Fitch sees semicon outsourcing revenue falling by 10%

Fitch expected further consolidation in the highly fragmented US$25bil integrated circuit outsourced semiconductor assembly and test (OSAT) industry

KUALA LUMPUR: Fitch Ratings believes the revenue from the highly fragmented outsourced semiconductor assembly and test (OSAT) industry could fall by 10% during 2015-16.

The international ratings agency said on Monday that EBITDA (earnings before interest, taxation, depreciation and amortisation) profits “may drop by mid- to high-teens percentages due to slowing end-device demand growth”, especially for smartphones as users replace them less frequently. 

Fitch explained OSAT companies are particularly exposed to changes in demand. 

“This is because integrated device manufacturers and foundries that use OSAT services also have in-house facilities and they tend to disproportionately cut outsourcing during slowdowns,” it said.

In its report, Fitch expected further consolidation in the highly fragmented US$25bil integrated circuit outsourced semiconductor assembly and test (OSAT) industry.

Driving the mergers and acquisition would be slowing smartphone and tablet demand growth and declining PC sales in the next 12 months.

“Consolidation could help smaller and weaker companies strengthen their capacity utilisation and market position in the face of falling revenue and profit. Taiwanese OSAT companies could also consider deals in response to growing competition from Chinese government-funded rivals,” it said.

Fitch pointed out market leader Advanced Semiconductor Engineering Inc.'s (ASE) US$1bil cash acquisition of a 24.99% stake in third-largest OSAT peer, Siliconware Precision Industries Co. Ltd (SPIL), was unlikely to affect its “BBB” rating with Stable Outlook. 

ASE would use this acquisition to explore possible cooperation between ASE and SPIL. 

ASE's 2015 FFO-adjusted leverage could deteriorate closer to Fitch's negative rating guidance of 2.0 times, but it should improve in 2016-2017 given ASE's ability to generate positive free cash flow thanks to its market leadership and its advanced technological abilities. 

SPIL and Hon Hai Precision Industry recently proposed a share swap to strengthen their product offerings, which are backed by SPIL's advanced packaging abilities and Hon Hai's system-in-package (SiP) technology. 

This transaction will be subject to SPIL shareholder approval at an EGM on 15 October 2015. Should the transaction proceed, Hon Hai will hold a 21.24% stake in SPIL and SPIL will own 2.2% of Hon Hai.

”We believe that the Taiwanese OSAT companies' consolidation drive is a response to rising Chinese competition. Industry competition could intensify as the Chinese government-funded Integrated Circuit Industry Investment Fund (IC fund) is investing in each semiconductor industry segment and acquiring new technologies,” it said. 

China-based Jiangsu Changjiang Electronics' acquisition of STATS ChipPAC Limited for an equity value of US$780mil will make it the fourth-largest operator with an 11% revenue market share. 

The deal will also provide advanced IC packaging capability, established relationships with US- and Europe-based customers, and exposure to growing Chinese demand.

Smaller OSAT competitors with less than 5% market share, including Powertech Technology, Global A&T Electronics (B-/Stable), ChipMOS Technologies and Chipbond are among the others that could seek M&A. 

“OSAT companies typically lack pricing power due to the fragmented industry and have relatively low bargaining power due to customer concentration and low switching costs.

“Previous semiconductor industry slowdowns have generally lasted 18-24 months before a demand bounce once excess inventory cleared and device sales picked up. 

“However, a prolonged industry slowdown could seriously affect smaller OSAT companies as lower capacity utilisation could seriously affect their cash generation and leverage,” Fitch said.