IQE PLC (LON:IQE) has assessed the potential impact on its business of the decision by the US Department of Commerce’s Bureau of Industry and Security to prohibit the sale to Huawei, by certain of IQE’s customers, of products covered by the Export Administration Regulations without obtaining an appropriate export licence. Following discussions across its customer base, IQE estimates that its current maximum risk exposure with regards to this ban is less than 5% of its total FY19 revenue guidance. We, therefore, leave our estimates and indicative valuation of 91–99p/share unchanged.
IQE’s customers are potentially affected in two ways. If they have products containing US-derived IP, these would, theoretically, be barred from shipment to Huawei. In addition, if any individual critical component is barred, then Huawei may be unable to finish manufacturing complete devices and therefore stop purchasing other parts to avoid unnecessary inventory build-up and cash burn. Telecoms operators can switch to offering handsets from alternative vendors relatively quickly. Switching infrastructure vendor takes longer because of the complex product qualification required. Therefore, the ban is expected to cause short-term disruption to the smartphone supply chain. However, in the longer term, the ban will result in a shift in market share for handset and infrastructure vendors but no change in actual market size.
IQE’s dominant position in the outsourced compound semiconductor epitaxy market means that it has supply relationships with multiple non-US (and the US) customers. It is therefore relatively agnostic to any mid- to long-term shifts in market share at either component or OEM level. However, in the short term management believes that the ban may result in some delay to orders and temporary destocking in its wireless business. The photonics and Infrared activity is not materially affected.
Business description
IQE is the leading supplier of epitaxial compound semiconductor wafers globally. The principal applications include radio frequency semiconductors, devices for optical networks, vertical cavity lasers, infrared semiconductors and power electronics.