* Growth at any price

- We downgrade our recommendation on the IT H/W sector to Neutral/ In July, sales of Taiwanese foundries, which are useful as an indicator to predict the  demand for end-user products remain robust

We downgrade our recommendation on the IT H/W sector from Overweight to Neutral as we expect the profitability of major end-user products to decline from 3Q08 due to a price war despite growing shipments of handsets and TVs. We maintain BUY on Samsung Electronics (Samsung) because its stock price may be re-rated thanks to its ability to gain a larger market share, although we plan to adjust down our earnings estimates. We also maintain BUY on LG Electronics given its capability to generate growth and profitability which are higher than the industry average until 4Q08. On the other hand, we maintain Hold on Hynix Semiconductor and LG Display due to their weaker competitiveness.

When looking into the earnings performance of Taiwanese foundries, a useful indicator to forecast demand for end-user products, sales fell in June compared to May, however, in July, sales rose 7.2% MoM. We believe the weaker top-line growth in June was caused by a temporary dip in sell-in demand due to inventory adjustment, rather than a decline in actual sell-through demand. In July, sales of EMS makers rose 19.1% MoM, which proves that the sell-in demand of major end-user product makers remains robust prior to the peak season. Despite concerns over the global economic slowdown, the growth of IT end-user products sustained double-digit growth until 2Q08, and the growth momentum is likely to remain strong in 3Q08. However, in 2H08, we expect growth to slow down as compared to 1H08. In response, leaders continue to slash prices, and thus, the industry’s profitability is deteriorating.