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Outlook for semiconductor foundries stable despite tempered momentum, says credit ratings agency

Outlook for semiconductor foundries stable despite tempered momentum, says credit ratings agency

Credit ratings agency Fitch Ratings said on Thursday that its outlook for Asia's dedicated integrated circuit foundry (DICF) operators remains stable despite a likely contraction in the growth momentum of the sector.
Companies reviewed in Fitch's special report included Taiwan Semiconductor Manufacturing Company Limited, United Microelectronics Corporation, Chartered Semiconductor Manufacturing Ltd. and Semiconductor Manufacturing International Corporation.
Those players are the top four DICF operators in the world, the credit ratings agency said.
"Global economic activity is likely to slow down this year, putting pressure on the operating results of DICF companies," said Kevin Chang, associate director in Fitch's Asia-Pacific telecommunication, media and technology team.
"However, Fitch's assigned ratings and outlook of DICF companies have already factored in this cyclical nature of the sector."
Fitch added that the increasing level of production outsourcing by integrated device manufacturers (IDMs) and the rise of the fabless IC companies will continue to benefit the DICF sector, allowing the sector to maintain its growth momentum in excess of the overall semiconductor industry and expand its share of global IC production over the next two to three years.
The top four DICF players had reported healthy operational performance last year, said the agency.
"Profitability has generally improved on the back of increased shipments, although average selling price performance is mixed across the group," Chang said.
"In addition, overall capacity utilization has improved last year notwithstanding the increase in 12-inch wafer fabrication capacities."
The higher operating cash generation in 2006 has led to a general reduction in debt, improvement in leverage position and stronger free cash flow for the sector, despite high capex and rising shareholder distribution, Fitch said.
In particular, Fitch underscored TSMC's better credit metrics compared to its peers, given its advantages in capacity scale and utilization, technology capability, pricing, customer mix and financial flexibility.
In the agency's opinion, the sector's competitive landscape will maintain the existing status quo in spite of the intensifying competition and narrowing technology gap between major players and challenges from IDMs.
"Of special mention is CSM, which has significantly narrowed the time for the introduction of new technologies as compared to its Taiwanese competitors, as well as provided a defined path for technology advancement," Fitch said.
However, the agency said funding for capital expenditures and research and development remains a much greater burden for CSM and SMIC than for TSMC and UMC.
The agency said it believes the credit profile of the sector will continue to move in line with the semiconductor industry cycle.
In addition to event risk from industry consolidation, various concerns facing the sector included continuing cyclicality, intensifying competition, consistent pricing pressures, rapid technological changes and the constant need for hefty capex.