Tech Stock Focus: Taiwan Chip Cos Still Long-Term Buys
TAIPEI (Dow Jones)--Taiwan's notable chip stocks fell hard when the September 21, 1999, earthquake rocked the island, sending tremors throughout global technology shares.
Exactly one year later, deja vu occurred when an earnings warning from Intel sent local shares diving out of fears of falling global demand for computers and related components.
And just like last time, share prices for the island's foundries and dynamic random access memory chipmakers are expected to rebound in the intermediate and long term, analysts say, though overcapacity concerns will limit the near-term upside for DRAM makers.
"If you have money you're not using, buy TSMC and UMC for the next one to two years. If you don't get a 50% to 100% return on your investment, call me," says Raymond C. Wu, chip analyst at Entrust Securities in Taipei.
Foundries Taiwan Semiconductor Manufacturing Co. (TSM) and United Microelectronics Corp. (2303.TW) have been an unwavering "buy" this year. However, investor confidence has been shaken after a 22% rally in the bellwether index breached the 10,000 point level earlier in the year, only to then plunge 37% to 18-month lows this month.
The selling is unwarranted, analysts say, pointing out the foundries' order books are full which should keep capacity strained until at least the end of 2001 as the world's personal computers, telecommunication devices and information appliances all vie for semiconductors.
Taiwan is the fourth largest maker of semiconductors and the third leading computer equipment manufacturer worldwide. Technology shares typically account for more than 80% of the daily trading volume on the island's bellwether main index.
In the wake of the rout following Intel's news last Thursday that its third quarter earnings would miss forecast, TSMC and UMC stock prices have shed 2.6% and 1.4%, respectively in the last four trading sessions. Over the past month, TSMC has lost 20% and UMC has fallen 17%.
Together the two stocks account for roughly 20% of total stock market capitalization.
Under Supply Underpinning Firm Outlook
Annual capacity of TSMC, the world's largest foundry, is set for 3.4 million 8-inch equivalent wafers in 2000, increasing to 4.7 million in 2001, while UMC's output during the same time will increase from 2.1 million to 3.1 million, Wu wrote in a recent chip report.
Earnings per share for TSMC should steadily rise from NT$5.12 in 2000 to NT$6.35 and NT$6.67 in 2001 and 2002, respectively, according to Entrust, also estimating UMC's EPS should grow to NT$4.63 and NT$4.65 during the same time from NT$4.08 this year.
Attractive valuations for Taiwan's chip shares will emerge in the next six months due to cautious stock market performance, giving investors an opportunity to accumulate them, according to National Securities in Taipei, which recommends TSMC, UMC and DRAM maker Nanya Technology Corp. (Q.NYT).
The valuations based on a roughly 30% compounded average growth rate for capacity expansion planned by the three firms between 2000-2002 imply "stronger sales momentum and resulting bottom line earnings," according to National Securities.
The under-supply situation isn't much different for the island's memory chip makers, which also fell in sympathy to Intel's woes. However, analysts say the poor performance should continue for a few months yet as high inventories slacken demand for DRAM makers.
Wu figures another 10%-20% downside might be in store for DRAM stocks.
Benchmark DRAM shares Mosel Vitelic Inc. (2342.TW), Winbond Electronics Corp. (2344.TW), Powerchip Semiconductor Corp. (Q.PWC), Promos Technologies Inc. and Nanya Technology have dropped an average 20% each in the past four sessions. They are down an average 44% in the past month.
Albert King, fund manager of the US$300 million Taiwan Fund at China Securities Investment Trust in Taipei remains "cautious" on DRAM stocks in the fourth quarter because anticipation of a supply shortage earlier this year prompted inventory pile ups that now have to be digested.
Inventory Overhang Temporary
Indeed, one standard 64-megabit DRAM is now priced around US$6 in the spot market, well below the US$10 forecasted earlier this year.
"Companies bought more DRAM (chips) than they needed and investors bought more DRAM stocks than they needed," says King, pointing out the expected 5%-10% shortage in DRAM chips that was being forecasted for the latter months of 2000 has likely become a 15%-20% oversupply in the near term.
However, once inventories and expectations for DRAM chips come down, more gains are likely going into 2001.
"We're not at the end of the long-term cycle for DRAM which began in late 1998. The long-term stock price trend is still intact," King says, predicting DRAM stock prices should soar to record highs next year.
Merrill Lynch has an intermediate buy recommendation for Winbond in a recent DRAM report stating, the sector's "short-term inventory overhang should be relieved quickly."
Though worries remain over high oil prices that might cause global investors to retreat from Asian shares as a whole, in addition to domestic uncertainty over the government's tax and economic policies weighing on overall market sentiment, some analysts say investors shouldn't shy away from the chip sector's solid fundamentals. |
