UPDATE 2-TSMC hikes capex after record profit; glut fears loom

Thu Jul 29, 2010 4:05am EDT

* Q2 net record T$40.3 bln vs consensus forecast T$35.2 bln

* Raises 2010 total capex forecast about a fifth to $5.9 bln

* Sees Q3 sales T$109-T$111 bln vs T$105 billion in Q2

* Stock ends flat before results; off 2% ytd vs 16% UMC fall (Recasts with capex, analyst comments on glut and details)

By Baker Li

TAIPEI, July 29 (Reuters) - Top contract chipmaker TSMC (2330.TW) sharply raised its 2010 capital spending forecast after posting a record quarterly profit, likely leading to oversupply that could hurt chip prices and the firm's bottomline.

TSMC (TSM.N) and cross-town rival UMC (2303.TW) (UMC.N) are ramping up production to meet growing demand for electronics products, with stockpiles likely forming in late 2010 or early 2011 if Europe's debt problem persists and demand weakens.

The two firms' earnings are seen peaking in the third quarter, the busiest sales season, before they start to fall in the fourth quarter. Technology demand typically slows after the pre-Christmas buying boom.

"Some of their clients might have started adjusting their inventories because we are seeing some double bookings," said John Chiu, a fund manager at Taiwan's Fuh Hwa Securities Investment Trust.

"The third quarter could be a peak and weakness in the fourth quarter is inevitable," said Chiu, who has no TSMC and UMC shares in his portfolios now.

TSMC said on Thursday it is raising total capital expenditure for this year to $5.9 billion from the previous estimate of $4.8 billion to boost capacity and widen its technology gap with smaller rivals, including UMC and China's SMIC (0981.HK).

TSMC, which counts Texas Instruments TXN.N and Nvidia (NVDA.O) among major clients, said it expected third-quarter sales to reach T$109-T$111 billion from the second quarter's T$105 billion and higher than market expectations of about T$104.6 billion.

TSMC said its third-quarter gross profit margin should be 48-50 percent, compared with the 49.5 percent in the previous three months. It expects an operating profit margin of 36-38 percent, versus the second quarter's 38.6 percent.

By churning out more chips with more advanced technology to meet rising demand for new PCs and other high-tech gadgets, Taiwan Semiconductor Manufacturing Co Ltd (TSMC) earned a net profit of T$40.3 billion ($1.3 billion) in April-June.

That was higher than T$24.44 billion in the same period a year ago and compared with a consensus forecast of T$35.2 billion from Thomson Reuters I/B/E/S.

LOWER INVENTORY LEVELS

Sales in the global semiconductor market would rise about 30 percent this year, with sales in the foundry market growing by a larger 40 percent, TSMC Chairman and CEO Morris Chang forecast at its quarterly investor conference on Thursday.

Chang said foundry sales growth would be higher next year, but did not give numbers.

"It is our responsibilty to do our most to meet demand (from our customers)," Chang said, adding that inventory in the whole semiconductor supply chain is rising but will still be below seasonal levels at the end of the third quarter.

Sales of microchips made by 65 nanometre process technology, or 65 billionths of a metre, accounted for 27 percent of TSMC's total sales in the second quarter, while 16 percent of its sales were from more advanced 40-nano technology in the quarter.

Intel Corp (INTC.O), Qualcomm Inc (QCOM.O) and Apple Inc (AAPL.O) have reported stellar quarterly results, helping to kick off the tech sector's earnings on a strong note. [ID:nN12197658] [ID:nN21138547] [ID:nSGE66K0BZ]

Investors, however, are focused on oversupply and weaker chip prices as they look beyond the strong second quarter.

TSMC announced the results after the Taipei stock market closed on Thursday. The stock ended unchanged on the day while the main TAIEX .TWII edged up 0.2 percent.

TSMC shares have fallen 2 percent so far this year while UMC shares are down 16 percent, against a 5 percent rise on the big board. UMC's quarterly results are scheduled for August 4. (US$1=T$32) (Editing by Muralikumar Anantharaman)

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