China Shows Hope to Chipmakers

The Chinese stimulus package announced in November last year has started impacting demand for consumer electronics products. Statistics released by the Chinese government indicate a 15.2% increase in May retail sales, the highest in four months. This, in turn, is pushing up demand for semiconductors used in cell phones, TVs and other electronic gadgets. During the course of the past one month, the top four foundries have turned more optimistic, citing higher Chinese demand and strength in consumer and computing markets.

Taiwan Semiconductor Mfg. Co. Ltd. (TSM - Analyst Report), the largest semiconductor foundry, went back on its decision to cut capex spending in 2009. The company raised its capex estimate from $1.5 billion to $1.9 billion, similar to 2008 levels. It also decided to increase R&D headcount by 360 and design technology headcount by another 90. While the company's profitability could look like a positive in comparison to peers, TSMC continues to suffer the impact of a stronger Taiwanese dollar. This impacts profitability and makes it less competitive. Considering the given situation, one does wonder whether the headcount additions were not the result of last month's labor unrest rather than management's immediate plans to make R&D investments.

United Microelectronics Corp (UMC - Analyst Report) management sees a somewhat brighter future, driven by the Chinese market. However, significant improvement in results may not be evident until a revival of demand in the U.S. and Europe. Texas Instruments Inc's (TXN - Analyst Report) revised guidance would no doubt be a positive for the foundry, since TXN is a major customer.

Chartered Semiconductor Mfg. Ltd. (CHRT - Snapshot Report) joined the top two, raising its revenue estimate by 20%, and now expects second quarter revenue to increase 60% sequentially. Management stated that the stronger demand was at its mature processes.

Semiconductor Manufacturing Int'l (SMI - Snapshot Report) management was particularly upbeat, raising Q2 guidance from a sequential increase of 60% to 77%. Although the company did not provide an outlook for the rest of the year, management indicated that the stronger domestic market could enable SMI to turn in profits next year. We remain skeptical, since the company reported losses in each of the preceding four years.