Chipmakers still a risky purchase

"Investing in chipmakers is risky because there's no clear sign of recovery."

Katsuaki Furutachi, a manager at Asahi Life Asset Management

Most of Asia's chipmakers reported better earnings in the last quarter. With a few exceptions, that doesn't mean their shares are going to rise.

The reason, investors say, is because the region's chipmakers, including South Korea's Samsung Electronics Co and United Microelectronics Corp (UMC, 聯電), rely heavily on the computer market, which shows few signs of a rebound.

"Investing in chipmakers is risky because there's no clear sign of recovery," said Katsuaki Furutachi, who helps manage about ?150 billion (US$1.3 billion) in Japanese equities at Asahi Life Asset Management Co. He doesn't own any chipmakers' shares and doesn't intend to buy them. "I can't be bullish yet."

Investors a more promising investment in semiconductors may be outside the personal-computer market. Among the best bets are companies such as Japan's Toshiba Corp and Sanyo Electric Co, which have begun churning out more and more chips for devices such as digital still cameras, game consoles and mobile phones.

Underscoring sentiment, Sanyo last week said it posted a fiscal third-quarter profit of ?2.67 billion compared with a ?6.72 billion loss a year ago.

The reason for the rebound, the world's biggest maker of mobile-phone batteries said, was strong demand for cellular phones with built-in cameras and the components that go into them, especially a type of semiconductor called a charge-coupled device.

Demand so strong for CCDs -- Sanyo's sales of the image-capturing chips surged 12-fold in the three months ended Dec. 31 -- that Sanyo has promised to spend Y45 billion in the next three years to increase production.

Even Sanyo's results failed to cheer investors. Sanyo's shares yesterday fell as much as 2.1 percent to ?333 before rebounding to a gain of 1.8 percent at the 3pm close on the Tokyo Stock Exchange.

Pessimism the fortunes of Asia's chipmakers, which accounted for 53 percent of worldwide semiconductor sales in 2001, comes amid growing doubts about the strength of the PC market.

Shares Samsung Electronics, the world's No. 1 memory-chip maker, have fallen 10 percent since the company said its fourth-quarter profit almost quadrupled.

The biggest worry for Samsung Electronics' investors: the company, which dominated the US$12 billion memory-chip market in 2001 with a 27 percent share, expects an oversupply of dynamic random-access memory chips in the first quarter this year. DRAM chips act as the main memory in personal computers.

Sending negative signal about the PC market, Intel Corp, the world's largest chipmaker, earlier this month said it's unable to tell whether PC demand is recovering. Sony Corp.

followed by cutting its Vaio computer shipment target for its fiscal year ending March 31 by almost a third.

Even suppliers of made-to-order chips such as UMC and Singapore's Chartered Semiconductor Manufacturing Ltd are becoming less optimistic about the industry's outlook.

UMC, the world's second-largest supplier of made-to-order chips, doesn't expect to make a profit from chips in the first quarter because its factory-use ratio will probably drop, Chairman Robert Tsao said.

"The era of high margins for the current foundry model is gone forever," Tsao told reporters in Taipei last week. "Even the world's largest player can't fight this fate."

Taiwan home to two of the world's three largest made-to-order chipmakers, or so-called foundries, companies like Taiwan Semiconductor and Chartered that make chips for a broad range of customers across the industry's spectrum.

While chipmakers stand to benefit as their chipmaking customers farm out more production and curtail expansion plans, the industry's strongest proponents have turned less optimistic in recent months.

"A lot of CEOs of technology companies are being very conservative about 2003," said Morris Chang, chairman of Taiwan Semiconductor, the world's No. 1 supplier of made-to-order chips.

Chartered Semiconductor, the world's third-largest supplier of made-to-order chips, has been using less than half the capacity at its five plants in Singapore since the second quarter of 2001.

Chartered's have declined by about 82 percent in the past year, falling to S$0.71 on Friday.

"We won't see earnings growth for the next three to four months," said Simon Chao, who helps manage US$20 million in equities at President Investment Trust Corp in Taiwan.

Still, investors say growth for the chip industry may come from consumer electronics, which accounted for 16 percent of world chip sales in 2001 and may contribute a larger portion following the introduction of new gadgets such as portable music players and hand-held computers with a larger appetite for memory chips.

"The consumer segment is what's driving growth," Manoj Nadkarni, editor of newsletter ChipInvestor.com wrote in a letter to subscribers. ``Cell phones are getting fancier -- you have color screens and camera phones -- all of which require more memory."

Sanyo 80 percent of new mobile phones in Japan will have built-in cameras this year. The percentage outside Japan, where camera-equipped mobile phones are just now reaching the market, will probably rise to 20 percent, the company says.

Other such as flash-memory chips, digital signal processors, CCDs and graphics chips include video-game consoles, digital still cameras and newly introduced hand-held terminals used to view movies and television shows.