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Lucas Oleniuk for Asiaweek.
Nasdaq may have taken a plunge, but that is no reason for mass pessimism over Asian technology stocks.

It's Not the Apocalypse
Asian chip makers feel the chill from the U.S.

Nasdaq isn't the only casualty of the latest profit warnings from microprocessor giant Intel and computer maker Apple. Technology stocks in Asia have also been reeling from the shock. From Taiwanese semiconductor foundries to South Korean chip makers to Singapore's sound-card producers, just about every listed Asian technology manufacturing company has seen investors panic and bail out. "When Nasdaq sneezes, Asia catches a cold," says Robert Rountree, a strategist for Prudential-Bache Securities Asia in Hong Kong. "For global funds, the news from Apple and Intel is just another excuse to sell Asia and invest in U.S. assets."

Growth forecasts for global personal-computer demand have come down sharply. Merrill Lynch originally predicted a 21% growth this year; it has since revised it to 17.5%. Teresa Chen, PC analyst at Deutsche Bank Securities in Taipei, says desktop PC makers in Taiwan are growing at 12%-15% annually now, compared to 15%-20% a year ago. "In the desktop area, there is definitely some weakness," she says.

Last week, the U.S. Semiconductor Industry Association reported that worldwide chip sales for August were $18.2 billion, an increase of 52.7% over the same period last year. But the inventories of semiconductors in an industry famous for "just-in-time" component purchases have been rising. The prices of 64-megabit DRAM (dynamic random access memory) chips are now hovering just under $7, compared to nearly $20 a year ago. South Korea's Samsung Electronics, the world's biggest manufacturer of DRAMs, has seen its stock price nearly halve from its peak earlier this year. The shares of Hyundai Electronics (which has become the world No.2 after a merger with LG Semicon) have met a similar fate. Only the shares of Taiwan's Mosel Vitalec, No.7 in the world, are up because it is diversifying into LCD screens.

But Dan Heyler, regional semiconductor analyst for Merrill Lynch in Taipei, remains sanguine about the prospects of Asian chips. "We are nowhere near an oversupply situation in DRAMs, because otherwise you would have seen a freefall by now," he says. "We have actually seen prices hold up fairly well despite a rough few weeks when PC makers built inventories. True, we've had a little too many PCs in the third quarter and more DRAMs, but we are far from an oversupply situation." Moreover, the cost of making DRAMs decreases by 30% a year. It costs Samsung just over $3.50 to make a DRAM, which it can sell for that $7 today. "That's not a bad business to be in," remarks Heyler.

Among the biggest semiconductor manufacturers in Asia are independent chip foundries like TSMC and UMC of Taiwan and Chartered Semicon of Singapore, which cater to fabless chip design houses that do not own a semiconductor plant of their own. "Foundries are in fairly good shape," says Heyler. "They are benefiting from the outsourcing trend."

For many of them, the biggest segment lies in communications, rather than PCs. But the companies' shares have been beaten down because of the general negative sentiment over tech stocks and the perception that all chip companies are overly reliant on the PC market. "PCs are a major user of semiconductors and when growth is slower than what most people estimated earlier, it's natural to see some negative sentiment," says Heyler. "But this is overdone."

What about PC makers? Tim Ariowitsch, technology analyst with Goldman Sachs in Hong Kong, says the weakness of Apple directly corresponds with reduced prospects for Singapore-based contract manufacturers like Natsteel Electronics and Omni Industries, where Apple accounts for about half the total output. "They benefited from the successful launch of the Apple iMac two years ago," he says. "Now, as demand for Apple tapers, they are suffering." Non-Asian contract manufacturers have fared better because they are more diversified. Says Ariowitsch: "The challenge for Natsteel is to add to their customer base and create new avenues of growth, not just in PCs but also in the communications segment."

Ariowitsch adds that worries over Apple and the slowdown among other PC makers will have little impact on Asian PC makers like China's Legend. "The Chinese PC market is still very strong and there is no question that Legend is still best placed to take advantage of the strong demand," he notes. "To the extent that Intel might be seeing weakness, Legend can actually benefit because that could lead to falling component prices."

Taiwan, which today accounts for 60% of the world's notebook-PC production, need not worry either. Last year, its notebook manufacturers suffered due to a strong local currency and a shortage-induced increase in the price of LCD panels. In the past six months, however, the NT dollar has stabilized and LCD prices have fallen. Market researcher IDC estimates that notebook sales will grow 30% this year. "There are no signs that demand for notebooks might start to taper off," says Chen of Deutsche Bank Securities.

"Some Asian tech stocks are pricing in the end of the world," says Heyler. "I'd like to bet we are nowhere near the end of the world." The only thing worse than mass exuberance is mass pessimism.

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