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TSMC's growth prospects still strong

Taiwan Semiconductor Manu-facturing Co (TSMC, 台積電) should continue to show impressive revenue growth next year, even if the growth rate is slightly slower than this year, analysts said yesterday after the company released strong third quarter results.

Orders will fall off a little, but capacity will still be very tight," said Maddux Lin, project consultant at Belief Internet Information Co, a venture capital company.

The world's largest producer of made-to-order chips reported third quarter revenue and net profits that met or beat analysts' estimates. TSMC's net income rose 227 percent over the same period last year and 50.3 percent compared with the previous quarter, to NT$20.06 billion.

Revenue for the third quarter rose to NT$47.49 billion, up nearly 141 percent over last year's figure and 49.3 percent higher than the previous quarter.

The company was also upbeat about continued future demand. "Our outlook in 2001 has shown no signs of regressing," said Harvey Chang, vice president and chief financial officer at TSMC, at a briefing for institutional investors. "Not a single customer has told us they want to decrease their wafer bookings for 2001," he said.

The earnings report came amid disappointing third quarter results of fourth quarter projections from several major PC and communications manufacturers in the US.

But yesterday, Singapore-based Chartered Semiconductor Manufacturing, the world's third largest chip foundry, reported better-than-expected earnings growth in the third quarter.

While revenue and profits grew, TSMC's capacity utilization rate fell 7 percentage points compared with the second quarter to 107 percent. Chang said the increase in installed capacity from its merger with TSMC-Acer Semiconductor Manufacturing and World Semiconductor Manufacturing Co in July was the main cause behind the drop.

He also pointed out that despite the fall in the utilization rate, the company's gross profit margin still grew to 47.1 percent from 44.5 percent during the same period a year ago.

"It's good, but was expected by the whole market," said Ken Chang, an analyst at China Securities Co.

"If the gross margin had been lower than this, the stock price of TSMC would have fallen."

It fell anyway, closing down nearly the maximum 7 percent yesterday at NT$81.5.

The rising profit margin is important, analysts said, because it demonstrates the benefits of lower production costs from the use of more advanced technology. So even if lower demand in the future does reduce the utilization rate and the average selling price, the lower production costs will limit the effect on the company's profit margins.

"By the end of 2001, capacity output using 0.18 and 0.25 micron process technology will account for about 60 percent of total capacity, which means costs will drop," said Wen Shyang Ju, a manager at Fortune Investment Trust Co. The higher margin manufacturing technology enables greater circuit integration on a chip.

"I can't say the gross margin will be higher than this year, but it can keep at the same level," said Wen.

For the third quarter, the proportion of sales using the advanced 0.18 or 0.25 micron production process rose to 34 percent, from 26 percent in the second quarter.

At the same time, and in the midst of a slowdown in PC demand growth, the average selling price for all wafers in the third quarter rose 20 percent compared with the quarter before. It was also the highest price since the fourth quarter of 1996.

With its diversified client and product base and reduced risk from a downturn in any one sector, TSMC's Chang expects demand to remain solid and the company's utilization rate to stay above 100 percent in the fourth quarter.

Nevertheless, when asked about the degree by which demand now exceeded capacity supply, Chang would provide no figure. TSMC reportedly said during the second quarter that orders at the time exceeded capacity output by 40 percent.
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