|TSM: Goldman Cuts to Hold, Sees Risk of Inventory Build in Second Half|
By Tiernan Ray
Goldman Sach’s Donald Lu today cut his ratings on chip foundries Taiwan Semiconductor Manufacturing (TSM) and United Microelectronics (UMC) after concluding that wafer shipments are rising faster than revenue at customers this quarter, threatening results for the rest of the year.
Lu cut his rating on TSM to Neutral from Buy, and cut UMC to Sell from Neutral. In particular for the stocks, he notes that TSM’s manufacturing “utilization” may now be at about 98%, which would pose a problem if true, because “In the past, TSMC shares have rarely outperformed the market once its utilization has surpassed 95% due to cyclical concerns.”
As Lu sees the big picture,
Our recent channel checks indicate that wafer orders have remained stable at TSMC, UMC, SMIC (Not Covered) and GlobalFoundries. We expect total shipment of TSMC, UMC and SMIC (I/B/E/S consensus estimates for SMIC) to rise 20% and 8% qoq in 2Q12 and 3Q12, respectively. Their customers’ inventory has increased 3% qoq in 1Q12, indicating foundry shipment was above the sell-through in 1Q12, and is on track to increase meaningfully in 2Q12 because foundry customers guided their revenue to increase only 4.2% qoq in the same period. Meanwhile, macro uncertainties, tepid PC and industrial demand, as well as muted end-demand in China and Europe indicate that the sell-through is unlikely to be above seasonal trends in 2H12. As such, we expect semiconductor inventory to increase in 2Q12-3Q12, and potentially correct in 4Q12. In our view, this correction could be moderate as we have just had an inventory correction in 4Q11-1Q12.
Lu notes that he still likes the long-term earnings potential for TSM, especially as it gobbles up share of manufacturing for chips with 28-nanometer feature sizes.
TSM shares today are down 7 cents, or half a percent, at $13.86, while UMC stock is down 7 cents, or 3%, at $2.20.
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