Chip Manufacturers Invest On Expectation Of Recovery In '02
2001-02-16
Summary
Confirmation that the world's No. 3 foundry chip producer, Chartered Semiconductor, is pushing ahead with plans for a 12" semiconductor fab in Singapore is a vote of confidence in the prospects for the industry and is a signal that investors should not ignore. The news follows the decision by a consortium led by United Microelectronics Company (UMC) to build a 12" fab also in Singapore. In contrast to the current mood of pessimism surrounding the sector, analysts are advising investors to buy on any further weakness based on expectations of a cyclical recovery in the sector during '02.
The big picture
The current oversupply of memory and logic chips in the global market has led to a collapse in spot chip prices. This news has been fully reflected in semiconductor manufacturers share prices and is expected to lead to a '98 style shake out in the sector. Once again the catalyst for the shake out is expected to be led by the exit of many Korean manufacturers (or at least the mothballing of capacity) in the memory chip market. In addition to this, an increase in outsourcing among smaller semiconductor companies to Taiwanese and Singaporean foundry producers will ease the oversupply problem and further consolidate the leading position of these companies in the foundry market.
With the final phase in the semiconductor down cycle expected to materialise in the coming months, analysts are advising investors to pay close attention to the share prices of Asian foundry producers. Buy on any sudden weakness has been the advice to institutional investors, based on expectations that the semiconductor cycle will recover in '02.
For individual investors the same advice applies, however, the herd is unlikely to follow this advice until clear evidence of a recovery materialises. Such evidence is unlikely to appear until 4Q ¡¦01 at the earliest. However, by then the valuation argument is likely to be less appealing.
The higher efficiency of the new 12" fab plants currently under construction will boost the productivity of the leading foundry producers, all of which are Asian based. This will lead to a structural improvement in earnings as each production line will be able to produce more chips per piece of silicon, relative to the previous 8" and in some cases 6" production lines.
UMC's decision to further diversify its production base out of Taiwan is positive for the company as it will reduce the risk to earnings from sudden production breaks in Taiwan. These are become increasingly regular due to problems with the supply of electricity and environmental issues such as earthquakes and typhoons. This risk was emphasised over the weekend when a Taipower sub contractor severed a cable supplying feeding power to the Hsinchu science park outside Taipei. Singapore is a clear beneficiary of these problems and is capturing an increasing share of the foundry market thanks to tax breaks excellent infrastructure and a skilled labour force. From 6.5% of exports now, semiconductors are expected to account for 10% of exports by '03.
Investment implications
Chartered Semiconductor decision to push ahead with plans for a 12" semiconductor fab in Singapore in combination with similar plans by a consortium led by United Microelectronics Company (UMC) signals to investors the long term positive outlook for the industry. While semiconductors sales are forecast to slow to single digit growth this year from a 37% increase last year, forecasts for '02 are relatively unchanged, implying analysts are optimistic on recovery prospects for the industry. Importantly, this optimism is based expectations that the US economy will recover in 2H '01. Individual investors should heed analysts advice of buying on any further weakness in the sector.
quamnet.com |
