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Chartered Semiconductor Manufacturing (CHRT) |
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WIKI ANALYSIS
Chartered Semiconductor is a Singapore-based semiconductor foundry. The company manufactures Integrated Circuits (ICs) on behalf of customers such as Advanced Micro Devices (AMD) and Broadcom (BRCM).[1]
As a smaller manufacturer in a smaller island state, part of Chartered's reason for existence is political. The company was set up by the Singaporean government to foster high-tech growth, and partially privatized in 1999. However, the government still owns more than 50% of the company.[2] CHRT has established a niche as a partner for several companies on the leading edge of technology, such as Advanced Micro Devices (AMD) and International Business Machines (IBM). Without the same scale as industry-giant Taiwan Semiconductor Manufacturing Company (TSM), Chartered margins are not as good but they have improved as its customers are awarding it a growing share of the higher margin new-technology businesses. Much of CHRT's potential hinges not only on the economic macro-environment for semiconductors, but also on the company's ability to increase operating profitability, which will not allow it to continue price-undercutting Taiwan Semiconductor Manufacturing Company (TSM) in exchange for market share.
Business Overview
Chartered was the first semiconductor foundry to exit the commodity dynamic RAM (DRAM) business, as other foundries are now doing today, such as SMI. DRAM chips don't need to be as high in quality as processor chips, and thus can be sourced to non-technology leading foundries. As a result, the pricing pressure has made it a low margin business. This allowed it to grow its margins from the low-margin DRAM business and move into more profitable chips by making long-term partnerships with clients.
Business & Financial Metrics[3]
In 2009, CHRT generated a net income of $7.8 million on revenues of $932.1 million. This represents a serious turnaround from 2008, when the company lost $161.1 million on $1.02 billion in revenues.
Business Segments[4]
CHRT does not define any operating segments - it acts as a single, cohesive unit. The company generates 76.3% of its revenue in the United States.
Trends/Forces
Government majority ownership decreases necessity for managers to improve business
As mentioned prior, the majority of the company is owned by Temasek Holdings. As such, its existence is partially political, and operating profitability is not necessarily the primary concern, as demonstrated by the firms low operating margins. This leads to negative free cash flow in the semiconductor industry, due to high capital expenditure requirements.
Semiconductor cyclicality and recession risks magnified
CHRT's risks related to semiconductor cyclicality and the 2008 recession are magnified due to:
- Smaller Scale
- Customer Concentration
- Second-Source Status
The company is more vulnerable to the changes in client's need and the macroenvironment than its competitor, since each contract is worth a comparatively larger fraction of revenues. [5][6] Semiconductor volume has boomed and busted in cycles since the foundation of the industry.
Slowing migration to newer technologies may slow the company's revenue growth
The company has contracts with AMD and Broadcom for the leading edge 65 nm technologies, but it is having trouble converting more customers, as there are fewer benefits from switching to a more expensive part for non-leading edge customers. This is because commodity products do not require the same miniaturization and energy savings that the new technologies give. The company acknowledged that it has clearly seen declines in the 90nm node due to declines in AMD's business.[7] This slowing migration will slow revenue growth unless the company finds more leading-technology customers.
Competition
- Taiwan Semiconductor Manufacturing Company (TSM) - TSM market leadership by revenues was based initially on technology leadership, which has allowed it to charge a price premium. This helps both its margins as well as its ability to reinvest into the business.
- United Microelectronics (UMC) - The industry's number #2 company by revenues, UMC and TSM used to form the duopoly. Going into the future, UMC is again attempting to chart a different course than TSM, not supporting a 450mm (18 inch) wafer launch, electing to stick with 300mm (12 inch) wafers for the near-course.[8]
- Semiconductor Manufacturing International (SMI) - SMI is a relative upstart in the industry, but gained share rapidly due to cost efficiencies that it realized from basing its fabrication plants in China.
References
- ↑ Chartered Semiconductor FY 2007 20-F "Risk Factors" pg. 9
- ↑ Chartered Semiconductor FY 2007 424B3 Prospectus"SHAREHOLDING STATISTICS"
- ↑ CHRT 2009 20-F pg. 2
- ↑ CHRT 2009 20-F pg. F-51
- ↑ Chartered Semiconductor FY 2007 20-F "SELECTED FINANCIAL DATA" pg. 3
- ↑ Google Finance "CHRT"
- ↑ FabTech.com "AMD cuts MPU production at Chartered; 65nm ramp bigger in bulk-CMOS" April 27, 2007
- ↑ Electronic Engineering Times "UMC tips roadmap, questions 450-mm" June 10, 2008
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