Chip Fabs: Merrill Turns Cautions On The Sector

Bank of America/Merrill Lynch analyst Daniel Helyar this morning turned cautious on the semiconductor contract manufacturing sector, down grading most of the stocks in the group given elevated valuations and weak near-term cyclical indicators.

The firm made the following downgrades:

• Taiwan Semiconductor (TSM) to Neutral from Buy


• Siliconware (SPIL) to Neutral from Buy


• Advanced Semiconductor Engineering (ASX) to Neutral from Buy


• ASM Pacific (0522.HK) to Neutral from Buy


• Kinsus (3189.TW) to Neutral from Buy


• United Microelectronics (UMC) to Underperform from Neutral


• Semiconductor Manufacturing International (SMI) to Underperform from Neutral

Helyar notes that the stocks in the group are up 45%-55% from February are within 10% of mid-cycle fair values.

Even if there is a significant recovery in logic IC demand in the second half, Helyar thinks there will a rising customer inventories, increasing the chances for order cuts in Q4 2009 and Q1 2010. “If demand meets forecasts, as hopes, then logic IC inventory should remain manageable and stocks should remain range-bound,” he writes. Disappointing demand, he adds, would put pressure on the stocks. “We would revisit the group when the overbuild reverse, inventory risk abates and 2010 visibility improves.”

Helyar said the downturn has been too brief to push out marginal players; the result is that the logic industry may remain saddled with excess 200 mm production capacity until mid-2010. And he adds that the 300 mm competitive landscape “”is not improving as quickly as we had expected due to the short, sharp nature of the downturn.”