Sat, Dec 20, 2008 page12

• Chip shares rally on Hynix cuts in output

  NEW RULES Hynix’s production cuts are the first of this year and may help offset the negative impact new accounting measures are expected to have on local chipmakers

  • By Lisa Wang / STAFF REPORTER
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  Led by Powerchip Semiconductor Corp (力晶半導體), shares of the nation’s major computer memory chip makers jumped by nearly the 7 percent daily limit as chip prices rebounded for the first time in six months on Hynix Semiconductor Inc’s plan to reduce output by 30 percent.

  Joining their Asian peers, the stocks of Powerchip and Nanya Technology Corp (南亞科技), Taiwan’s second-biggest maker of dynamic random access memory (DRAM) chips, rallied 6.84 percent to NT$4.22 and NT$6.4, respectively.

  The nation’s third-largest DRAM supplier ProMOS Technologies Inc (茂德) also gained 6.74 percent to NT$2.06.

  The price of the benchmark DRAM chip, the DDR2 1G 228X8 eTT, bounced back 3.21 percent to average US$0.77 per unit yesterday as supplies may fall further, Taipei-based market researcher DRAMeXchange Technology Inc (集邦科技) said.

  Hynix’s first production cuts this year may have offset the anticipated adverse effect of the government’s implementation of new accounting rules next month.

  Based on the Statement of Financial Accounting Standards No. 10, local companies will have to book their inventory write-offs as costs of goods sold rather than as non-operating items.

  In other words, the new rule will force companies to essentially mark inventory to market, which could lead to greater inventory impairment losses and erode gross margin.

  “For local DRAM makers, the new accounting standard may weaken companies’ profitability and cut their gross margins,” said Alex Huang (黃國偉), an assistant vice president of Mega International Investment Service (兆豐證券). But, “it [profit erosion] is less of a concern at the moment when compared to the survival issue DRAM players are facing.”

  Huang attributed the DRAM stocks’ surge yesterday to investors’ growing optimism that domestic memory chipmakers may have a more secure future thanks to the government’s aid proposal.

  A Powerchip official agreed with Huang.

  “At this point, the harm done by the new accounting rule will be relatively small as all figures [including gross margin] have fallen into the red already,” Powerchip spokesman Eric Tan (譚仲民) said by telephone.

  Powerchip posted NT$15 billion in losses in the third quarter with gross margin at minus 59.7 percent.

  SinoPac Securities Corp (永豐金證券) analyst Sophie Chuang said in a client note yesterday that she remained cautious about the sector’s long term outlook, despite recent production cuts by major players that could reduce global output by between 15 percent and 20 percent starting next month.

  Chuang said that any short-term change in supply and demand could be just an illusion because major players — now running at low utilization rates — may act to increase production as soon as they see signs of recovery.

  Local DRAM companies will not be the only victims of the implementation of the new accounting rule, however. Huang said the new accounting standard would also cut into the bottom line of local companies with inventory issues, especially construction companies.

  In Taipei trading yesterday, selling pressure also emerged on shares of cement, steel, construction and flat-panel display sectors, which have seen low gross margin, falling product prices and high inventory turnover this year.

  It is a common business model adopted by local construction companies to build inventories — including idle land, unsold housing and property bonds — that are at least 10 times higher than their paid-in capital, Huang said.

  As most local construction companies are small, they would be vulnerable to price volatility and Taiwan’s property market was quite volatile, he said.

  Additional reporting by Kevin Chen
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