STATS ChipPAC expects double-digit growth; Company remains confident despite forecast slowdown in semicon industry
Roland Lim -- The Business Times Singapore , December 12, 2006 Tuesday
DESPITE the anticipated slowdown in the overall semiconductor industry, semiconductor test and assembly service provider STATS ChipPAC (STATS) says it is confident of achieving growth in the double-digit range that will outpace the overall semiconductor industry.
'Next year, it will be more tepid industry growth, but the OSAT (outsource assembly and test) industry will still outpace industry growth,' predicted Tan Lay Koon, president and chief executive officer of STATS, in a recent interview with BT.
'Even if we do nothing, among the big four, we should all be able to grow in double digits for the next five years, according to consensus estimates,' said Mr Tan.
STATS, South-east Asia's largest semiconductor test and assembly service provider, along with ASE Test Ltd, Amkor and Siliconware Precision Industries Co Ltd (SPIL), are often referred to as the 'big four' in the semiconductor outsource assembly and test market.
Mr Tan estimated that between the four of them, they have about 85 per cent of the business of the semiconductor majors such as Intel.
Industry watchers predict the overall semiconductor industry growth to slow to some 7 to 8 per cent growth next year. However, according to Mr Tan, the OSAT market typically outpaces the overall semiconductor industry growth by about one and a half times.
STATS reported its fourth-straight quarter of profit in October. Mr Tan said: 'We can generate enough cash from operations to fund our capital investments - and this is not necessarily always the case in the semiconductor industry. We have succeeded in doing that in 2005, and are able to continue to do this in 2006.
'The business model now also has got the scale, and a balanced mix of assembly and test.'
Prior to its merger, about half of its revenue were from assembly operations, while the other half is from test services. However, it is now about 75 per cent from assembly services and 25 per cent from test services. 'It will still be about 75-25 next year,' said Mr Tan.
He added that the company now has a broader customer base, and its top five customers account for about 40 to 45 per cent of its revenue. Before the merger, its top five customers accounted for some 65 per cent of its revenue.
Mr Tan said STATS now has exposure to the PC and consumer electronics market than in pre-merger days, when it had heavy concentration in communications products. STATS is also testing the waters in the LCD test and assembly market, which many smaller niche players in Taiwan compete in.
The company has a modest investment of about US$10 million to start LCD test and assembly operations in China. 'We are exploring it and will see how that goes,' said Mr Tan.
The company's capital expenditure as a percentage of revenue has also been falling, he said. In 2004, it was about 34 per cent, but has since fallen to 24 per cent. This year, capex is expected to reach about US$300 million. About US$80 million of this is non-recurring, involving a new building in China.
As part of its overall growth strategy, one area which STATS is constantly on the lookout for are Integrated Device Manufacturers (IDMs) which are looking to go 'fabless'. IDMs traditionally design, manufacture, test and package their chips. However, more of them are outsourcing parts of the chip manufacture process, such as test and packaging, so as to focus on chip design.
Mr Tan declined to comment specifically on recent media reports that STATS was looking to purchase the back-end facilities of a US-based semiconductor firm in Asia.
While STATS does perform a lot of memory testing, Mr Tan revealed that they are focused on flash memory assembly and test services, and not on DRAM testing. 'While memory products might be commoditised, the service we provide is not a commodity,' Mr Tan said.
He explained that STATS is capable of advanced 3D test and packaging. This allows it to put together a few complementary chips, which it can package into a single package, such as a complete memory module.
The trend towards miniaturisation is also increasing the need for 3D packaging, as manufacturers look to squeeze more features into a smaller device.
UBS recently upgraded the company to a 'buy', from a 'neutral', and upped its 12-month target price by some 52 per cent to $1.60. STATS on Oct 26 reported third-quarter net income of $18.5 million, its fourth-straight quarter of profit, compared to a $1 million loss a year earlier.
The company, whose customers include Sony and Intel, has forecast full-year revenues to be between US$1.6 billion and US$1.62 billion, and net profit to be between US$67.5 million and US$74.5 million.
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