Asia's Semiconductor Makers Mirroring Improvement of U.S. Counterparts

By , Money Morning •

Some of Asia's biggest players in the chipmaking business have confirmed what U.S. semiconductor makers have been saying for months: Demand for semiconductors is growing and the future looks bright.

South Korea's Samsung Electronics Co. Ltd. (PINK: SSNLF) saw operating profit in its semiconductor business improve by more than 84%, rising to $968.8 million (1.15 trillion won) in the third quarter, up from $160 million (190 billion won) in the same period a year ago. The company is seeing growing strength in PCs, for which it is the world's largest supplier in dynamic random access memory (DRAM) chips.

Samsung's overall profit, which tripled to $3.1 billion (3.72 won), was buoyed not only by its chip business, but its flat panel television and mobile phone businesses. A weak won enabled it to undercut its Japanese rivals decimated by a strong yen.

"The company will continue posting solid earnings next year, and the semiconductor business will be the key driver," Lee Jin Woo, a fund manager at KTB Asset Management Co. in Seoul told Bloomberg News. "As Intel and other chipmakers forecast, I see strong PC demand."

To meet that demand, Samsung said it will boost its 2010 capital spending on semiconductors to $4.2 billion (5 trillion won), up from $3.3 billion (4 trillion won) this year. Another $2.9 billion (3.5 trillion won) will be spent on its LCD technology.

According to Dramexchange Tech Inc., prices for benchmark DRAM chips have more than tripled this year after falling 62% in 2008 as the worst economic downturn since the 1930s tightened its grip on consumer spending.

"Amid rising demand for highly-advanced and low-voltage consumer products, Samsung will use most of the projected investment to migrate into thinner technologies for PC and flash memory chips," Robert Yi, head of Samsung's investor relations team told The Korea Times. Flash memory is used in everything from MP3 players to cell phones.

Samsung executives showed cautious optimism for the fourth quarter.

"Looking ahead, we forecast a solid fourth quarter supported by seasonal demand for consumer electronics, though the appreciation of the won and increased marketing expenses may lead to a quarter-on-quarter decline in profit," said Yi.

In Japan, Toshiba Corp.'s chip division returned to profitability following cost cuts, stronger demand, and higher prices for semiconductors. The Tokyo-based chipmaker saw its semiconductor division swing from a $32.5 million (29.3 billion yen) loss to a net income of $57.7 million (5.2 billion yen), the first profit in the division in more than two years.

Toshiba, the world's No. 2 maker of NAND flash memory behind Samsung, sees stronger demand in products that use this type of memory. Toshiba supplies NAND memory for Apple Inc.'s (Nasdaq: AAPL) iPhone and Sony Corp.'s (NYSE ADR: SNE) PlayStation 3 (PS3).

Market share for Apple's iPhone continued to grow last quarter, rising to 2.9%. And Sony's PS3 is gaining momentum after a price cut: It outsold Nintendo Co. Ltd.'s (OTC ADR: NTDOY) market-leading Wii console for the first time last month in Japan and the United States, despite being No. 3 in market share behind Nintendo and Microsoft Corp. (Nasdaq: MSFT).

Like Samsung, Toshiba was cautious about the future and said NAND prices may soften a bit after rising 20% in the six months ended Sept. 30.

"There is still uncertainty for the October-December quarter as well as the January-March quarter," Fumio Muraoka, Toshiba's corporate senior executive vice president told Dow Jones Newswires. "We need to see the outcome of the shopping season for Thanksgiving and Christmas."

Intel Corp. (NYSE: INTC) earlier this month soundly beat Wall Street estimates, posting a profit of $1.9 billion, or 33 cents per share on revenue of $9.4 billion. Analysts' consensus estimates called for earnings of 28 cents on revenue of $9.0 billion, according to Thomson Reuters Corp. (NYSE: TRI)

Shortly after Intel's earnings, Texas Instruments Inc. (NYSE: TXN), the world's No. 4 chipmaker, also beat analyst expectations, reporting a profit of $2.88 billion, or 43 cents per share. Analysts polled by Thomson Reuters expected a net income of a $2.82 billion profit, or 39 cents per share.

Given the microchip's ubiquitous nature, the companies that make them can be viewed as a kind of leading economic indicator. Companies that intend to produce products down the road have to place orders for chips or for equipment now, meaning an uptick in semiconductor-sector business activity today and represent a jump in broader economic growth tomorrow.

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