Despite severe 4Q08, expect deeper
1Q09 trough and large consensus cut
􀀗 Downturn depth will soon be clear,
shifting focus to trajectory of recovery
􀀗 Resetting forecasts and targets;
downgrading Chartered and SMIC
Deeper 1Q09 hole – 1Q09 will mark the cycle trough, in our
view, albeit with a deeper than expected “hole” due to weak
end demand resulting in excess semiconductor inventories
into 1H09. Consequently, we are making yet another preemptive
strike on our below-Street forecasts ahead of 1Q09
earnings season. We expect consensus estimates to follow.
Confirming the 1Q09 trough – The speed/magnitude of the
current downturn is now recognized as worse than the
bursting of the 2001 tech bubble. Notably, we estimate that
foundries’ quarterly-sales trough (1Q09) is only 50% higher
than the 2001 trough, despite much larger and more diverse
end-markets. For example, iPods were still on the drawing
board back then and the mobile phone market is 2.5x larger
today. Today’s semiconductor market is also nearly double
2001’s, and annual chip unit sales are 2.5x larger. We
consequently view the current low levels as unsustainable.
Recovery arithmetic – Following a likely deeper 1Q09
quarterly revenue trough, we note that assuming 15-20% qo-
q growth for the rest of 2009 still results in a roughly 40%
decline in full-year revenue for the foundries (compared to
consensus of a 22% decline). Even after consensus forecasts
adjust during earnings season, risks still exist should the
trajectory of the recovery push-out or ramps more slowly.
The good news is that the quarterly exit run-rate in 4Q09
likely sets the scene for 30%+ y-o-y growth rates in 2010.
Picks and Pans – We maintain our Overweight (V) rating
on TSMC, and downgrade Chartered and SMIC to
Underweight (V) from Neutral (V) as we forecast negative
gross margins for most of 2009. Within semi equipment, we
prefer Chroma ATE - OW(V) over ASM Pacific - N(V) and
would accumulate the former on any downside following the
likely cut to consensus given that it trades at 10x trough
earnings. We remain Neutral on both ASE and Siliconware,
but favour the latter for its consistency and less debt.