Elpida shares drop on fears of lengthy chip slump
TOKYO, Nov 19 (Reuters) - Shares of Elpida Memory Inc (6665.T) dropped as much as 19.6 percent on Wednesday on fears that rival computer memory firms in Taiwan could receive government support, which could worsen a chip supply glut.
Cash-strapped Elpida, the world's No.3 maker of dynamic random access memory, has been hoping that ones of its rivals would fail, lowering global chip output and propelling a sector-wide recovery in the first half of 2009.
The global economic slowdown is hitting the sales outlook for high-end PCs. Spot prices of DRAM memory chips have tumbled to around half the cost of making them, pulling chip manufacturers deeper into the red with each chip they produce.
Goldman Sachs downgraded Elpida to "neutral" from "buy" and cut its target price to 500 yen from 950 yen.
"If market mechanisms do not operate to weed out uncompetitive companies, this will prolong supply correction and put competitive companies at a disadvantage," Goldman Sachs analyst Ikuo Matsuhashi said in a note to investors.
Shares of Elpida, which closed down 13.4 percent at 350 yen, have shed 75 percent since the company announced a 50 billion yen ($515.4 million) moving strike convertible bond issue last month.
Its share price closed below the bond's minimum conversion price for the fifth straight business day, increasing the possibility that Elpida will redeem the bond.
That could mean Elpida will look to other financing methods or forego investment in new technologies to stay competitive against bigger rivals Samsung Electronics Co (005930.KS) and Hynix Semiconductor Inc (000660.KS).
The firm, spun out of the DRAM operations at Hitachi Ltd (6501.T) and NEC Corp (6701.T) in 1999, could consider a private placement of new shares by strategic investors coupled with an investment in its factories, analysts said.
Investors Elpida might approach include former investor Intel Corp's (INTC.O) investment arm Intel Capital, U.S. memory module maker and customer Kingston Technology Co and the Development Bank of Japan, they said.
Under the terms of the bond, if Elpida's share price stays below the bond's minimum conversion price of 509 yen through Dec. 11, then it could be forced to redeem the bonds to Nomura Holdings Inc (8604.T) by Jan. 10.
Elpida's 5-year yen CDS spread is around 1,000, with no virtual trading. A premium analyst said the spread is too wide, since the chip maker is not short of operating funds, but is merely seeking money for long-term growth. MARKITCDS.
TO SPEND OR NOT TO SPEND
Makers of DRAM, used mainly in computers, are under constant pressure to invest in new lines to lower unit costs to beat price falls and stay competitive.
But Elpida is weighing the pressure to grab market share and position itself for the next economic upswing against its growing losses, tumbling share price and dwindling cash. Continued...
