Semiconductor players set to ride industry recovery
Surging demand for consumer electronics driving upswing: analysts
By ROLAND LIM
WITH the increased demand for consumer electronics widely expected to fuel the recovery in the semiconductor industry this year, listed semiconductor players here look all set to ride this wave in 2006.
Jonathan Koh, an analyst with UOB Kay Hian wrote recently in a report: 'Semiconductor content in consumer electronics is increasing with the trend to digitise music, photos, videos and TV broadcasting. Another key driver is the convergence of computing, communications, networking and entertainment to create new generations of hybrid devices.'
He also noted that the semiconductor industry had bottomed out in Q105, and that demand has recovered since H205. 'Growth momentum has spilled over into 1H06 with stronger-than-anticipated retail spending during the holiday season. We expect the recovery to extend into 2006,' he said.
Separately, a Nomura International report predicted: 'Asia's top four semiconductor foundries to post stronger-than-seasonal quarter-on-quarter revenue growth in 1Q06'.
The US-based Semiconductor Industry Association (SIA) has also forecast worldwide semiconductor sales to increase 7.9 per cent to US$245.5 billion in 2006 and grow to US$309.2 billion in 2008. SIA predicted that the Asia-Pacific region will be the fastest growing market, putting on 11.4 per cent in 2006 to reach US$115.1 billion and eventually, US$150.4 billion in 2008.
'Semiconductor content in consumer electronics is increasing with the trend to digitise music, photos, videos and TV broadcasting.'
- Jonathan Koh,
UOB Kay Hian analyst
One of the trends in the semiconductor industry is the increasing reliance on semiconductor foundries such as Taiwan Semiconductor Manufacturing Co (TSMC) and Chartered Semiconductor Manufacturing for production, especially with the move from using 8-inch wafers to 12-inch wafers.
While the larger wafers help to reduce manufacturing cost by up to 30 per cent, UOB Kay Hian's Mr Koh noted that a 12-inch wafer fab costs US$3 billion to build - twice the cost of an 8-inch wafer fab. 'Many companies simply cannot afford these expensive fabs ... and few companies have the scale to keep the fabs running profitably around the clock at utilisation of 70 to 80 per cent,' he said.
As a result, he sees the trend of smaller players not building new fabs, and instead relying on foundries for production.
Another trend in the industry is the lower capital spending levels, as the industry consolidates and improves its efficiency. Semiconductor research firm IC Insights predicted that capital spending as a percentage of semiconductor sales will fall to 15 per cent after 2010, as compared to the historical average of 22 per cent. However, with the overall growth in the industry, capital spending is still expected to grow some 5 per cent in 2006.
Fabless chip makers have also grown to account from 3.5 per cent of global semiconductor sales in 1994 to 15.6 per cent in 2004. Global fabless semiconductor players with operations in Singapore include Xilinx, Broadcom, Marvell Technology Group Ltd and MediaTek Inc.
Mr Koh noted that this trend is 'positive for companies offering foundry and assembly & test services as fabless IC suppliers outsource all manufacturing requirements, thus providing a stable source of orders.'
All this bodes well for Singapore, which has many players in the semiconductor sector. Listed companies here that offer semiconductor products and services here include Chartered, Venture Corporation, Stats ChipPac, United Test and Assembly Centre (Utac) and Global Testing. Additionally, Asti Holdings, Advanced Systems Automation, AEM-Evertech Holdings, Manufacturing Integration Technology and Ellipsiz sell equipment used by chipmakers.
According to the Economic Development Board, Singapore has 14 wafer fabrication plants, 19 chip test and assembly operations and about 40 chip design centres. The semiconductor industry here employs about 33,750 people, and accounts for about 30 per cent of the electronics and precision engineering sectors' annual output of $93 billion.
Translating his analysis into stock calls, Mr Koh issued 'buy' calls on Chartered, Utac and Global Testing, with target prices of $1.60, $0.94 and $0.40 respectively. Chartered shares have risen about 38 per cent since Oct 19 last year, and closed at $1.31 last Friday. Utac shares hit a 20-month high of 86.5 cents on Jan 11 and closed at 84 cents on Friday. In the past three months, Global Testing has risen some 63 per cent from a low of 20 cents to close at 32.5 cents on Friday.
Nomura, however, maintained a 'neutral' call on Chartered, and provided a fair value estimate of $1.20 for it, saying that 'price competition, CSM's relatively slow ramp of its 300mm (12-inch) fab and the constraints of its balance sheet pose a concern'.
In a separate report from Kim Eng Securities, analyst Dharmo Soejanto also issued a 'buy' call on Global Testing, with a target price of $0.43. 'We believe the stock offers the best exposure to the current upswing in the semiconductor cycle given its focus on test services, which offer high operating leverage,' he said in the report.
However, not all semiconductor counters are poised to ride this wave. Mr Koh issued a 'sell' call on Stats ChipPac with a fair value estimate of $0.92. Shares of Stats ChipPac closed Friday at $1.05.
