To: DJBEINO who wrote (7998 ) 7/24/2000 7:25:19 AM From: Amadeo Mendez-Vigo Read Replies (2) | Respond to Investment Opinion: 07/21/00 at $24 We rate ALSC a STRONG BUY for the following reasons: * We believe that Alliance is well positioned to take advantage of theincreasing levels of product demand in the SRAM, DRAM, and flash memory chipmarkets. While competitors are facing production crunches from the intensedemand for chips, ALSC has ample production capacity thanks to its equityventures in two fabrication facilities (United Microelectronics and CharteredSemiconductor (CHRT). These investments provide them with the ability tosupport production for a $600 to $800 million company. * Alliance has made great strides to improve both its visibility in themarketplace and its marketing/sales strategies. They are enjoying thestrongest backlog levels in their history, currently in excess of $100 million,which could lead to potential upside in top line, gross margin, and operatingexpense lines. ALSC is currently "sold out" of its DRAMs through the Decemberquarter and is also beginning to experience some consistent yields in its flashproducts. They expect their product mix to eventually become 45%SRAM, 45%DRAMand 10% flash. * Alliance also maintains a substantial private and public equity portfoliocontaining some of the strongest players in the semiconductor industry. Theirholdings include 340 million shares of UMC, 2.14 million shares of CharteredSemiconductor, 488,000 shares of Broadcom (BRCM), and 852,000 shares of VitesseSemiconductor (VTSS). This collection carries a market cap (as of 5/16/00) ofapproximately $1.2 billion. ALSC also has roughly $130 million tied up inprivate equity holdings through its venture capital division. We feel thatthese holdings are underestimated in the valuation of ALSC's share price(current market cap of $830 million), and could lead to a significant upside onits appraisal. * ALSC's connections with UMC and CHRT appear to be paying off already. Thecompany still has ample production capacity at UMC and Chartered, so whiledemand for Alliance SRAMs and DRAMs continues to accelerate, most competitorsare already sold out. This in turn has allowed ALSC to raise prices for theirproducts 10% in the September quarter and up their book-to-bill ratio to over2.0. * Our valuation of ALSC is based on a sum-of-the-parts analysis. The combinedpublic holdings can be valued at approximately $21 per share (applying a 25%discount to $1.2 billion for lock-ups and volatility). The value of theprivate holdings comes to approximately $3.00/share (applying a 35% discount to$130 million value for illiquidity). To account for Alliance's operations, weare applying a 23 times multiple to our FY01 calendar earnings per shareestimate of $0.90, which is a significant discount to other memory companiestrading on average around 29 times calendar 2001 estimates, and gets us toroughly $20.00. Adding the sum-of-the-parts, ($21+ $3+ $20) results in our $44target. Last Earnings Estimate Change: 07/21/00--------------------------------------------------------------------------------FY01 EPS estimate raised from $0.47 to $0.69.FY02 EPS estimate raised from $0.70 to $0.90. Earnings Update: 07/20/00--------------------------------------------------------------------------------ALSC reported 1Q01 EPS of $0.13 versus $(0.02), exceeding our $0.10 estimate
