Mon, Mar 06, 2000 page20

• Election concerns sideline investors

  • By Michael Logan / STAFF REPORTER
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  Uncertainty surrounding the March 18 presidential election continued to dog the market last week, with the KMT's Lien Chan (連戰), the DPP's Chen Shui-bian (陳水扁) and independent James Soong (宋楚瑜) locked in a race too close to call.

  Until a clear winner emerges, or until voting day passes, many investors are betting its safer to wait out the election on the market's sidelines.

  After tumbling 7.1 percent in the Feb. 21 to Feb. 25 period, the TAIEX finished Saturday at 9,517.97, up 85.48, or 0.9 percent for the week.

  But the Over-the-Counter index managed to pare some of its 9.3 percent loss from the earlier week. The index rose 17.27, or 6.7 percent, to 273.37.

  "People are going to live with whatever choice is made at the end of the day because of the strong underlying fundamentals," said Ralph Dixon, head of sales at Primasia Securities.

  And when fundamentals rule the market once more instead of political considerations, Dixon said, the market could advance to as high as 13,000 for the year.

  In the meantime, however, most analysts expect that the TAIEX, like last week, will trade in a narrow range and on relatively low volume.

  Neal Stovicek, head of equity research at National Securities Corp, said he had his eye on margin borrowing levels, which came to roughly NT$562 billion last week. "If it pulls back, that would suggest bearishness," Stovicek said.

  In addition, domestic mutual funds have reduced their equity holdings and bulked up on cash, Stovicek said, signalling "that mutual fund investors are becoming more prudish."

  Another sign of investor reluctance has been the decreased market turnover, said Grace Li, research manager at MasterLink Securities.

  "The volume is shrinking. The liquidity is not so great," Li said. "People are pretty conservative leading up to the election. Investors want to retain some cash."

  In addition, Dixon said, the Central Bank of China (中央信託), through the issuance of certificate of deposits, was "roping in a bit of liquidity for use later on." Last week the amount of CDs issued by the bank hit NT$947.6 billion -- the highest level ever.

  What this all means is that investors haven't been out in force, and won't return to the market in number until one of the three leading candidates breaks away from the pack.

  "It's still unclear as it was a week ago," Li said.

  Dixon said stocks may get a lift if polls, which show a statistical dead heat between Lien, Chen and Soong, begin to tell a different story. "Maybe we'll get some indication as to who will come out" ahead, Dixon said.

  Barring that, the TAIEX is expected to trade between a range of 9,300 and 9,800.

  Taiwan DRAM makers got a slight boost over the past week as spot prices rose by roughly 28 percent to as high as US$6.06 Friday, recovering from earlier lows of US$4.71 reached two weeks earlier, according to the American Integrated Circuit Exchange.

  Investors also bid up Taiwan-ese DRAM plays after US memory maker Micron Technology rose 23 percent in a single trading session last week to US$96.

  Winbond Electronics (華邦電子) rose 11.7 percent to NT$81. Mosel Vitelic jumped 18.8 percent to NT$63, while ProMos Technology wasn't too far behind with a 14.1 percent gain, at NT$97. Powerchip Semiconductor finished the week up 12 percent at NT$56.

  But while the rise in spot prices gave investors some reason to cheer, analysts say the rally could be short-lived.

  The oversupply that led to lower memory prices earlier remains a problem, they say. In addition, the cyclical industry isn't likely to attract the big money until the second quarter.

  It's during that time, the thinking goes, that institutional investors will place their DRAM bets in preparation for the third and fourth quarters, which are traditionally high-demand periods.

  "I agree that the industry has good prospects in the long-term. But the problem is when to get in," said Jovi Chen, equities analyst at China Securities.

  "Right now the problem is oversupply from the big guys," Chen said, referring to Micron and others.

  Chen said the earlier weakness in spot prices was due to excess inventory surrounding Y2K and a shortage in CPUs, which had suppressed DRAM demand. "But these two factors were gone in the past week," Chen said.

  Still, he said, the 28 percent jump may also have been the result of panic buying, noting that trading volume became thinner as prices climbed higher.

  "DRAM prices will come down again in March" to about US$5, Chen said, and he recommended considering memory plays after the presidential election.

  In the meantime, Chen expects Winbond to trade between NT$75 and NT$85. His price target for the year is between NT$130 and NT$140.

  Also sounding bearish was Don Floyd, who covers DRAM makers for Credit Lyonnais Securities.

  "The current price rise may be tenuous," Floyd said, who rates Winbond as a "trading/sale" in the short-term. "I wouldn't be too surprised to see prices fall."

  Like Chen, Floyd said the earlier spot price slump was due to excess inventory. "In addition to that, we're seeing slower-than-expected PC growth," he said, noting the recent troubles of Dell Computer, the largest direct seller of PCs.

  Then there were yield improvements from the so-called "first-tier" players such as Micron, which allows more memory to be produced at a lower cost.

  "These guys all had a lot more product," Floyd said. "You had increased supply at the same time you had decreased demand."

  The bright spot, though, is that contract prices remain between US$5.50 and US$6.00, as spot prices tend to lead contract pricing. The US$4.50 to US$5.00 range is seen as the break-even point for most DRAM makers.

  Furthmore, memory makers such as Winbond are expected to be employing 0.18 micron technology on a meaningful scale by the third quarter. The technology allows DRAM makers to improve yields and lower production costs to roughly US$3.00, Floyd said.

  So while DRAM spot prices may head south in the short-term, most analysts say the outlook for the industry over the long haul is bright.

  "Long-term, in terms of the cycle," Floyd said, "these companies should be okay."

  Publication Notes

  2344 Winbond Electronics

  March 3 share price: NT$81 Shares outstanding: 3.1 billion Estimated 2000 earnings per share: NT$3.393 Estimated 200p/e ratio: 23.87
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