaging system shipments are on track to more than double in 2010 to ~100 systems. In fact, management indicated that after announcing the Paragon Express DI system in 4Q09, demand YTD has actually surpassed the company's expectations/production capacity, suggesting some level of pent up demand into 2H10 and beyond.
FPD Fundamentals Rapidly Recovering, But Questions Remain Around the Sustainability of Capex Strength Into 2011
On the display side, management discussed their 3-pronged product offering, including AOI, test and repair. These 3 segments combined typically constitute 1/6 of the total panel maker equipment spending. Specifically, with management/industry sources estimating 2010 LCD capex at ~$13B, management believes that equipment will likely account for ~$6B of this total, inspection/test/repair will account for ~$1B, and Orbotech's TAM will total ~$350M. As widely discussed, 2010 spending will be driven by Korea (LG and Samsung expanding their Gen 8 facilities), and to a lesser extent Taiwan (AUO expanding their Gen 7.5 and Gen 8 fabs and Chi Mei Innolux resuming their Gen 8 investment) and China (BOE Gen 5 and 8 and China Star). Looking to 2011, management expects a similar level of LCD industry capex, driven primarily by investments in China-based fabs. This is supported by the TV/notebook/monitor unit outlook through 2013 (DisplaySearch estimates), which requires an estimated annual glass area demand of ~46M square meters and therefore equates to over 10 new fabs at a monthly capacity of 30K glass starts per month. While Barclays does agree that the outlook for multi-year double digit growth in LCD TVs and notebooks should drive continued capacity adds, continued uncertainty around the timing and the number of China fab approvals that the Chinese government will grant suggests that the 2011 capex outlook is still somewhat uncertain.
This said, the lagging growth in Orbotech's FPD revenues in 2010 relative to industry capex (Barclays models Orbotech's display revenues +21% vs. LCD capex of +65%) as a result of a heavier skew towards bricks & mortar this year as well as the later-stage nature of Orbotech's equipment, suggests some visibility to continued growth in the company's LCD revenues into 2011.
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