Contract Chip Fabs: Merrill Turns Bullish

Merrill Lynch analyst Daniel Heyler this morning turned bullish on the contract semiconductor manufacturing sector, asserting that a bottom to the current cycle is in sight. In a research note, Heyler asserts that inventories should bottom in Q2, with a modest second half recovery likely in the second half and a strong rebound in demand in 2010. He asserts that valuations in the sector are on average 45% below his mid-cycle fair value estimates. He thinks the stock should reflect a 2010 recovery within 12 months.

Heyler thinks that “logic IC inventory should peak in Q1, but should decline sharply in Q2 which likely positions the sector for a Q3 recovery.” And he adds that “modest growth could transform into an all-out supply chain rebuild if electronics end-demand show positive growth” in the second half.

Heyler upped his ratings on a host of companies in the sector:

• United Microelectronics (UMC), Chipbond (6147.TWO), Advanced Semiconductor Manufacturing (3355.HK), and Kinsus (3189.TW) were upgraded to Buy from Underperform.


• Taiwan Semicondcutor (TSM), Chartered (CHRT) and Advanced Semiconductor Engineering (ASX) were upgraded to Buy from Neutral.


• Semiconductor Manufacturing International (SMI), also known as SMIC, was upgraded to Neutral from Underperform.