UMC shares head south

United Microelectronics Corp (UMC, 聯電) fell 4.8 percent after the No. 2 chipmaker in Taiwan said Friday it expects to post an operating loss in the second quarter and forecast orders may continue to fall in the third.

Business in the third quarter may deteriorate from the second, Chief Executive Peter Chang (張崇德) said in a statement after the Taiwan stock market closed on Friday. UMC said more than half of its production capacity was idle in the second quarter as global demand slumped for computer, communications and consumer electronics chips.

Despite UMC's forecast, investors are optimistic that orders at both UMC and Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), its biggest rival, will start to rise in the third quarter following an expected recovery in demand for personal computers.

"TSMC should fare better in the third quarter because it's been getting big orders from Sharp Corp and others, and because its main product is personal computer chips," said Steven Chen, who manages about NT$1 billion in Taiwan stocks at Union Securities Investment Trust Corp.

Shares in UMC fell NT$2.5 to NT$50 in trading yesterday on the Taiwan Stock Exchange. TSMC fell NT$1.5, or 1.6 percent, to NT$92.

Computer-related chips made up almost a third of TSMC's first-quarter sales of NT$39.5 billion, while communications chips accounted for 31 percent. Demand for computers should recover earlier than demand for communications-related products, fund managers said.

"We are surprised about the negative outlook, but at least UMC is being brave and honest in coming out to warn investors about the third quarter," said Jerry Chen, who manages the NT$3 billion (US$87.2 million) Excellent Fund at First Global Investment Trust Co.

UMC's forecast may also be a strategy to fend off competition by intimidating potential new entrants, such as South Korean memory chipmakers, which have expressed an interest in the foundry business, said Chen, who has invested about 2 percent of his fund in UMC shares.

"UMC should improve over the second quarter, but it won't be as good as TSMC because more of its chips are used for communications products," Union Securities' Chen said.

Net income for UMC, which makes chips for companies such as Xilinx Inc and SanDisk Corp in the US, slipped 13 percent in the first quarter to NT$6.5 billion (US$197 million) from NT$7.3 billion a year earlier. Communications-related chips made up almost half UMC's first-quarter sales of NT$23.6 billion.

Taiwan Semiconductor declined to comment on the industry outlook, though analysts said the company's performance will improve in the three months ending Sept. 30.