Semiconductors
By OCBC Research
The Philadelphia Semiconductor Index had shot up 36.8% since March 2009 amid early optimism of a market recovery. In stark contrast to the negative outlook given just towards the end of 2008, major semiconductor companies, including foundries like TSMC and UMC, are now citing improvements in orders and better utilization rates.
A report released over the weekend by Semiconductor Industry Association (SIA) had also suggested that the semiconductor demand has stabilised somewhat, with global sales up 3.3% month-on-month (m-o-m) in March vs. 7.6% m-o-m decline in February.
Chartered Semiconductor and Micro-Mechanics (MMH) had similarly cited demand pickup during the period, partly buoyed by introduction of new products and/or inventory re-stocking.
However, as with many companies, the improved orders were not enough to bring them bring back to profitability. As such, both Chartered (UMC and SMIC alike) and MMH registered significant losses in 1Q09.
For Chartered, it was hit by lower revenue, high fixed costs and lower utilization rates. As for MMH, it was mainly dragged down by low business volumes, high fixed costs at its custom machining & assembly (CMA) plant in US, and to a lesser extent, price pressure. We believe we may see downside earnings surprise for Avi-Tech Electronics as well.
There is scant evidence in the near term that points to a sustainable recovery in semicon demand. Nearly all sectors in the electronics industry (key markets for semicon industry) were poised to report dismal performances in 2009, as consumers cut spending in face of the global recession.
Moreover, it is likely to continue to be mired by great uncertainty and limited visibility while the crisis plays out. As it is, industry watcher Gartner has recently projected the Asia-Pacific chip market to fall 22.7% to US$115.2 billion and global semicon revenue to fall 24.1% to US$194.5 billion in 2009.
Until we see clearer signs of a firming up in the semicon demand, backed by leading indicators and economic data, we maintain our Underweight rating for the semiconductor industry. Additionally, we keep our Hold rating on Avi-Tech (Fair Value: S$0.11) and MMH (FV: S$0.19), and Sell rating on Chartered (FV: S$0.08 before share consolidation), as the latter may not be able to return to profitability in FY10 and its re-financing issues continue to be a concern.
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