SEMI-confusion

September 1, 2006

SEMI-confusion

(c) copyright View from Silicon Valley, 2006. All rights reserved.

Demonstrating their can-do initiative, the Wall Street cheerleaders announced last week the "rock" of the semiconductor business was in SEMI equipment rather than the SIA chip sales. Other than because it was SEMI's "turn," there was no public info suggesting this was a particularly brilliant call by VLSI Research and J.P. Morgan. But, hey, these guys need to earn their commissions somehow. ("It's always a bull marker somewhere.")

We concede it is not impossible SEMI stocks could be at the start of the long climb implied by the so-called research but news released in the following days casts doubt.

On August 26, 2006, we wrote, "Why upgrade SEMI now?" An examination of the actual SEMI numbers seemed to build more of a "sell" case than a "buy" case, yet VLSI Research and J.P. Morgan upgraded the sector (coincidentally?) within a day or two of one other.

Then on August 28, EETimes puts out,
"Capital spending slowing at Intel, foundries."

This article included such tidbits as,
" Intel... reduced its 2006 capital spending guidance," for the second time.

Inside the article, we also found,
"Foundries in general have not been spending much in the recent quarters and our checks indicate that they might not be coming back for at least another two quarters."

and,
"We are expecting [(Novellus) December quarter] orders to decline 10-15 percent quarter-over-quarter."

This news emerges literally days after Wall Street trumpets major upgrades for SEMI stocks???

Not to worry, the article quotes a guy form Novellus intoning,
"China is growing faster than the overall equipment market."

"Interestingly" (in the Chinese sense of the word), the same day we get,
"Deflated expectations in China's IC biz,"
with the sub-headline,
"Fab growth has slowed, taking the air out of China's high-flying equipment market."

It says SMIC "was aggressively ramping up, and dozens of fab projects were being announced--so the optimism was probably justified. But 'many of the fabs have not been built.'"

Maybe somebody needs to send a memo to Novellus?

The article goes on to say, the current expectation in China is $2.3B in SEMI sales, down from $3.3B forecast earlier in 2006. (A -30% decrease.) They don't expect to reach even $3B until 2009. (That's ~9% CAGR, which is dramatically slower than SEMI's 2006 y-o-y running at +20% billings and +47% bookings.)

It also notes,
"The slowdown in China's fab growth validates another recent report from SEMI that said half or more of China's fab projects are likely to fail."

and,
"a market research firm, has reported that at least 43 fabs were scheduled to be built in China between 2004 and 2008.

"After the growth spurt of the previous five years, it may be challenging to achieve this goal. Already, some fabs have hit hard times, reportedly seeking delays on loan repayments, pushing out ramp-up schedules or seeking unusual arrangements to survive or break into the business."

Doesn't this make you want to run out and buy SEMI stocks?

Then August 29, we got,
"Asia scored 90% of 2005 foundry revenues, says analyst."

It included,
"With the foundry business centered in Taiwan, and major memory makers located nearby in Japan and South Korea, China is expected to drive the next manufacturing growth wave."

But wait, didn't the article yesterday say expectations in China were being reduced? Are the global growth prospects for SEMI so poor that China at a mere 9% will be the best in the world?

Conclusion:
If there is unifying theme in these anecdotes it would seem to be that a lot of SEMI growth forecasts are, or were, predicated on new Chinese fabs needed to service the insatiable demand for chips. Since our readers know wafer area shipments are already growing faster than SIA sales, this is hardly surprising.

However, most relevant to our whole diatribe was the comment buried in the middle of the "Deflated Expectations..." article,
"A slowdown in China's chip consumption may also be putting a damper on things."

Did anybody see a comment to that effect anywhere else? Now that's news!

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The above is not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Buy and sell at your own risk (just like we do.)