Tech Hardware Supply Chain - Gazhoo

Bhavin Shah
(852) 2800-8538
bhavin.a.shah@jpmorgan.com
Bhavin Shah AC
(852) 2800-8538
bhavin.a.shah@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
Patrick Liao
(886-2) 2725-9874
patrick.kh.liao@jpmorgan.com
J.P. Morgan Securities (Taiwan) Limited
Figure 204: Top four foundry shipments
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
330
000's unit
Foundry
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
Top 4 foundty shipment Y/Y grow th %
Asia Pacific Equity Research
20 April 2009
A sharp fall in revenue following seven years of expansion
After the 2001 downturn, the foundry industry has seen relatively healthy unit and
revenue growth. Revenue growth has lagged unit growth primarily due to the 2003-
2006 period of aggressive pricing, driven by the new entry of SMIC. From 2H07,
foundries’ ASPs have been fairly stable. However, starting from 4Q08, driven by
inventory correction as well as end-market decline, foundries have entered a period
of very sharp decline. We expect foundry revenue to decline by 25% in 2009.
Capex and R&D budgets under pressure; capital intensity declined to a new low
For 2009, we expect capacity growth of 7% for the top four foundries and the overall
foundry industry. In 2008, the aggregate capex-to-sales ratio of the top foundries fell
below the trough value since 2002 and will likely fall further to a new low in 2009.
Capex and R&D go hand in hand. If leading-edge capex is terminated, R&D on
leading-edge loses its relevance. Over the past five years, CHRT has spent US$500
million or more on R&D and US$2 billion on capex with no results. We believe
foundries will not be able to raise capital from the market, and with cash balance
running down, we believe all the foundries, but TSMC, will have to make the
virtually inevitable decision of giving up aggressive investments in leading-edge
technology.
We believe SMIC will finally slow its investment in China foundry capacity, but the
investments by Chinese local governments in Wuhan, Chendu and Shenzhen are not
transparent, which we believe will be the hidden capacity in 2009. Besides,
Vanguard had invested aggressively in 2007 to acquire Winbond DRAM 8-inch fab 4
and 5, and is now running at partial DRAM capacity to be converted to logic. The
benefit of capacity increase was not visible in 2008, and we believe it will remain a
heavy burden; we do not expect it to turn around in 2009.
7-yr CAGR 25% -24%
YoY
Source: Company reports, Bloomberg, J.P. Morgan estimates. Top four foundries include: TSMC,
UMC, CHRT, SMIC. Estimates for SMIC are based on Bloomberg consensus and company
guidance.
80%
60%
40%
20%
0%
-20%
-40%
-60%
Figure 205: Top four foundry sales
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
US$m
7-yr CAGR 18%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
Top 4 foundty sales Y/Y grow th %
-25%
YoY
Source: Company reports, Bloomberg, J.P. Morgan estimates. Top four foundries include:
TSMC, UMC, CHRT, SMIC. Estimates for SMIC are based on Bloomberg consensus and
company guidance.
80%
60%
40%
20%
0%
-20%
-40%
-60%