Long-Term Outlook Good for Taiwan Chip Makers
By Gabriella Faerber
Correspondent
07/12/2000 4:37 PM
worldlyinvestor.com
Last week, semiconductor stocks in Asia followed their US counterparts into freefall after Salomon Smith Barney analyst Jonathan Joseph forecast that chip shipments would slow and prices would fall.
In Taiwan, bellwethers like Taiwan Semiconductor Manufacturing (TSM: NYSE ADR), the world's biggest chipmaker, United Microelectronics and Winbond Electronic Corp all fell several percentage points.
But analysts in Taipei have united in a chorus of positive outlooks for the Taiwan chip makers.
"There is a flaw in the Salomon Smith Barney logic," says Chris Hsieh, head of semiconductor research at Nomura International in Taipei. "There is a legitimate reason to worry about the short-term. But in the long-term the industry will continue to do well," he says.
In fact, several analysts say the cyclical business is still in the upcycle – they even think that it will be more buoyant than past cycles -- and see much more upside in stock prices.
The Cycle of the Sector
Historically, June and July tend to be slower months in the semiconductor industry. Analysts say there is always some product-induced inventory migration, which is normal as customers get ready for new models using new components in the third and fourth quarters.
"Salomon Smith Barney picked up on a short-term monthly slowdown and took it as a sign of change in the industry fundamentals," explains Calvin Chang, technology analyst with Jardine Fleming in Taipei.
"There are no signs of a slowdown in Taipei. We see nothing to suggest a slow deceleration," he says. "Even during an industry upturn, things don't always go straight up. Maybe there is some short-term weakness but that doesn't mean the industry cycle is over."
In fact, say analysts, the semiconductor industry is very much in the early stage of the upcycle right now. It began in the second quarter of last year and could run for the next 18 to 24 months, perhaps even longer.
There's More Good News
Some even suggest that this cycle will be far more buoyant than past cycles due to increased demand from the Internet and telecommunications markets. Taiwan Semiconductor says that in the first quarter of this year communications chips accounted for 38% of output. Similarly, United Microelectronics says communications chips now account for 35% of output.
"The companies' concentration on high-end, value-added products will continue to boost profits," says Nomura's Hsieh.
And despite the generally sluggish seasonal environment, Taiwan's major semiconductor makers have just reported record June sales. Taiwan Semiconductor's June sales hit NT$13.2 billion. That's a 104.8% increase over the June 1999 numbers. (That increase is in part due to the completed mergers with TSMC-Acer Semiconductor Manufacturing and with Worldwide Semiconductor Manufacturing. The latter contributed NT$1.2 billion to June sales. TSMC-Acer did not contribute).
United Microelectronics posted sales of NT$8.8 billion, a 273% jump year-on-year. Macronix sales rose 103% to NT$2.2 billion. Sales at Winbond were up 119% at NT$4.2 billion.
"That's a resounding refute of the Salomon report," says Chang.
Furthermore, the Semiconductor Industry Association forecasts that the semiconductor industry will grow by 31% this year. Revenue will hit $195 billion. That figure will swell by 25% to $244 billion in 2001. By 2003, sales should hit $312 billion.
Stagnant Shares
But shares of the Taiwan semiconductor makers are generally not moving right now. Even though the market has largely discounted the Salomon report, analysts say there is still lingering concern about the high valuations of semiconductor stocks that continues to unsettle investor confidence.
Furthermore, the Taiwan market in general is flagging. Analysts say that's particularly due to confusion over the government's plans to review its taxation policies and fears that the government may take away tax incentives for the high-tech companies. If that happens, earnings will suffer.
But analysts point to 100% revenue visibility for Taiwan Semiconductor for the next 12 months for confidence. And there is nothing to suggest that there is any weakness at United Microelectronics, Winbond or Macronix either, say analysts. United Microelectronics is also reported to be fully booked for the next 12 months and all companies are expected to put out record monthly sales figures in the second half.
Expectations for Higher Prices
Furthermore, the average selling price is expected to trend up as there is a continued migration to higher technology products, which garner higher prices. Taiwan Semiconductor revenue is expected to grow by 100% this year. Jardine Fleming's Chang projects $1.64 billion net income for 2000 and $2.6 billion for 2001. He has a price target of NT$225 by years end, from the current NT$145 with earnings per share (EPS) at NT$5.01.
"It is the fastest growing company in the fastest growing industry," he says.
Price targets for United Microelectronics, Winbond and Macronix are NT$125, NT$120 and NT$125 respectively, with EPS estimates of NT$2.83, NT$3.55 and NT$2.95.
"Those increases are based on an increase in shipments, an increase in revenue and by the realization by investors that the industry up-trend is in tact," explains Chang. |
