Morgan Stanley Report on Semi Conductors

Summary & Conclusions
We believe that, for all three Singapore semiconductor stocks,
the upside risks outweigh the downside risk. We expect each
of the companies to gain market share in FY06 and hence
grow their revenue at a pace faster than the industry. The
market share gains should be driven by new customers and
potential overflow business. High revenue growth, combined
with operating leverage from stable to improving pricing,
should result in extremely strong earnings growth in FY06E
from depressed levels in FY05. Finally, all the stocks are
trading at reasonable valuations that are close to mid-cycle
levels, on our estimates. We expect the stocks to deliver 18-
27% returns over the coming year.
Of the three stocks, we prefer STATS over UTAC and
Chartered. We think STATS offers the greatest stock price
upside potential near term. On the back of a significant
improvement in earnings, we expect the stock to trade up to
15x P/E and 1.3x P/BV, implying 27% upside potential to
S$1.35 per share over the coming year.
In our view, there are three likely catalysts for STATS’ stock
price.
1. Strong revenue growth. We forecast strong revenue
growth, given STATS’ exposure to the high-growth
consumer and communications segments and potential
overflow business due to extremely tight capacity
utilization at its Taiwanese peers.
2. Improving margin. Stable to firm pricing should provide
operating leverage.
3. Recent underperformance. While the stock prices for
all its peers in Singapore and regional markets have risen
significantly, STATS is still trading at close to trough value.
Hence, it offers most compelling valuation, in our view.
Comparative Analysis
We rate Singapore semiconductor stocks on various criteria
as highlighted in Exhibit 1. We prefer stocks that can deliver
upside surprise and enjoy earnings momentum, and where
the consensus is lagging fundamentals and the stock
performance has lagged. Based on these criteria, we rate
STATS as our top pick, followed by UTAC and Chartered.