WRAPUP 2-Elpida, TSMC strong in Q3 as small rivals struggle

* Elpida sees flat Q4 output, to hike capex 67 pct in 09/10

* Elpida puts investment in TIMC on hold

* TSMC profit biggest in 2 yrs, eyes doubled capex

* NEC, Advantest narrow Q3 net loss, orders rising (Recasts; adds analyst comment)

By Mayumi Negishi

TOKYO Jan 28 (Reuters) - Chipmakers Elpida Memory Inc 6665.T and TSMC (2330.TW) posted strong third-quarter results on Thursday amid a fragile industry recovery in which smaller firms are struggling and fears are circulating of a supply glut.

Japanese DRAM maker Elpida said it would rein in output after it made its biggest net profit in three years as larger rivals Samsung Electronics Co (005930.KS) and Hynix Semiconductor Inc (000660.KS) are surging ahead in their investments to try and widen their leads.

Elpida, which is fighting Micron Technology (MU.O) to secure its place as the world's No.3 DRAM maker, is wary of a price slide and hopes the current demand for more powerful PC and cellphone chips will last long enough to allow it to catch up, analysts said.

Some analysts have said there could be a supply glut in the second half of the year as the strongest players hike output, with their investments catapulting equipment supplier Tokyo Electron's (8035.T) 2009/2010 outlook above expectations. [ID:nTOE60Q08E]

The fruits of the recovery in the chip sector are coming to the biggest players first and analysts have warned that a rise in spending by the giants could mean a supply glut later in the year before the smaller players can regain their footing.

Taiwan's TSMC, the world's top contract chipmaker, said it expected its capital spending this year to reach a record, while much smaller NEC Corp's (6701.T) chip unit is cutting costs as it waits for a promising rise in orders to translate into sales. [ID:nTOE60O05J]

Chip-tester supplier Advantest Corp (6857.T) is also waiting as its order backlog balloons. New orders are expected to rise 30 percent in the year to March.

Elpida, which received an injection of public money last year, said it would keep its output flat for the January-March quarter. It said it would wait until the year starting in April to lift its capital expenditures by two-thirds to 100 billion yen -- still short of its spending prior to 2008.

Elpida cannot afford another tumble in prices, analysts said.

"Elpida has half a year to catch up to Samsung and Hynix" in technology investment, said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "It's hoping this respite will last."

Following a prolonged slump that forced the failures of chip makers Qimonda QMNDQ.PK and Spansion SPSNQ.PK, prices of DRAM, used most commonly in PCs, have nearly tripled over the past year.

Analysts have warned that a return to profit could not only fuel price falls but also put the brakes on much-needed consolidation in the sector.

Back in the black after nine quarters, Elpida said it had put on hold its plans to invest in Taiwan's state-backed Taiwan Innovation Memory Co (TIMC) and would wait to see if the Taiwan government was investing in the firm, set up to bail out ailing chip makers.

"It's the same story," said Fumiaki Sato, representative director of consultancy Sangyo Sosei Advisory Inc. "As soon as the outlook gets better, impetus to join hands shrivels up."

FINGERS CROSSED

TSMC doubled its net profit from a year ago to T$32.67 billion ($102 million) in the October-December period, while Elpida returned to a profit earning 21.1 billion yen, up from a loss of 72.3 billion yen.

For graphics on TSMC and Elpida's earnings, click here here here

Elpida, which analysts expect to report its third year in the red, is scrambling to catch up to Samsung and Hynix by adopting advanced 40-nanometre chips by year-end at Rexchip, its joint venture with Taiwan's Powerchip.

"We expect the supply shortage to continue this year," said Elpida Chief Financial Yasuo Shirai at a news conference, adding that while it was hard to read DRAM prices, they were likely to remain stable throughout the year to March 2011.

Elpida's shares have jumped more than 15 percent so far this year, outperforming a 2 percent rise in the Tokyo index of electrical machinery stocks .IELEC.T.

Japan's Advantest, which supplies testers to chip makers such as Intel (INTC.O) and Samsung, narrowed its losses to a quarterly net loss of 5.7 billion yen from a loss of 7.8 billion yen the previous year.

But as chipmakers become selective about their investments, Advantest now expects to see an annual net loss of 13.5 billion yen, missing a market consensus for a loss of 7.2 billion yen by 16 analysts, despite a 30 percent rise in orders.

NEC, which owns 65 percent of Japanese system chip maker NEC Electronics Corp (6723.T), said its quarterly net loss narrowed to 9.6 billion yen from 130.8 billion yen in the previous year, thanks to cost cuts. It kept its full-year outlook above market consensus. ($1=90.34 Yen) (Additional reporting by Baker Li in Taipei; editing by Karen Foster)