Thu, Jul 24, 2003 - Page 11 News List

TSMC hopes to benefit from lower spending

PROFITABILITY Morris Chang wants to see a return on equity of at least 20 percent

BLOOMBERG

Investors want Taiwan Semicon-ductor Manufacturing Co (台積電) chairman Morris Chang (張忠謀) to cut spending this year to boost profit, after dominating the made-to-order chip industry by outspending rivals to be first with new production technology.

Lower investments on plants and equipment are beginning to pay off. The company, which makes chips for Microsoft Corp's Xbox video-game console and Texas Instruments Inc, is expected to report its second-quarter profit today. It generated NT$9.3 billion in second-quarter profit a year ago.

TSMC has said it may pare capital expenditure this year to as little as $1 billion, a third of what it spent in 2000. Its attempts to use existing plants better may extend profit gains as the chip industry recovers from its worst slump.

"It's a good sign," said Ernie Tam, who counts shares in TSMC among the US$2.5 billion in equities he helps manage for Baring Asset Management, of the company's reduced budget.

"People are concerned about over-investment," he said.

TSMC said on July 7 it used 86 percent of its production capacity in the three months ended June 30, the highest rate since the fourth quarter of 2000. Sales rose 13 percent to NT$13 billion as demand improved.

Chang said in March the company will spend money on new equipment only when it's confident it will be fully used, reassuring investors concerned that the company might place building market share ahead of profitability.

TSMC reaped the benefits of investing in its business in the late 1990s, as profits rose more than fourfold and its stock price trebled between 1998 and 2000.

The company increased capital expenditure by half in 2000 to NT$103.8 billion (US$3 billion) -- about 60 percent more than its record net income of $65.1 billion that year.

The anticipated growth in demand didn't arrive. Chip sales plunged by a third in 2001, the industry's steepest decline, and barely rose last year.

Collapsing demand left much of the company's advanced new production lines idle, prompting it to reduce capital spending to US$2 billion in 2001 and US$1.6 billion last year. This year's budget is US$1 billion to US$1.5 billion.

TSMC's investment budget is still at least twice as much as the US$500 million rival United Microelectronics Corp (聯電) has said it plans to spend this year.

The reductions have left the company well placed to profit from a recovery in semiconductor spending, some investors say.

"The main difference this year is TSMC has kept pretty good control of capital expenditures," said George Wu (吳裕良), an analyst at Primasia Securities Co in Taipei, who forecast the company will post a second-quarter profit of NT$12.7 billion.

After a 33 percent drop in first-quarter net income to NT$4.36 billion, Chang has forecast profit will increase through the rest of this year.

Chang said he aims to achieve a return on equity, or net income as a percentage of shareholders' funds, of at least 20 percent, about the return the company earned in 1998 and 1999, without giving a time frame for the target.

The company's return on equity was 7.73 percent last year, after tumbling to 5.4 percent in 2001 from 31.4 percent the previous year.

The company said it expects this year's sales to rise by a fifth from last year, more than double the 8.4 percent pace forecast for the industry by market researcher Gartner Inc.

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