Tech Hardware Supply Chain - Gazhoo

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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%
Bhavin Shah (852) 2800-8538 bhavin.a.shah@jpmorgan.com Figure 206: Foundry capacity outlook 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 000's of 8" equiv . 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E Top 4 foundries Total foundry Top 4 foundries grow th Total foundry grow th 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. 60% 50% 40% 30% 20% 10% 0% -10% -20% Figure 207: Foundry capex outlook 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 US$ in millions 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E Top 4 foundries capex Total foundry capex Top 4 foundries grow th Total foundry grow th 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. Figure 208: Top four foundries' 2008/2009E capex change -200 -400 -600 -800 -1,000 -1,200 Figure 209: Top four foundries' aggregate capex-to-sales 20,000 16,000 12,000 8,000 4,000 0 -26.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 200 Capex (LHS) Sales (LHS) Capex-to-sales (RHS) Asia Pacific Equity Research 20 April 2009 -52.0% 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 0 -57.4% -29.6% -24.0% -34.9% 10.2% TSMC UMC CHRT SMIC Foundry capex 07/08 change Foundry capex 08/09 change Foundry capex 07/08 chg % Foundry capex 08/09 chg % -74.7% 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. 70% 60% 50% 40% 30% 20% 10% Figure 210: Capex-to-sales comparison among foundry companies 100% 80% 60% 40% 20% 0% 195% 145% 95% 45% -5% 0% -55% 20% -20% -40% -60% -80% 2002 2003 2004 2005 2006 2007 2008 2009E TSMC UMC CHRT SMIC Vanguard Source: Company reports, Bloomberg, J.P. Morgan estimates. 331
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