Capital reduction fever in the high-tech industry prompted speculation last week over whether several chipmakers could follow in United Microelectronics Corp's (UMC, 聯電) footsteps and cancel shares in a bid to improve their financial structure.
Given their high cash position, local chipmakers -- including Silicon Integrated Systems Corp (Sis, 矽統科技), Vanguard International Semiconductor Corp (世界先進) and Elan Microelectronics Corp (義隆電子) -- are likely to exercise capital reduction plans, a report released by the BNP Paribas Securities said last week.
These companies are highly likely to follow the trend among local semiconductor companies of better utilizing excessive cash by giving payouts to shareholders through a cut in the number of shares they own.
UMC, the world's second-largest contract chipmaker, said last week it planned to cancel a third of its outstanding shares and make payments to shareholders to boost its return on equity (ROE).
Apart from those companies mentioned above, other chipmakers like Sunplus Technology Co (
"Sis, Vanguard and Elan are the next in line for capital reductions," BNP Paribas analyst Eric Chen (
Chen said that in the semiconductor sector, Taiwanese chip designers and foundry makers were more likely to adopt capital reduction strategies because of their high cash position.
In other words, those companies with at least 20 percent more cash than their revenues are able to perform a capital reduction, the analyst said.
Sis' and Elan's cash position would exceed their revenue for last year by 40 percent, while Vanguard's cash balance would be 140 percent higher than its revenue, Chen said.
In terms of ROE, Sis' would be 1.7 percent and Elan's 9.3 percent, compared to 5.8 percent and 9.6 percent, respectively, for 2005, Chen's report showed. Vanguard would report 13 percent for last year.
For their part, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world's biggest contract chipmaker and MediaTek Inc (聯發科), the biggest handset chip supplier in China, would report 28.6 percent and 37.7 percent in ROE for last year, Chen said.
Chen warned, however, that capital reduction would only provide a short-term boost to the companies' stock prices -- possibly at expense of their long-term expansion -- as semiconductor companies would need large amounts of cash for expansion, acquisitions and intellectual property expense to increase their competitiveness.
Shares of UMC jumped to a eight-and-a-half month high at NT$21.6 on Thursday, three days after it unveiled its capital reduction plan, before closing at NT$21.1 on Friday.
Despite their impressive financial structure and large cash reserves, TSMC and MediaTek could decide not to return large sums of money to their investors in order to ensure future growth and maintain their lead, Chen said in the report.
Chen gave a "buy" on TSMC, MediaTek and Vanguard and maintained a "hold" on UMC and Sunplus. Realtek, for its part, was rated as "reduce.
TSMC told investors last week it did not have a capital reduction plan in the near term, except a share buyback from major shareholder Royal Philips Electronics NV.
This possibility was contingent on the Dutch electronics giant's willingness to sell.
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