Foundries Forge Ahead
By Macabe Keliher, AsiaWise
Guess what? John agrees with Morris: the semiconductor industry will pick up in the second half.
John (Hsuan), Chairman of UMC, the world's second largest made to order chip maker, and Morris (Chang) Chairman of the largest chip maker, TSMC, speak loudly and with authority. So Thursday (the day after Hsuan's little talk), UMC closed at NT$58.5, up 6.4%, and TSMC closed at NT$100.5, up 6.9%. But don't worry if you don't have your finger in the pie yet - it isn't too late.
Earlier this week, AsiaWise discussed the rosy prospects of the foundry industry in the long term (see Sticking With Semiconductors?), and obviously, that will benefit foundry stocks.
The UMC and TSMC stock prices don't have much downside left. We've heard and digested the bad news - we face a slow down. U.S. research houses are forecasting a drastic reduction in foundry revenue growth this year, and Hsuan says revenue growth in the first quarter would be about 25% off the previous quarter. Morris over at TSMC said the same thing last week.
The market knew it was coming, and the stock prices took their hits earlier this month: UMC tasting the low 50's and TSMC the high 80's. Now, "everyone is waiting on indications for the second half," says Kristopher Thornton at W.I. Carr Securities.
Jim Kupec, UMC's president of worldwide marketing and sales, says "its still too early to tell if demand will increase in the second half, but inventories ought to be flushed out in the first and second quarters." As companies rid themselves of overstocked inventories, orders placed with foundries drop, as do investors' "buy" orders to brokers. But come the second half, everyone expects inventories will need to be replenished, and if demand does indeed come roaring back the foundries will be off and running and investors who hesitated will be left behind.
Everything - of course - hinges on the U.S. economy where "a third quarter pick up is likely," says Janardan Menon, head of Asian technology research at Kleinwort Benson Securities. He's got his eye on the foundries' long-term stock performance, rating both UMC and TSMC as "accumulate."
Thornton at W.I. Carr also remains positive on foundry stocks this year and has 'buys' on both UMC and TSMC, with target prices of NT$80 and NT$125 respectively.
Hsuan says the gap in stock price between his UMC and Chang's TSMC should close this year. With gross margins of 55%, UMC is already the most profitable company in the industry. Fourth quarter 2000 profits soared 132% year-on-year to NT$16.7 billion. The company posted operating revenues of NT$105 billion last year, growth of over 92%, and profits of NT$50.8 billion - a 292% increase over1999.
In comparison, TSMC's 2000 revenues were up 127% year-on-year to NT$166.2 billion and profits rose 165% to NT$65.1 billion. TSMC's gross margins in 2000 were 44.5%.
The announcement that UMC will cut its planned cap-ex for this year to US$1.5 billion from an original US$2.5 billion, leaves some skeptical however: "If UMC expects a strong second half rebound then why are they cutting capital expenditure by 48%?" asks Thornton. |
