TSMC, UMC named in Citigroup top chip stocks

Citigroup Inc named Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), United Test & Assembly Center Ltd (聯合科技) and United Microelectronics Corp (UMC, 聯電) among its top chip stocks in Asia on the industry's growth prospects.

Citigroup has a "buy" rating on TSMC and UMC, the world's two largest made-to-order chipmakers, based in Hsinchu, according to a report yesterday from Citigroup's Asia semiconductor team headed by Andrew Lu (陸行之).

Advanced Semiconductor Engineering Inc (日月光), the world's biggest packager of computer chips, Siliconware Precision Industries Co (矽品精密) and Singapore-based United Test are Citigroup's top picks for the semiconductor testing and packaging industry.

Citigroup rates these companies a "buy." Demand for electronics such as Microsoft Corp's Xbox 360 game console and mobile phones are boosting earnings at semiconductor companies after years of oversupply depressed prices. Worldwide chip sales are expected to gain 9.5 percent to US$257.7 billion in this year after rising 7 percent last year, researcher Gartner Inc said.

Asia's "top-tier" chipmakers and testers "look well placed to pay out sizable cash dividends, buy back shares and strengthen their financial structures by paying down debt," Citigroup said.

They are expected to post 15 percent to 20 percent sales growth this year, outperforming the overall industry's 5 percent to 10 percent growth, the report said.

TSMC's stock was unchanged at NT$61.40 at the 1:30pm close in Taipei. The company on Friday reported sales last month rose 40 percent to NT$24.01 billion (US$738 million). UMC rose 1.3 percent to NT$19.40.

Shares of Kaohsiung based Advanced Semiconductor climbed 5.1 percent, the biggest gain in a month, to NT$28.1.

Taichung-based Siliconware, the world's third-biggest chip packager, rose 4 percent to NT$41.5. It was the stock's largest gain since Feb. 27.

Shares of United Test, Singapore's second-biggest chip tester, gained 2.2 percent to S$0.915 as of 2:52pm in the city-state. Stats Chippac Ltd, the world's fourth-largest provider of chip testing and packaging services, advanced 1.7 percent to S$1.22. Citigroup has a "hold" recommendation on Singapore-based Stats.

These chipmakers and testers are starting to focus on generating cash by controlling expenses rather than gaining market share, Citigroup said.

Semiconductor Manufacturing International Corp (SMIC, 中芯), China's biggest chipmaker, as well as Chartered Semiconductor Manufacturing Ltd, the world's third-largest customized chipmaker, were rated "sell" by Citigroup on their so-called negative free cash-flow yield. Citigroup defines the yield as free cash-flow divided by market capitalization.

Shares of Chartered rose 0.7 percent to S$1.46 and Shanghai-based SMIC's stock gained 0.9 percent to HK$1.14.