Pricing Pressure for Siliconware

Siliconware Precision Industries Co., Ltd. (SPIL - Analyst Report) reported a weaker first-quarter of 2008 than expected, with revenues and earnings below our estimates. The company has reduced its Capex [capital expenditure] budget for 2008 and is experiencing severe pricing pressure in its memory testing business.

There is an indication of further erosion in gross and net operating margins in 2008 due to reduction in average selling prices in all three segments computing, communication and consumer. We were shocked by the revenue weakness due to its dependence on its top customers, and the uncertainty in global financial markets has left little upside to the stock, in our opinion, at this time. It is for this reason that we are maintaining our Hold rating on shares.

We are encouraged by the company's strong cost management and expansion efforts, which have maintained utilization rates in the high 95% range, although they are projected to come down in 2008.  We believe Siliconware will benefit from the continued trend towards outsourcing by integrated device manufacturers (IDMs). We are particularly optimistic about the prospects of the high-margin liquid crystal display (LCD) driver integrated circuit (IC) packaging business.

Shares of Siliconware are currently trading at 10.5x our 2008 earnings estimate of $0.67 and 8.5x our new 2009 estimate of $0.82. We have fixed our price target at $7.30 based on the company selling between 10.8x 10.9x our new 2008 EPADR estimate of $0.67, as 2008 has begun and we will have more visibility after 2Q08.

Udayan Mukherjee contributed to this report.

Read the full analyst report on SPIL

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