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Chartered Semiconductor Manufacturing (CHRT)Stock (Semiconductor - Foundry Industry)
 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 as of 2008.[3] 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 (operating margin of 1% and 7% in 2007 and 2006, respectively[4]) 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.
[edit] Business DescriptionChartered 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. In 2007, Chartered's top ten customers accounted for approximately 76% of total revenue. The top five customers collectively accounted for approximately 61% of revenue in 2007, compared with approximately 60% of total net revenue in the previous year. Broadcom and Advanced Micro Devices, each contributed more than 10% of total net revenue in 2007. [5] [edit] Financial Analysis
CHRT's gross and operating margin have generally trended upward since the 2001 downturn, where the company earned gross margin of -44% and operating margin of -82% on revenues that were 40% those of 2000.[10] The same year, its capacity utilization was 35%.[11] In 2007, the company's utilization has improved to 79%, and has held in the 70-80% range since 2004.[12] This data also indicates how utilization is determined largely by global demand and Semiconductor Cyclicality. Since the company's scale is so much smaller than Taiwan Semiconductor Manufacturing Company (TSM), it must operate at high utilization, yet it is still unable to achieve double-digit operating profitability.  CHRT Geographic Revenue Contribution 2005-2007[13]
The company's revenue growth boomed in all regions in 2006, as described above. However, revenues in North America contracted 10.7%.[15] This North American contraction was caused in part by the weakness in the latter half of FY 2007 due to the U.S. Housing crunch which reduced demand for consumer electronics such as computers and TVs. [edit] Trends/Forces[edit] Government majority ownership decreases necessity for managers to improve businessAs 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. In 2007, CHRT earned $478.9MM in net cash from operating activities[16], but also had to spend $758.4MM in capital expenditures.[17] This makes its free cash flow in 2007 negative, at -$279.5MM. Chartered does not face solvency-risk due to government ownership, which decreases the urgency for management improvements. [edit] Semiconductor Cyclicality & Recession risks magnified due to:
Chartered's revenues in 2007 are 13.6% of those of the industry's largest competitor Taiwan Semiconductor Manufacturing Company (TSM). As such it 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. Sales grew in 2006 by 37%, but shrank 4% in 2007.[19][20] Semiconductor volume has boomed and busted in cycles since the beginning of the industry. [edit] Slowing migration to newer technologies may slow the company's revenue growthThe 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. In 2005 and 2006, .13 micron and smaller chips constituted 42% and 57% of Chartered's revenues.[21] In 2007, 90nm and smaller, reflecting the pace of technological improvement, constituted only 21% of the company's revenues.[22] Another 34% of the company's revenues are on .13 micron processes.[23] The company acknowledged that it had clearly seen declines in the 90nm node due to declines in AMD's business.[24] This slowing migration will slow revenue growth unless the company finds more leading-technology customers. [edit] Competition
[edit] Market ShareThe total revenues for the global semiconductor foundry market are estimated at $22.2B by Gartner Dataquest[26] and $24.5B by IC Insights for the year 2007.[27] The "Top 4" - TSM, UMC, SMI, and CHRT - are estimated to have 72.5%[28] and 68%[29] combined share of the total market by the two data services, respectively. Below are Gartner's estimates of market share by revenues for the year 2007 with the top 10 semiconductor foundries. By these estimates, CHRT had 6.5% market share in 2007 by revenues. It's position on the tables has see-sawed in the 2000's with competitor Semiconductor Manufacturing International (SMI).[30]  Semiconductor Foundry Market Share (2007)[31]
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