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Sharp Demand, Short Supply Boost Asia Chipmakers
By Tony Munroe Jul 12 11:30pm ET
HONG KONG (Reuters) - Investors see huge opportunity in the Asian semiconductor
industry as Internet applications, mobile phones and silicon-reliant appliances suck up
chip-making capacity faster than they can be filled.
``Technology has become the status symbol of consumption today,'' said Robin How,
managing director of A.P.C. Asset Management (Hong Kong) Ltd, who remains bullish
on the boom-and-bust prone sector.
``Even if there's a slowdown in demand, you're going to operate at 99 percent capacity
instead of 100.''
After a worst-ever industry slump that ended in 1998, times have vastly improved for
Asian semiconductor makers, where lead times for capacitors and flash memory chips
have extended to as much as 18 months. Prices and profits have risen accordingly.
Global chip sales reached a record US$15.8 billion in May according to the
Semiconductor Industry Association, a nearly 40 percent increase from a year earlier.
In Asia excluding Japan, chip sales saw a 45.8 percent year-on-year boost in May,
while Japan enjoyed a 43.6 percent sales surge. With sales totaling US$7.57 billion in
May, Asia, including Japan, accounted for nearly half the world's semiconductor sales,
according to the SIA.
``The demand is looking good,'' said Adrian Fu, portfolio manager with Investec
Guinness Flight Capital in Hong Kong, who predicts the current up-cycle for
semiconductor makers would be longer than usual given the diversity of demand.
The present chip cycle is the industry's ninth. The previous cycle saw an upturn from
1992 through 1995, followed by a slowdown that lasted into 1998, according to Chase
H&Q.
One reason supply so sharply lags demand is that during the Asian financial crisis --
which occurred during the chip sector's last cyclical downturn -- no new capacity was
built in Korea or Japan, Chase H&Q said. Long lead times and immense expense
prevent new plants from quickly coming online to meet demand.
SOME NAYSAYING
But the upbeat sentiment isn't universal. Salomon Smith Barney roiled the chip world
last week with a report downgrading the industry to ``neutral'' from ``outperform'' based
on what it called ``slowly reversing industry fundamentals'' and slight decline in cellular
phone growth and surge in capacity.
Many came to the industry's defense.
``So what?'' asked How. ``You've got PDAs (personal digital assistants) coming
through, you've got in-car navigation systems, all of which use up chips instead ...
DVD (digital video disc) sales are mushrooming this year,'' he added.
While demand from PCs accounted for nearly half the chip output during the previous
cycle peak, they account for just 25-30 percent of present demand, analysts said.
Mobile phones account for just 10 percent of demand, analysts said.
Merrill Lynch, which recently reiterated its ``buy'' rating on the chip sector, forecasts
420-440 million cell phones will be sold this year with a 21 percent surge in PC unit
sales.
Some analysts had earlier predicted wireless handset sales would reach an
astounding 500 million units this year.
Merrill Lynch Asian semiconductor analyst Dan Heyler said supplies of semiconductor
silicon are expected to grow by 23-25 percent this year with revenue rising by 32-36
percent. The difference, he wrote in a recent report, is higher prices.
Morris Chang, chairman of Taiwan Semiconductor Manufacturing (2330.TW) (TSM.N)
(TSMC), the world's top chip foundry, or made-to-order chipmaker, recently said, ``I
can't say that semiconductors are no longer cyclical but think the best and most
bountiful part of this cycle will come at the earliest in mid-2002.''
RECORDS BREAKING
In Korea, where last year Samsung Electronics (05930.KS) and Hyundai Electronics
Industries (00660.KS) made 40 percent of the world's workhorse dynamic random
access memory (DRAM) chips used in personal computers and other appliances,
semiconductor exports are expected to reach a record US$25 billion this year -- an
increase of 23.1 percent.
In Taiwan, home to the largest semiconductor foundries, executives say
consumer-driven demand is helping to mitigate the industry's historic cyclicality.
``The beauty of this demand is that it's like a fashion thing,'' said Peter Chang, chief
executive of foundry operations at number two Taiwan chipmaker United
Microelectronics Corp (2303.TW). ``People keep on changing their phone. I've changed
three phones already this year.''
Japanese chip-makers, scorched by an overreliance on price-volatile DRAM when the
last semiconductor boom turned to bust, have turned to higher-end multi-function chips
as well as flash memory devices used in mobile phones.
Three of Japan's five largest chipmakers -- NEC Corp (6701.T), Fujitsu Ltd (6702.T) and
Mitsubishi Electric Corp (6503.T) -- recently boosted capital spending outlooks for this
year to a record 904 billion yen in order to meet added demand.
HOT DRAM
Investec Guinness Flight's Fu said he likes DRAM makers in particular because of
rising prices caused by tight supply and demand from PC upgrades, other Internet
access devices, MP3 music players and digital players.
``All those are creating new demand for DRAM,'' he said, citing both Samsung and
Hyundai Electronics Industries as attractive.
Merrill's Heyler rates Chartered Semiconductor Manufacturing (CSMF.SI) (CHRT.O)
and TSMC as buys, and How of A.P.C. Asset favors microprocessor and chipset
maker VIA Technologies (2388.TW) as well as microchip firm ProMos Technologies
(5387.TWO).
Analysts note no major surge in new capacity is imminent, with plants set to slowly
come online over the next 18 months.
How said industry fundamentals continue to look solid: ``The valuations are vulnerable
more than the actual fundamentals,'' he said. ``The world's gone digital. And the core
ingredient is what? Chips.'' |
