Thu, Jan 13, 2005 - Page 11 News List

Strategist: chip sales seen recovering in 2nd quarter

SILVER LINING Despite the gloomy outlook of the first quarter, one analyst said that sales for contract chip manufacturers should start to rebound in April


Sales of Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) and other suppliers of made-to-order computer chips may start to rebound in the second quarter as customers reduce inventories, according to Morgan Stanley.

Foundries will probably produce fewer chips as customers trim their own stockpiles in the first three months of this year, Sunil Gupta, the head of equity research at Morgan Stanley in Singapore, wrote in a report dated yesterday.

"We expect the first quarter of 2005 to be the first quarter where production is likely to be significantly lower than end demand," Gupta wrote in his report. That "will mark the true start of inventory digestion."

Chipmakers will benefit because customers are cutting inventories amid recovering demand, and the economic outlook is expected to improve in the second half of this year, wrote Gupta.

TSMC, the world's largest supplier of made-to-order computer chips, is the brokerage's top pick.

TSMC is attractive because the company may benefit from "resilience" in its prices and because the company focuses on making 12-inch wafers, which are more cost effective than conventional 8-inch wafers, Gupta wrote.

United Microelectronics Corp (UMC, 聯電), Singapore's Chartered Semiconductor Manufacturing Ltd (特許) and Semiconductor Manufacturing International Corp (中芯) in China may suffer sales declines in the first quarter, Gupta wrote. The three companies are the next biggest providers of made-to-order chips after TSMC.

UMC will probably post the "biggest revenue decline in the first quarter among all the foundries," Gupta wrote. The company, which makes chips used in mobile phones, DVD players and computers, is unable to produce 12-inch wafers efficiently, he wrote.

Investors should avoid shares of Chartered and Semiconductor Manufacturing International, Gupta wrote.

Chartered may face "intense" pricing pressure and chip prices may also fall by as much as 2 percent in the first quarter, according to Gupta, who has a "underweight" rating on the stock.

There is also a "very high risk" that Chartered may sell shares to raise funds in the second half of 2005, he wrote. The company on Dec. 30 said it arranged a US$1.05 billion loan to fund the purchase of manufacturing gear for a new factory.

Semiconductor Manufacturing, China's largest supplier of made- to-order chips, may also be forced to cut its prices. Rising depreciation may also hurt the company's profitability this year, Gupta wrote.

Some strategists are even more bearish. Stewart Paterson, the regional strategist for Credit Suisse First Boston, said at a briefing in Hong Kong yesterday that technology stocks still have room to decline.

"We are going into the start of the year with expectations being fairly low for tech," he said. "The market hasn't grasped the full horror of how the tech cycle could pan out." Even so, wafers prices are set to recover in the second quarter once customers cut existing inventories, Gupta wrote. The chip foundries will have to cut costs by making 12-inch wafers more efficiently and increasing competitiveness, he said.

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