Morgan Stanley cuts UMC rating on competition worries

United Microelectronics Corp (UMC, 聯電), the world's second-largest made-to-order chipmaker, was downgraded to "equal weight" by Morgan Stanley & Co International, citing increasing competition.

Shares of UMC fell 2.4 percent, their biggest drop since Jan. 18, to close at NT$20.35. Shares also dropped after completion of a share buyback scheme on Tuesday, where the company bought one billion of its own shares amounting to NT$19.65 billion (US$603 million). Over the buyback period, UMC shares advanced 18.5 percent from NT$17.6 to NT$20.85. The stock has risen 9.4 percent this year, compared with a 4 percent gain in the benchmark TAIEX.

"With competition from Chartered [Semiconductor Manufacturing Ltd] (特許) for some customers on 90 nanometer, we believe that UMC will have to share the market," Sunil Gupta, a Singapore-based Morgan Stanley analyst, wrote in a report yesterday. "We believe that its profitability and growth will remain low."

The 90-nanometer technology shrinks chip sizes, allowing a company to make more per silicon wafer. A nanometer is a billionth of a meter and is the space between transistors in a chip.

Gupta cut his rating on UMC from "overweight" and said he expects the shares to rise to NT$22 within 12 to 18 months.

UMC, based in Hsinchu, competes with market leader Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) and Singapore's Chartered Semiconductor Manuf-acturing Ltd.

TSMC, the world's largest contract chipmaker by revenue, rose 1.1 percent to NT$66.8 after Citigroup upgraded its earnings forecast for the company.