Fitch: Mobile Saturation to Hit Semiconductor Back-end Industry

Powertech Technology

10/05/2016 05:24

(The following statement was released by the rating agency)

SINGAPORE/SYDNEY, May 10 (Fitch) The impact of slowing smartphones sales growth 
on the semiconductor industry will be felt hardest by back-end companies, and 
will add to the pressure for consolidation as Chinese competition grows, says 
Fitch Ratings. Revenue and profit in the segment could fall by double-digit 
percentages in 2016 due to lower capacity utilisation and the largely fixed-cost 
nature of the business. We expect larger companies to acquire smaller ones, 
which could weaken their credit profile if acquisitions are funded by debt. 

Saturation in the global device market will pose serious challenges to all 
semiconductor industry participants - including integrated device manufacturers 
(IDMs), foundries and outsourced assembly and testing companies (OSAT). But OSAT 
companies, which focus on the back end of the manufacturing process, suffer 
disproportionately during downturns as IDMs and foundries bring more testing and 
packaging back in-house, significantly cutting outsourcing demand. 

We expect smartphone sales will grow only by a low-single-digit percentage in 
2016 following 10% growth in 2015. We forecast personal computer and tablet 
sales to decline by 3%-5% and 5%, respectively. We expect this will lead to a 
fall of at least 10%-15% in OSAT companies' 2016 revenue. EBIT margins may 
shrink to 5%, which would be the lowest in five years, and we expect utilisation 
rates to dip below 70% (2015: 75%-80%).

Previous semiconductor industry slowdowns have generally lasted 18-24 months 
before excess inventory cleared and device sales picked up. However, a prolonged 
industry slowdown exacerbated by slowing smartphone sales growth and the absence 
of a new mass-appeal device could hit the liquidity of smaller OSAT companies.

Smaller companies could merge to survive as profits decline and they lack 
financial flexibility to spend on R&D and capex. OSAT companies lack pricing 
power due to a fragmented industry, high customer concentration and low 
switching costs. Industry prices, which typically decline by 3%-5% a year, could 
fall further on competition from Chinese companies backed by the USD20bn 
government-funded Integrated Circuit Industry Investment Fund (IC Fund). 

Taiwanese OSAT companies are already pursuing consolidation. We placed market 
leader Advanced Semiconductor Engineering's 'BBB' rating on Negative Watch in 
December following its plan to acquire the third-largest operator Siliconware 
Precision Industries (SPIL). Taiwan's Fair Trade Commission suspended its review 
of ASE's acquisition of SPIL in March 2016. However, ASE is still keen to 
acquire the 75% of SPIL which it does not currently own for USD4bn. ASE's 
ratings could come under pressure if such an acquisition were to be debt-funded.

The fourth-largest OSAT company, STATS ChipPAC (BB-/Stable), has low ratings 
headroom - given its high debt and its relatively high exposure to advanced 
packaging for high-end smartphones. Its 2016 revenue could decline by 15%-20% 
with a negative EBIT margin. Its ratings are based on the consolidated credit 
profile of its 100% parent, Jiangsu Changjiang Electronics Technology (JCET). 

This consolidated profile will benefit from a potential equity injection of 
USD400m by Chinese largest foundry - Semiconductor Manufacturing Investment 
Corp. - and conversion of IC Fund's USD140m shareholder loan into equity.

Smaller OSAT competitors with less than a 5% market share are among the others 
that could seek mergers. These include Powertech Technology, Global A&T 
Electronics (GATE), ChipMOS Technologies and Chipbond. Chinese Tsinghua Unigroup 
has announced plans to acquire 25% stake in ChipMOS for USD368m. 

We placed GATE's 'B-' rating on Negative Outlook in October 2016, as we expect 
its liquidity to worsen due to lower cash generation and high interest costs. 

  

Contacts:

Nitin Soni

Director

Corporates

+65 6796 7235

Fitch Ratings Singapore Pte Ltd.

#35-05, Suntec Tower 4

6 Temasek Boulevard

Singapore, 038986

Steve Durose

Managing Director

Corporates

+61 2 82560307

Simon Kennedy

Director

Fitch Wire

+44 20 3530 1387

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 
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