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Technology Stocks : Taiwan Semiconductor (NYSE: TSM) -- Ignore unavailable to you. Want to Upgrade?

To: tom who wrote (492)	5/14/1999 3:12:00 AM
From: tom	Read Replies (1) \| Respond to of 684

H&Q on the TSM and the ADR premium The guy who wrote this, Lucas Ward, used to work at Goldman Sachs who were very close to TSMC. He's probably one of the best analysts on the stock. Lucas Ward 415 439 3237 lward@hamquist.com Semiconductor and Systems Research Hambrecht & Quist TSMC's ADR has been under pressure in the past week due to 2 factors: 1) market concerns that utilization could soften over the summer, and 2) approval by TSMC's board for holders of Taiwan local shares to sell into the ADR market, which is currently at a 44% premium. While we see no evidence of business softening, we are concerned about the potential "overhang" of local shares for the ADR. Despite this, we believe that fundamentals are very supportive of both a higher ADR and local share price, and would view any softness in the ADR as a buying opportunity. Business looks great. Based on anecdotal evidence from TSMC customers, as well as conversations with TSMC's US and Taiwan sales organizations, we see no evidence of softening in utilization, at least through July. In fact, TSMC continues to report a lengthening backlog, and customers asking for more wafers than TSMC can deliver. Last night, TSMC put out a press release indicating that it expected near full utilization in June of 8" capacity, a book to bill above 1, and strength expected to build through the end of the year. We believe such strength is supported by the global backdrop, which appears healthy for most segments of the semiconductor industry, driven by i) strong demand growth in communications and consumer, ii) relatively conservative investment and high current utilization rates among semiconductor majors, and iii) lower inventories throughout the electronic supply chain following the massive correction during 1998. National Semiconductor fab sale emblematic of outsourcing megatrend. The outsourcing trend continues to gain momentum, due to on-going strength in the fabless sector and a greater willingness by vertically integrated semiconductor majors to take advantage of foundry economics and outsource on a strategic, rather than a tactical basis. Last week, National Semiconductor announced it would like to sell part or all of its newest fab in Portland Maine to a third party, preferably a foundry. National joins the growing list of IDMs wishing to partner with foundries to meet the requirement for next generation process technology. Because the outsourcing opportunity is still largely un-penetrated (TSMC represents less than 5% of the COGS of the semiconductor industry), we believe that greater outsourcing can generate strong secular growth for TSMC, even in an environment of sluggish or flat semiconductor sales. In the current environment of tightening global capacity and healthy semiconductor demand, TSMC actually runs the risk of not being able to bring on capacity fast enough to meet growing demand from existing and new customers. Obviously, this is a high quality problem. New supply of ADRs a mixed blessing for ADR holders. On May 11, TSMC's board approved in principal the sale by holders of greater than .02% of TSMC's local shares into the US ADR program. This amounts to positions of greater than US$4 mn at the current local share price. With the US ADR premium currently at greater than 44%, the potential "overhang" of local shareholders wishing to realize a higher price by selling in the US could create substantial selling pressure on the US ADR. While this is a concern for ADR shareholders, we believe several factors will mitigate the adverse impact: * Each sale has to be approved by TSMC's board of directors as well as Taiwan and US regulators. Thus, the board has the power to prevent a "disorderly" collapse in the premium by regulating each transaction. * No more than 0.5% of the company can be sold into the US in a given quarter. Currently, about 5% of TSMC's shares outstanding are in ADR form. * The underlying fundamentals of the company are currently very favorable, supporting both a higher local and ADR share price. Ultimately, the sales will create greater liquidity on the NYSE, and therefore broader participation by US investors. Over time, the sales are bound to result in a lower ADR premium, although not necessarily a lower ADR share price. We would view any ADR price weakness associated with greater supply of ADRs as a buying opportunity, given TSMC's unique positioning as the world's premier semiconductor outsourcing play in an environment of tightening global capacity and increased use of outsourcing.