Wed, Sep 03, 2003 page10

• High-tech firms pose high credit risk, S&P warns

  GOOD AND BAD Local companies have smaller revenues compared to foreign counterparts, but stand out in terms of their efficiency and lower costs

  • By Joyce Huang / STAFF REPORTER
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  Recent convertible bond sales by the nation's high-tech sector have successfully attracted buyers by promising foreseeable returns, but the international rating agency Standard & Poor's yesterday cautioned stock investors about the sector's high credit risk.

  "The dynamic random-access memory [DRAM] chipmakers in Taiwan possess the highest credit risk," Tony Tsai (蔡東松), director of corporate ratings at Taiwan Ratings Corp (中華信評), a Standard & Poor's local affiliate, said yesterday during a teleconference call.

  Despite consolidation efforts, Taiwanese DRAM makers, which are both capital- and technology-intensive, rely heavily on global players to buy technologies from and, therefore, pose a not-so-sustainable business model, Tsai said.

  Commenting on domestic high-tech companies in general, Tsai said these companies reported small revenues compared to their foreign counterparts.

  But they stand out in terms of better operating efficiency and lower costs, which are the major factors helping Taiwan's high-tech sector ride out the economic downturn, he said

  However, a main weakness of Taiwanese high-tech companies is their production and consumer concentration. Most domestic companies focus too much on hardware manufacturing, while lacking the capability to build their own brand and distribution channels, Tsai said.

  Moreover, there's a lot of room for improvement in terms of corporate governance and financial transparency.

  Most domestic high-tech companies have complicated investor structures and financial portfolios, which provide limited information for analysts to assess, Tsai said.

  According to Tsai, the nation's foundries, which impose good credit policies, are expected to meet their revenue goals with Taiwan Semiconductor Manufacturing Co (台積電) -- the world's largest made-to-order chipmaker, having no problem increasing sales in the near future.

  Meanwhile, the nation's top three original design manufacturing companies -- Hon Hai Precision Industry Co (鴻海精密), Quanta Computer Inc (廣達電腦) and Compal Electronics Inc (仁寶電腦) -- are benefiting from the economic downturn since their customers transfer a small amount of orders to them due to their low costs and good quality, as well as their global logistic capabilities.

  The nation's TFT-LCD sector, which is a capital-intensive industry relying heavily on external capital, will be the most important sector to raise funds this year through the issuance of bonds, Tsai said.

  But the sector -- in which the number of players has grown from one to five in the past three years -- is expected to further consolidate, since oversupply will be inevitable, Tsai added.

  Nevertheless, John Bailey, director and team leader of Corporate & Infrastructure Ratings at S&P, said yesterday that some tech markets -- including the semiconductor, desktop and mobile phones industries -- are maturing, although the sector's credit may not quickly turn around.

  "The worst is over from the sales and revenues perspectives," Bailey said yesterday in New York through the same teleconference call.

  But not every company is going to make it into or through upcoming expansion, since it could be three or more years before some companies get back to peak-sales level, he said.

  "The success is going to come from providing higher value to their customers, generating above-average sales growth and stronger profit margins," he said.

  He added that successful companies will expand new markets, advance their technologies or find a way to convince their customers to buy more.

  The sector's emerging bond sales, however, will continue to be driven by prices, instead of credit, Bailey said.

  He added that bond holders are sure to find their assets much more attractive in a few years.
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