Wed, Jul 23, 2008 - Page 11 News List

Citigroup lowers target price for TSMC on glut

LACK OF CATALYSTS Lower overall revenue growth for contract chipmakers this year could result in the world’s top chipmaker trading below its historical low


Citigroup Inc yesterday lowered its target price for shares of Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world’s biggest contract chipmaker, by 2.6 percent to NT$63, citing growing concerns over rising inventory at the chipmaker’s top customers.

TSMC shares fell 3.18 percent to NT$57.9 yesterday, underperforming the benchmark TAIEX index, which dropped 0.28 percent.

“We are seeing months of inventory rising to high or record-high levels with many of TSMC’s top customers, which are consuming more than 50 percent of TSMC advanced capacity,” Andrew Lu (陸行之) wrote in a report yesterday.

These customers were likely to see revenues remain flat for the third quarter from the second quarter, with inventory rising to record-high 3.1-months, Lu said.

On Monday, Texas Instruments Inc, the world’s biggest handset chip supplier and one of TSMC’s customers, forecast revenues would be between US$3.26 billion and US$3.54 billion in the third quarter, compared to US$3.35 billion during the second quarter.

“Our rating reflects a lack of positive catalysts and the risk of a downturn in global foundry demand,” Lu said.

He had previously set the target price for TSMC at NT$64.67.

Lower overall revenue growth — a 4 percent to 5 percent annual increase — for contract chipmakers this year could result in TSMC trading below its historical trough price-to-book-value ratio, following recent breaching of trough valuation levels by United Microelectronics Corp (UMC, 聯電), the world’s second-largest contract chipmaker, the report said.

Lu said TSMC’s revenues could grow 6 percent to 8 percent annually this year on inventory buildup demand rather than real demand.

Any reduction in inventory increase in the first quarter of next year or earlier would affect Citigroup’s TSMC growth forecast, the report said.

Lu retained his “hold” rating for TSMC with low investment risk. He expected TSMC to post in-line earnings of NT$27.85 billion (US$916.7 million) for the second quarter, with operating profit margin hitting the company’s high-end target of 32 percent to 34 percent, the report said.

Revenues were expected to increase 11 percent to 14 percent in the third quarter from the second quarter, Lu said, adding that TSMC’s operating profit margin could improve by 35 percent to 36 percent in the third quarter.

TSMC is scheduled to release its second quarter earnings Thursday next week.

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