Spreadtrum Communications, Inc. (SPRD)

[nicmar]

Merrill Sees Supply Chain Disruption, Cuts Ratings On Fabs

Mar. 29 2011 - 10:25 am comments
By ERIC SAVITZ

Citing interruptions in the global semiconductor supply chain triggered by the quake and tsunami in Japan, Bank of America/Merrill Lynch analyst Daniel Helyar this morning turned bearish on the contract chip makers and related companies.

Helyar cut his ratings on Semiconductor Manufacturing International (SMI), United Microelectronics (UMC), Advanced Semiconductor Engineering (ASX), Spreadtrum (SPRD) and Siliconware (SPIL) to Underperform from Buy; he also reduces Taiwan Semiconductor (TSM) to Neutral from Buy. (He also trimmed ratings on some additional stocks not traded in the U.S. markets.)

The Merrill analyst notes that the firm last week cut projected 2011 logic IC shipment growth to 7.7% from 10.6% – and this morning, Merrill slashed its forecast for the semi manufacturing sector to 3.6% from 18%. Helyar writes that that manufacturers have started to cut orders to chip suppliers, and that chip maker cuts to the contract fabs are likely to follow. Margins among the fabs “are vulnerable to a decline in utilization as capex push-outs may be modest given expectations for a snap-back in 2012,” he writes.
Helyar expects a 10%-15% shortage of 300mm wafers in the second quarter, with a more than 20% shortfall in BT-based substrates, with additional shortages of hard-drives, oscillators, multi-layer ceramic capacitors and other parts. And he adds that “the real shortage levels are likely to be higher than the nominal levels since large customers are currently hoarding supply,” a factor that “will likely exacerbate shortages elsewhere in the supply chain and distort the supply/demand balances throughout the supply chain.”

Helyar notes that equipment manufacturers are likely to reduce orders to avoid a sharp increase in their inventory of work in progress. “OEMs are starting to put a brake on orders, which is likely to weaken semi logic shipments from Q2-Q4,” he writes. “Share prices have partially discounted supply chain risks but appear to be discounting a one-quarter interruption rather than two-quarters or longer, in our view. We anticipate downside to earnings expectations and expect the stocks to trade on 2011 [estimated] earnings.”

Most of the affected stocks are trading lower this morning.