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July 28, 2006 2:18 am

Inventory issues set to affect TSMC

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Taiwan Semiconductor Manufacturing, the world’s largest contract chipmaker, yesterday said demand would be weaker in the second half due to inventory corrections in the electronics manufacturing chain.

The cautious forecasts confirm analysts’ concerns that inventories have been building in the industry. But TSMC’s outlook suggests the correction is far milder than the one seen two years ago.

In the second quarter, TSMC’s net sales rose to T$82.1bn (US$2.5bn) – 5.5 per cent up from the previous quarter and a 36.9 per cent increase over the same period last year. Consolidated net income was T$34bn, up 4.3 per cent quarter-on-quarter and up 85.1 per cent year-on-year.

Lora Ho, chief financial officer, said the results were driven primarily by sequentially stronger demand from its customers in communications and consumer segments. “Going forward, however, we expect the overall demand in the third quarter to be level or slightly down from the second quarter, in response to the correction of inventory in the supply chain,” she said.

Third-quarter revenue is expected to be T$79bn-T$82bn and the gross margin is expected to slide below 50 per cent from the 51.8 per cent seen in the second quarter, Ms Ho said.

Rick Tsai, chief executive, said TSMC’s capacity expansion would slow in response to the glut and capital expenditure could be at the lower end of the US$2.6bn-US$2.8bn range given earlier.

Mr Tsai also adjusted downwards his forecast for the semiconductor industry. The sector would grow to the low end of 8 per cent this year rather than the 8-12 per cent forecast, he said.

However, he said clients were more sensitive to inventory management than in 2004. Then the chip sector saw a sharp correction after demand failed to live up to rosy estimates and manufacturers took several months to digest inventories.

Analysts echoed Mr Tsai’s interpretation. “The third quarter is seeing continued inventory digestion but this time the correction will be much shallower than in 2004,” said Rick Hsu at Nomura in Taipei.

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