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Foreign banks cautious about TSMC's increased capital spending

2012/04/22 14:38:40

Taipei, April 22 (CNA) The increase in capital spending for Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip maker, is not all positive for investors, analysts of foreign investment banks said recently.

At TSMC's Technology Symposium forum in the United States on Wednesday, company Chairman Morris Chang said TSMC's capital spending in 2012 might exceed the US$7.3 billion spent last year.

Compared with its earlier forecast of US$6 billion, the increase was due to strong demand for 28-nanometer products, according to the Hsinchu-based company.

Andrew Lu, Hong Kong-based head of semiconductor research at Barclays Capital in Asia ex-Japan, said in a recent note that he did not view the increased capital spending as all positive for TSMC's earnings outlook.

"We believe TSMC has no choice but to raise capital spending, given recent 28nm orders switching to competitors, many complaints from customers about the shortage and rising competition from Samsung, Intel and UMC," stated Lu.

He explained that increasing capital spending to between US$7.5 billion and US$8 billion could cause depreciation costs to increase 25-30 percent year-on-year in 2012, far exceeding the bank's expected sales growth of 10-15 percent year-on-year for TSMC.

"This implies some marginal improvement from a recovery in utilization could be offset by an increase in depreciation costs," Lu added.

Barclays Capital maintained an "equal weight" rating on TSMC and a target price of NT$84 (US$2.86). TSMC is set to announce the actual figures of the new capital spending on April 26 at its investors conference.

Separately, Credit Suisse kept an "outperform" rating on TSMC and its target price of NT$90, saying that the increase in its 2012 capital spending may cap the recovery of TSMC's return on equity and gross margins.

TSMC's longer-term competitive position and growth drivers remain intact, but the company also showed normalization in return on equity back to its historical average because of the rising capital spending, said Randy Abrams, director and head of equity research in Taiwan for Credit Suisse.

He noted that TSMC's return on equity had declined from a peak of 28 percent in 2010 to 21 percent in 2011, and the figure could remain low at 20 percent this year due to rising capital spending, electricity price hikes and the exchange rate of the Taiwan dollar.

(By Jeffrey Wu)