Tue, Apr 28, 2009 - Page 12 News List

Foundry margins at risk: report

OUTLOOK Taiwan Ratings said UMC and Chartered could see their EBITDA margins slip into negative territory in the first quarter, but TSMC’s was likely to remain positive

By Lisa Wang  /  STAFF REPORTER

Global contract chipmakers could see their profitability deteriorate further this year because of a slow recovery from the industry’s deepest downturn amid a bleak economy and intensifying competition, local ratings agency Taiwan Ratings Corp (中華信評) said yesterday.

Continuing the downward spiral over the past three years, the world’s major contract chipmakers could see their EBITDA margins plunge into negative territory in the first quarter of this year after the global recession hit demand for information technology products, Taiwan Ratings semiconductor analyst Raymond Hsu (許智清) told a teleconference yesterday.

EBITDA — or earnings before income tax, depreciation and amortization — margins are a key indicator of a company’s operating profitability.

Hsu said that chipmakers’ EBITDA margin levels could remain weak this year, although they could see a quarterly improvement in operations. Taiwan Ratings is a local arm of Standard and Poor’s Ratings Services.

The world’s second and third-largest foundries, or dedicated semiconductor manufacturing companies, United Microelectronics Corp (UMC, 聯電) and Chartered Semiconductor Manufacturing Ltd, are expected to report zero or negative EBITDA margins for the quarter ending March 31, from more than 40 percent and 28 percent respectively last year, Hsu said.

Almost immune to the macroeconomic weakness, industry leader Taiwan Semiconductor Manufacturing Co’s (TSMC, 台積電) EBITDA margin is expected to remain positive in the first quarter, given its strong pricing power and as the Hsinchu-based chipmaker widens its leadership in developing next-generation technologies, Hsu said.

TSMC reported an EBITDA margin of nearly 60 percent last year, a drop of just 3 percentage points from 2006, Hsu said.

“We believe that all foundries will face obstacles to [see a] significant improvement in their credit metrics over the next one or two years, even if demand recovers during [this period],” Hsu said in a report released yesterday.

Intensifying competition could offset revenue growth and recovering demand from chip designers, which do not have their own fabs, and integrated design manufacturers, which outsources part of their production to other makers, he said.

New entrant Global Foundries, a joint venture between chipmaker Advanced Micro Devices Inc and cash-rich Advanced Technology Investment Co (ATIC), is likely to build capacity aggressively and heavily invest in new technologies, which may pose a greater threat to UMC and Chartered, he said.

ATIC is a venture investment arm of the Abu Dhabi government.

S&P has downgraded Chartered’s outlook to “negative” given its weak technological capability and ability to generate cash flow, while Taiwan Ratings retained its “stable” ratings on TSMC and UMC, saying the Taiwanese chipmakers could generate stronger cash flow when the industry recovers.

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