No need to get away from chips, analysts say

By Noah Weston, Special to The China Post

While Taiwan semiconductor foundries are taking a hit of late, thanks to broad anti-tech sentiment and spillover from U.S. probes into the pricing practices of DRAM makers, many analysts see bargains in chip heavyweights such as Taiwan Semiconductor Manufacturing (TSMC) and United Microelectronics (UMC).

But as share prices in local foundries approach levels not seen since November of last year, business prospects continue to look good, say analysts. TSMC reported that May sales were NT$15.2 billion, up 14 percent from April, and 78 percent higher than the same period last year. UMC profits were up month-on-month an even more dramatic 27 percent, with NT$6.6 billion in May sales representing a 34 percent hike over last year. Executives at both companies further note that expectations for sales growth are continuing at least for the next few months. But fears about a slow recovery in end-demand for PCs and other technology products may not be entirely misplaced, and the recent downward revisions to earning projections from Intel highlight this point, analysts say. Merrill Lynch also issued a report downgrading Intel and other U.S.-based semiconductor companies. Add to this general fear the fact that the U.S. Department of Justice has served subpoenas on several computer memory-chip makers, and investors seem to have more to worry about and less to cheer about.

Analysts, however, argue that Taiwan foundries are taking an undue share of the pain. First, the business focus is slightly different from U.S. operations. While Intel relies on the PC market for 80 percent of its revenues, Taiwan foundries look to PCs to fill only 50 percent of their coffers, with the remainder coming mostly from communications and consumer electronics. And the long-term strategy of foundries looks good in the context of industry trends, say industry experts. As the costs of setting up plants increase, and as end-demand continues to be wrenched by volatility, the argument for outsourcing actual production operations to chip foundries such as those in Taiwan resonates more strongly. “While there are some cyclical issues, and the likelihood of a recovery is being pushed back all the time, we continue to like the Taiwanese foundries because the outsourcing story is a very strong one,” Kes Visuvalingam, director of Asian equity at First State Investments, tells the Asian Wall Street Journal. And Merrill Lynch agrees, saying that while U.S.-based semiconductor firms were out, Taiwan foundries still looked good earlier this month, thanks to strong strategic positioning and lower valuations. UMC, for example, is trading around 2.6 times its book value, according to the Journal. This measures well on the historical range of between 1.3 and 8.5.