inventor
inventories or inventions (intellectual property)?
(In link below, the embolding is mine)
atimes.com
Bloated stockpiles hit electronics market
By Scott Ridley
TAIPEI - The grandfather of Taiwan's semiconductor industry, Taiwan Semiconductor Manufacturing Corp chairman and chief executive officer Morris Chang, said he would buy TSMC stock last Friday, one day after the corporation released record sales of US$1.89 billion for the second quarter of this year. TSMC is the world's largest contract chip maker but its share price peaked this year at US$1.85 on January 9 and closed at $1.25 on Friday, down 48% in the same period despite record profits. AU Optronics Corp, the world's third-largest TFT-LCD (thin film transistor liquid crystal display) panel maker and the largest panel maker in Taiwan, reported second-quarter profits of $424 million, five times the level of a year ago. AU's stock price has fallen from a high on April 19 of $2.21 to close down 52% on Friday at $1.15.
On July 14 the world's biggest semiconductor maker, Intel Corp, had reported second-quarter net income of $1.76 billion or earnings per share (EPS) of 27 cents, up from $896 million and EPS of 14 cents a year earlier. However, what worries some market observers is that microprocessor inventories rose by 15% and CEO Craig Barrett said gross margin in 2004 would fall to 60% versus the 62% previous estimate. Intel plans to cut prices and reduce factory output to reduce stockpiles.
It is estimated that Intel's chips power more than 80% of personal computers (PCs) and the financial market considers it a barometer for technology demand. Intel has being promoting notebook (NB) PC sales with its "Unwire" advertising campaign around the world. Profit margins are very thin, an estimated 6% for makers of NBs, namely Taiwan's Quanta Computer Inc, the largest NB manufacturer in the world.
AU also reported in its recent investor conference that it would be willing to cut production if other competitors would to curb a potential panel oversupply. International Data Corp (IDC) in a June report also said the global market for liquid crystal displays in 2004 is estimated to increase 44% to $47.7 billion. The average selling price (ASP) for panels larger than 10 inches, AU said, may fall by 10% in the third quarter this year. However second-tier rival Chunghwa Picture Tubes (CPT), said at its recent investor conference that its ASP may fall by 15% in the same period.
With inventory building in the system and third-quarter demand looking very weak, AU indicated that production utilization might fall a few percentage points below its current 100%. CPT indicated that it has enough orders to fill about 95% of its capacity. Both AU and CPT will increase production of larger glass panels, which allows more screens to be cut, hence higher output.
TSMC's rival United Microelectronics Corp (UMC), the second-largest contract chip maker in the world, reported its second-quarter earnings on July 27, with a net profit of $370 million, five times as much as a year earlier. CEO Jackson Hu said, "We expect revenue and profit growth to continue into the third quarter," but he declined to comment on demand for the fourth quarter.
So what we have is the prospect of inventory buildup in the system among various electronic products as outlined by Intel and panel maker AU, with declining prices, and hence profits. TSMC rival UMC at its investor conference on July 27 refused to comment on the outlook for the fourth quarter, hence order visibility in the final quarter is potentially weak. However, analysts ratings vary with a slight bias toward the foundries, which are world leaders in their field, over panel makers, which are in essence assemblers of goods.
The whole worldwide electronic market is waiting for "back to school", the traditional period in the United States when students returning to university or school buy new NBs or desktop computers, and demand kicks in. However, US dynamic random access memory (DRAM) chip maker Micron Technology announced on July 14 that back-to-school demand would probably occur a month later than previously expected. Usually whenever a company announces that demand will be delayed, it is not a good sign and creates uncertainty in the market place. The head of global sales at Micron, Michael Sadler, was quoted in the press as saying, "Demand certainly hasn't been on fire. We haven't seen the pick-up that we're anticipating."
Analysts are divided as well about the outlook for TSMC and UMC, with European investment bank Credit Suisse First Boston (CSFB) going against the grain by upgrading both stocks to neutral from underperforming. CSFB analyst Neelkanth Mishra wrote last Wednesday, "We upgrade TSMC and UMC to neutral due to sharp underperformance and because they are close to historical low valuations." Credit Lyonnais Securities Asia (CLSA) analyst Ming-Kai Cheung maintains his "buy" recommendation, writing on Thursday, "We are leaving our forecast unchanged and believe that the risks involving the business have been slowly subsiding."
In contrast, US investment bank Merrill Lynch's Dan Heyler on July 21 maintained a neutral rating on TSMC, "as any upside from a post-results relief rally is likely to be limited". For UMC, Heyler maintains a neutral rating, noting "rising risk to 2H [second half] earnings". Citigroup analyst Andrew Lu downgraded TSMC, UMC and Singapore's Chartered Semiconductor Manufacturing to "sell" from "buy" on July 14.
AU Merrill's Daniel Kim cut his rating to "sell' from "buy", "because of worsening industry fundamentals and product price falls". Citigroup cut its rating to "hold" on concerns about lower prices and rising inventories in the sector. CLSA's Timothy Chen cut his rating to "sell" as outlook on concern for the industry outlook going forward. Goldman Sachs also indicated in its August 2004 Flat Panel Monitor, "Our new supply/demand model already shows an oversupply of panels, and the gap is set to expand."
IDC estimates that PC growth will reach 13% in 2004 and only 11% in 2005, with consumers price-sensitive. For the TFT-LCD panel industry, competition is tough, with market leader Samsung having established a joint venture with Sony this year to produce panels mainly for use in televisions.
In any market downturn, companies that are world leaders in their respective fields usually are a safer bet to place investors' money. Of TSMC stock, 53.10% is held by foreign investors (including Royal Philips Electronics NV of the Netherlands, 11.02%) versus 22.58% foreign holdings for AU. Of the 21 analysts that cover TSMC on Bloomberg, 57.14% rate it a "buy" versus 50% for AU (out of 12 analysts), so only slightly favoring TSMC. With the outlook for both foundries and the panel industry unclear in the short term, international investors may be biased toward companies that can offer added value and are world leaders in their respective field, namely TSMC.
Scott Ridley works for a financial institution in Taipei. |
