Fri, Jun 29, 2001 page21

• Foundry outlook remains bleak

  SEMICONDUCTORS Predictions for a rebound in the sector appear premature. Still many analysts rate foundry shares as a 'buy' despite the industry's poor prospects

  • BLOOMBERG
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  Barry Waite, the Chief Executive of Chartered Semiconductor Manufacturing Ltd (特許), who predicted a stronger second half for the made-to-order chip industry in April, may now be preparing for the market to get worse.

  Chartered, which a local newspaper said may shut one of its five Singapore plants for two weeks to compensate for slowing demand, has reduced salaries of senior executives and trimmed planned spending on new investment by 16 percent.

  "The semiconductor industry is going through a very difficult year," said Chartered spokeswoman Maggie Tan.

  With consumers buying fewer personal computers and mobile phones, companies that make chips to the designs of Intel Corp, Motorola Inc and others are suffering. Chartered and larger rivals Taiwan Semiconductor Manufacturing Co (台積電) and United Microelectronics Corp (聯電) may need to trim production at factories already working at half their capacity.

  "We're going to continue to see a deterioration in the third quarter," said Del Ricks, an analyst at W.I. Carr Securities in Taiwan. Manufacturers aren't getting the kind of orders they'd expect for "back to school" computers and gadgets that'll be bought two months from now, he said.

  Chartered's Tan declined to comment specifically on a Business Times report Wednesday that it would close a chip plant for two weeks, saying only the company was looking for ways to cut costs.

  Yesterday, Alex Hinnawi, a UMC spokesman, denied a report that the company will temporarily shut two chip plants.

  Chipmakers are facing their worst year-on-year revenue decline ever, industry forecaster International Data Corp predicts. Chip sales are expected to decline 21 percent this year down from a record of nearly US$200 billion in sales last year, IDC said in a recent report. It said growth may not return to double figures until 2003 at the earliest.

  UMC, the industry's No. 2, said it expects an operating loss in the second quarter, forecasting orders may fall in the third.

  TSMC, the No. 1, said in May sales fell 21.8 percent on year and 7.4 percent from April to NT$8.6 billion (US$251 million).

  Factories at TSMC, UMC and Chartered are producing just 40 percent to 50 percent of the chips they're capable of churning out, according to analysts' estimates.

  "If we are talking about a return to the 100 percent capacity utilization ratios, then it won't be in the next two years," said Chris Hsieh, a semiconductor analyst at ING Baring in Taiwan.

  As earnings forecasts fall, shares in Chartered, TSMC or UMC look far from cheap.

  TSMC's stock is trading at 33 times 2001 forecast earnings, twice the 16 times ratio for the TAIEX. TSMC's shares gained 13 percent this year compared with the index's 2 percent increase.

  UMC, which trades at 39 times estimated 2001 earnings, is down 2 percent this year. Chartered, the industry's No. 3, has outperformed the Straits Times Index by 10 percent this year.

  That hasn't deterred analysts from recommending the stocks.

  Some 14 of 16 recommendations on Taiwan Semiconductor Manufacturing, the largest maker of made-to-order chips, are "buy" or equivalent, according to Bloomberg analytics. Only one of 17 recommendations on UMC is lower than "buy."

  "On certain stocks in Asia people just don't break from the pack," said Christian Dangerfield, chief investment officer at AIB Govett Asia Ltd, which manages US$1 billion in Asian investments in Singapore. Analysts aren't willing to recommend investors sell TSMC, he said, partly because they don't want to lose investment banking business.

  Demand for personal computers, which account for up to 30 percent of made-to-order chip orders, may fall further. Hewlett-Packard Co last month said PC sales in the third quarter ending in July will be unchanged to 5 percent lower than in the year-earlier period.

  Much depends on whether the market is lifted by Intel Corp's latest version of its Pentium 4 processor, which may encourage buyers to upgrade to speedier computer models later this year.

  When demand does pick up chip foundries may be among the first to benefit as their customers seek to keep a lid on costs.

  Chip manufacturers are agonizing over when to build plants which will use 12-inch silicon wafers. Most plants now use 8-inch wafers.

  Chipmakers calculate the upgrade will save up to 40 percent in the cost of manufacturing because they can cut more chips from the wafer. The savings come at a high cost, though. A new production line using 12-inch wafers can cost as much as US$3 billion, more than double the cost of existing plants.

  TSMC and UMC have said they intend to be among the first in the industry-wide shift, forcing many of the smaller makers and some equipment makers to give up their chip businesses in favor of buying from dedicated producers.

  "No one is doubting that the foundry model is here to stay," said Keon Han, a technology analysts at Bear Stearns Asia, in Hong Kong.

  For your information

  Boom and bust

  * Foundries that make chips for Intel, Motorola and others are suffering from a severe drop in PC and mobile phone purchases. * A continued deterioration in sales is expected in the third quarter, with the industry facing its worst year-on-year revenue decline ever, with chip sales expected to drop 21 percent this year -- down from last year's US$200 billion in sales. * TSMC, UMC and Chartered are all operating at just 40 to 50 percent of capacity or lower. * The industry is pinning its hopes on more robust sales of Intel's P4 chip later this year. Source: bloomberg
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