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TSMC's rating reflects its industry-leading position

Global rating agency Fitch Ratings yesterday assigned a Senior Unsecured foreign-currency rating of A-minus to Taiwan Semiconduc-tor Manufacturing Co (TSMC, 台積電), reflecting the contract chipmaker's capability to safeguard its leading position in the highly cyclical industry.

This was the first time that the rating agency assigned the rating to the world's top chip foundry.

"The rating reflects TSMC's dominant market position in the dedicated integrated-circuit foundry industry, which is supported by its advanced wafer fabrication technology and efficient production capability," Fitch semiconductor analyst Kevin Chang (張崇人) said.

The rating also reflects the company's strong product mix, which is superior to that of its peers, as well as its firm and diversified customer relationship, Chang said.

TSMC supplies chips to many leading chip vendors including Texas Instrument Inc, the biggest maker of chips used in mobile phones, as well as the US graphics chipmaker Nvidia Corp.

The rating, however, is constrained by TSMC's reliance on outsourcing orders, the industry's requirement for continuous significant capital expenditure and investment in research and development, as well as operating volatility because of the highly cyclical nature of the industry, Chang said.

Besides, the rating already took into consideration the adverse impact of substantial increases in dividend payouts and the government's minimum income-tax rate, ranging from 10 percent to 12 percent, Chang said,

The tax hikes are scheduled to take effect next year.

"These two factors are unfavorable to corporate bond investors as rising payments will reduce the company's financial flexibility," Chang told the Taipei Times.

For the moment, the new tax scheme would not seriously erode TSMC's earnings, he said.

TSMC significantly raised the percentage of dividend payout to make up half of its earnings last year, from around 30 percent of earnings in 2003, Chang said.

In addition to TSMC, Fitch also included United Microelectronics Corp (UMC, 聯電) into the rating list. The rating agency kept out smaller players Chinese Semiconductor Manufacturing International Corp (中芯) and Singaporean Chartered Semiconductor Manufacturing Ltd.

Fitch assigned a triple-B to the world's No. 2 contract chipmaker UMC, two notches lower than its arch-rival TSMC.

"It's mostly because of UMC's less favorable product mix ... Chips made on advanced technologies account for a smaller portion [of its sales]," Chang said.

UMC would face greater challenges in boosting its average selling price and factory utilization and heavier price pressure from emerging chip foundries in China, Korea and Japan, he said.

The rating outlook for the two Taiwanese companies is stable, the rating agency said.

The stable outlook reflects that the chipmakers would benefit from the global semiconductor revenue growth projected to be in the mid- to upper-single digit range over the medium-term, it said.

Fitch expects worldwide semiconductor revenues next year to have stronger growth momentum than this year.

But with consumer electronics becoming a more important force driving semiconductor demand, foundry service providers are likely to face greater challenges in managing cost structure, capacity allocation, technology development and client relationships, Fitch said.
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