By ROLAND LIM
WITH the increased demand for consumer electronics widely expected to fuel the recovery in the semiconductor industry this year, listed semiconductor players here look all set to ride this wave in 2006.
Jonathan Koh, an analyst with UOB Kay Hian wrote recently in a report: 'Semiconductor content in consumer electronics is increasing with the trend to digitise music, photos, videos and TV broadcasting. Another key driver is the convergence of computing, communications, networking and entertainment to create new generations of hybrid devices.'
He also noted that the semiconductor industry had bottomed out in Q105, and that demand has recovered since H205. 'Growth momentum has spilled over into 1H06 with stronger-than-anticipated retail spending during the holiday season. We expect the recovery to extend into 2006,' he said.
Separately, a Nomura International report predicted: 'Asia's top four semiconductor foundries to post stronger-than-seasonal quarter-on-quarter revenue growth in 1Q06'.
The US-based Semiconductor Industry Association (SIA) has also forecast worldwide semiconductor sales to increase 7.9 per cent to US$245.5 billion in 2006 and grow to US$309.2 billion in 2008. SIA predicted that the Asia-Pacific region will be the fastest growing market, putting on 11.4 per cent in 2006 to reach US$115.1 billion and eventually, US$150.4 billion in 2008.
'Semiconductor content in consumer electronics is increasing with the trend to digitise music, photos, videos and TV broadcasting.'
- Jonathan Koh,
UOB Kay Hian analyst
One of the trends in the semiconductor industry is the increasing reliance on semiconductor foundries such as Taiwan Semiconductor Manufacturing Co (TSMC) and Chartered Semiconductor Manufacturing for production, especially with the move from using 8-inch wafers to 12-inch wafers.
While the larger wafers help to reduce manufacturing cost by up to 30 per cent, UOB Kay Hian's Mr Koh noted that a 12-inch wafer fab costs US$3 billion to build - twice the cost of an 8-inch wafer fab. 'Many companies simply cannot afford these expensive fabs ... and few companies have the scale to keep the fabs running profitably around the clock at utilisation of 70 to 80 per cent,' he said.
As a result, he sees the trend of smaller players not building new fabs, and instead relying on foundries for production.
Another trend in the industry is the lower capital spending levels, as the industry consolidates and improves its efficiency. Semiconductor research firm IC Insights predicted that capital spending as a percentage of semiconductor sales will fall to 15 per cent after 2010, as compared to the historical average of 22 per cent. However, with the overall growth in the industry, capital spending is still expected to grow some 5 per cent in 2006.
Fabless chip makers have also grown to account from 3.5 per cent of global semiconductor sales in 1994 to 15.6 per cent in 2004. Global fabless semiconductor players with operations in Singapore include Xilinx, Broadcom, Marvell Technology Group Ltd and MediaTek Inc.
Mr Koh noted that this trend is 'positive for companies offering foundry and assembly & test services as fabless IC suppliers outsource all manufacturing requirements, thus providing a stable source of orders.'
All this bodes well for Singapore, which has many players in the semiconductor sector. Listed companies here that offer semiconductor products and services here include Chartered, Venture Corporation, Stats ChipPac, United Test and Assembly Centre (Utac) and Global Testing. Additionally, Asti Holdings, Advanced Systems Automation, AEM-Evertech Holdings, Manufacturing Integration Technology and Ellipsiz sell equipment used by chipmakers.
According to the Economic Development Board, Singapore has 14 wafer fabrication plants, 19 chip test and assembly operations and about 40 chip design centres. The semiconductor industry here employs about 33,750 people, and accounts for about 30 per cent of the electronics and precision engineering sectors' annual output of $93 billion.
Translating his analysis into stock calls, Mr Koh issued 'buy' calls on Chartered, Utac and Global Testing, with target prices of $1.60, $0.94 and $0.40 respectively. Chartered shares have risen about 38 per cent since Oct 19 last year, and closed at $1.31 last Friday. Utac shares hit a 20-month high of 86.5 cents on Jan 11 and closed at 84 cents on Friday. In the past three months, Global Testing has risen some 63 per cent from a low of 20 cents to close at 32.5 cents on Friday.
Nomura, however, maintained a 'neutral' call on Chartered, and provided a fair value estimate of $1.20 for it, saying that 'price competition, CSM's relatively slow ramp of its 300mm (12-inch) fab and the constraints of its balance sheet pose a concern'.
In a separate report from Kim Eng Securities, analyst Dharmo Soejanto also issued a 'buy' call on Global Testing, with a target price of $0.43. 'We believe the stock offers the best exposure to the current upswing in the semiconductor cycle given its focus on test services, which offer high operating leverage,' he said in the report.
However, not all semiconductor counters are poised to ride this wave. Mr Koh issued a 'sell' call on Stats ChipPac with a fair value estimate of $0.92. Shares of Stats ChipPac closed Friday at $1.05.
posted by SmartYInvestor at 12:03 PM
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