Investors in NEC Corp and other Asian chipmaker stocks say they got half their prayers answered by the Federal Reserve this week. Now they hope companies won't jump the gun by increasing production.
The Fed's surprise half-point cut in US lending rates to 6 percent may help stem a slowdown in the world's biggest economy and revive demand for computer chips. The other condition for a rebound in chipmakers, say investors, is for them to recognize forecasts for demand were too bullish.
"If chipmakers can defer or even cancel some of their plans, we'd expect the downturn to be fairly shallow," said Robert Conlon, chief investment officer at Investec Guinness Flight Asia Ltd, which invests US$500 million in Asia.
"People are concerned about how hard the US economy is going to bump and how quickly the Fed will act," he said.
After seeing their stocks rise to records six months ago, NEC, Samsung Electronics Co and Taiwan Semiconductor Manufacturing Co (
NEC has lost 39 percent since its peak in July. Samsung Electronics has fallen 57 percent since its high on July 13 and TSMC has fallen 66 percent from its record on April 5 last year.
"Consensus is sometimes wrong and that was definitely the case this time around," said Keon Han, a technology analyst at Bear Stearns Asia in Hong Kong.
The question now is whether last year's product price collapse was a temporary phenomenon, caused by demand falling short of inflated expectations, or whether the industry is about to suffer a long-term recession after investing in too much capacity that will flood the market and keep prices low.
"Right now it doesn't seem like its an over-capacity issue because we haven't really seen the aggressive investment in the last couple of years as would normally lead to a capacity overhang and price collapse," said Bear Stearns' Han.
Producers are making the right noises.
TSMC, the world's largest maker of chips made to order, says it's cautious about this year and is even accepting that some machines will be idle.
"We don't expect the market to be as strong" this year, said Kuo Shan-shan (
"Production will not be 100 percent for the first quarter," she said.
Early in 2000, producers and analysts forecast that the semiconductor industry was less likely to repeat its boom and bust cycle as demand from new mobile communications products was replacing reliance on personal computer sales.
While demand did rise, it fell short of forecasts. Gartner group estimates about 410 million mobile phones were sold this year, 45 percent more than last year but about 25 percent below the most bullish estimates that ranged as high as 500 million units.
Memory chipmakers, who supply PC producers with the US$20 billion of dynamic random access memory chips each year that they need for their computers, have seen the price of their product crash.
The spot price for the industry-standard PC100 8x8 64- megabit DRAM -- which investors use as an indicator of demand -- fell to US$3.05 from a high of nearly US$9 in July. The price of the chips, now close to or below the cost of production for many manufacturers, usually rises toward the end of the year as demand increases during the year-end holiday season. Some manufacturers have more riding on hopes of a price rebound than others. Hyundai Electronics Industries Co, the world's second- largest memory chipmaker to Samsung, currently sees a third of its operating income cover interest payments, and without higher prices, analysts say it could run short of cash.
"If the DRAM price goes down further, then they will have problems," said Hwang Min-seong, an analyst at ABN Amro Holding NV in Seoul, who has a "reduce" recommendation on the stock.
Much rides on whether the world's largest semiconductor company, Intel Corp, can convince enough consumers that they need its new Pentium 4 processor. Faster processors allow the use of more complex programs, which in turn require more memory. Hyundai Electronics is hoping the cheaper price of memory chips may help sell computers with faster processors and more memory.
"The recent collapse in prices is not like those in the past, which were caused by over-expansion of capacity," said Hyundai's CEO Park Chong-sup in a faxed reply to questions. "It came from the fact that prices were high in the third quarter, which in turn meant that PC makers couldn't upgrade to new models."
Intel is far from bullish. In December, Intel said it couldn't meet profit targets, saying orders were being cancelled worldwide.
"It's quite tough going forward for the semiconductor industry in January and February," said Warren Lau, an analyst at HSBC Securities Pte in Singapore. "We are likely to see negative month-on-month and a sharp fall in year-on-year growth in first quarter 2001."
Some investors argue chipmaker shares have fallen enough to account for their poorer outlook. Singapore's Chartered Semiconductor Manufacturing Ltd, which lost two-thirds of its value in the past six months, trades at just 0.2 times its estimated earnings. Samsung Electronics has a price-earnings-ratio, or PE, of 4.4 times and TSMC 14.4 times.
Other investors aren't so sure.
"The `E' in `PE' will be under pressure next year," said Chris Ruffle, who helps manage US$250 million in Taiwan equities at Martin Currie Investment Management Ltd in Taipei, commenting on Taiwanese technology stocks. "Valuations are still quite high."
Even in Japan, where semiconductor companies have tried to move away from commodity products into new advanced chips that combine the functions of several other chips, there is little optimism for a strong start to the New Year.
"Consumer spending may come down," said Satoru Oyama, a senior analyst at ABN Amro Securities (Japan). "That means we need to be careful about the total demand for semiconductors."
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