3Q ahead of expectations with 4Q better
than seasonal. Raise estimates
􀀗 Utilization rates full, capex ramping,
65/45nm accelerating. Demand better
than feared with inventory controlled
􀀗 Upgrade SMIC, but downgrade Chroma
2H10 tracking ahead Following recent meetings in Taiwan
and Shanghai, we believe our 2H09 estimates are too low.
We expect positive revenue/margin surprises this earnings
season with better than seasonal 4Q09 guidance as
utilization rates remain high and 65/45nm mix improves.
Some scepticism remains, but demand proving better
than feared Many management teams remain sceptical
(which we view as healthy) and are laser-focused on Golden
Week/Windows 7 sell-through and inventories. In fact,
initial China datapoints suggest relatively strong holiday
sales and commentary from others like Acer and Intel also
support broader-based “better than feared” demand trends.
Raising forecasts We raise our 2009/2010 revenue
forecasts by approximately 5-10% based on a stronger 2H09.
We now forecast 15-20% y-o-y growth next year, which
may prove conservative given easy 1Q09 compare and only
flattish y-o-y growth forecasts for 2H10.
Remain selective. Reiterate OW(V) on UMC and
upgrade SMIC to OW(V) on favourable risk/reward
While likely controversial, we upgrade SMIC based on
surprisingly clear visibility with q-o-q growth likely in both
4Q09 and 1Q10. Margins are also recovering on improved
mix, utilization and lower depreciation. The company is free
cash flow positive for the first time in a decade and it looks
sustainable. At 0.5x book value, risk/reward is favourable.
Downgrade Chroma ATE to UW(V) Shares up 40% in
last 90-days on EV/battery hype. We’re excited too, but it
will take time to have a meaningful impact.
Key risks – We view the primary near-term risks as margin
pressures from TWD appreciation, rising gold costs and any
potential year-end inventory resulting in below seasonal
1Q10. Also Street expectations all migrating towards a better
than seasonal 4Q09 may limit ability for upside surprise later.