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Taiwan Semiconductor (TSM) this morning reported Q1 results that were much better than the company had forecast in March - and said it expects a sharp rebound in performance in the second quarter. The upbeat report follows a similar turnaround story reported earlier this week by fellow chip foundry United Microelectronics (UMC).

United Microelectronics (UMC) shares are rallying sharply this morning on signs of improvement in the Taiwan-based contract chip manufacturer’s business.

Yesterday, UMC reported February sales of NT$3.143 billion, down just 0.3% from the $3.153 billion posted in January, although off 56.9% year over year. But in the current environment, flat is the new up: the Street was enthused to see a sign that demand might be bottoming. Earlier today, I noted that UMC rival Taiwan Semiconductor this morning raised its Q1 guidance.

Taiwan has unveiled a plan to rescue the company’s suffering memory chip sector.

The chip analysts at UBS turned bullish this morning, raising their ratings on a slew of stocks on the theory that the industry’s historically low utilization rates have likely troughed. UBS thinks year-over-year sales declines will likely hit bottom in the June quarter; the firm notes that “under-shipment of end consumption” should clear excess inventory over the next 1-2 quarters. While UBS sees industry revenues down 35% this year, they expect a rebound of 10% in 2010.

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.