Chartered's 60.5 percent - majority owner is Singapore
Technologies Group, which itself is owned by Temasek, the Singapore
government's investment vehicle for local companies.
Sinking Feeling
Far Eastern Economic Review
September 19, 2002
By Trish Saywell and Assif Shameen/SINGAPORE
RELATED:
Chartered Semiconductor faces trading investigation
CHIA SONG HWEE probably wishes he never took the job. In July, the
40-year-old chief financial officer of Singapore's Chartered
Semiconductor Manufacturing became the company's third chief
executive officer in as many months.
The world's No.3 maker of customized chips is under siege. Rumours
are dogging the company that it's likely to be sold or merged. In
July, Temasek Holdings, the government investment holding company
that owns Chartered's largest shareholder, Singapore Technologies
Group, said it no longer viewed the chipmaker as a "strategic"
holding.
In an interview with the REVIEW on August 5, the management denied
Chartered was looking for a buyer for its oldest silicon-wafer
fabrication plant, or fab, to raise cash. "We have no intention of
selling it," said Bruno Guilmart, Chartered's senior vice-president
of worldwide marketing and sales. "Look at our balance sheet. We
have over $1 billion in cash and credit facilities."
Chartered's message was clear: There would be no fire sale of
assets because it didn't need the cash. In subsequent remarks to
media and analysts last month, Chartered officials emphasized the
company's capital expenditure for 2002 of $500 million was
supported by its strong financial position. Indeed, most analysts
and investors were left with the impression that Chartered didn't
need any money and wasn't about to raise any.
So it came as a rather nasty surprise when Chartered announced on
September 2 that it would raise $633 million through a rights issue
at S$1 per share. The issue was at a steep 52 percent discount to
the then market price of S$2.10. "I had been predicting for months
that they would have to do a rights issue because they really
needed the cash, but they kept denying it," says Warren Lau, a
foundry analyst for HSBC Securities in Taipei. Lau says Chartered,
which has $1.1 billion in debt, needs up to $2 billion to complete
its new Fab Seven, which will expand its capacity. Chartered says
Fab Seven will cost approximately $3.5 billion. At the end of June,
it had only invested about $200 million.
Rumours that the company was preparing to raise funds through a
bond or a rights issue gathered steam from August 28, sending its
shares down 18 percent in the week before the announcement. The
controversy around the issue has wiped off about one third of
Chartered's Singapore market capitalization in two weeks. Chartered
stock is down over 70 percent since January and more than 92
percent from its peak in early 2000.
Minority shareholders are outraged. "Retail investors feel the
company has not been sensitive to their interests and its badly
timed decision has burnt the pockets of many retail investors,"
says David Gerald, president of the Securities Investors
Association of Singapore, an association for small investors. The
Singapore Exchange has launched an investigation of market activity
before the announcement was made to find out who was trading shares
and whether any possible information was relied on.
For its part, Chartered denies having misled the market with
statements about its cash position. It also denies that there was
any insider trading by its officers and directors. Merrill Lynch,
the investment bank acting as the issue's underwriter, said in a
statement on September 6 it "conducted itself properly in every
regard with respect to Chartered."
None of this sits well with shareholders or company analysts.
Recent events "don't pass the smell test," says an analyst at a
rival investment bank, speaking on condition of anonymity. "Our
understanding is that there were leaks two weeks in advance. Given
such widespread leaks, Chartered should have had an obligation to
postpone the timing of the issue. This has hurt the company's
reputation in the investor community."
While rumours that Chartered might be sold were rife before the
rights issue was made public, speculation is in overdrive now. If
Chartered is to be sold, however, it's got a way to go in any
pre-sale beautification campaign. The chipmaker has posted six
straight quarters of losses. It lost $384 million in 2001 and
analysts estimate losses could be as high as $400 million this year
and $230 million next year.
The foundry's overall capacity utilization rate is running at about
40 percent, better than the low of 18 percent a year ago but well
below its break-even rate of about 75 percent. By contrast, the
utilization rate at rival Taiwan Semiconductor Manufacturing Co.,
(TSMC), the world's largest chipmaker, is about 65 percent, and at
United Microelectronics Corp. 65 percent - 70 percent.
Chartered is also grappling with long-term structural issues. It's
got to compete with the fabs at the bottom of the technology
spectrum that are coming on stream in countries like Malaysia,
China and Korea. At the same time, it's trying to keep in step with
the top-tier foundries in Taiwan. Its advanced-process technology
is also lagging; Chartered is up to four quarters behind TSMC. Chia
has said that it expects to catch up by the time 0.10-micron wafers
are rolled out next year, but for now, few are willing to bet that
it will. "There is no room for lagging players in foundries," says
Russell Tan, an analyst with NetResearch Asia, a Singapore
investment advisory firm. "Chartered will have to do something
drastic soon or be sold for scrap in a few years' time, given its
business model, cost structure, customers, and technology."
"[They're] not good enough to have the premium pricing that the
Taiwanese guys have," adds Arthur Chai of Morley Fund Management in
Singapore. "So long term, there are questions about sustainability.
Selling it away might be the best way to address it."
Can Chartered chart a new course? That will depend on whether
Temasek will continue pumping money into the company and upgrade
its facilities to rival the Taiwanese--or cut its losses and bow
out of the industry. "The choice now facing Temasek is either to
exit the foundry business or to launch a massive up-scaling to
match the industry leaders," says Tan.
TIME IS RUNNING OUT
Chia declined to be interviewed for this story. But Guilmart argues
that Chartered has learned lessons from the current downturn in
electronics demand. Chartered has also raised the portion of annual
revenues it spends on research and development. It will spend about
$100 million on R&D this year, up from last year's $79
million.
Guilmart also argues that Chartered can afford to be a few months
behind the technology curve because it doesn't need to be No.1 in
all chip segments. "If you want to be a major player in
microprocessors or in graphics chips, you've got to be the No.1 in
technology," he says. "In the area of the convergence of
communications, computers and consumer electronics, there are
plenty of spaces you don't need to be No.1 [or] have the latest and
greatest technologies."
Analysts aren't holding their breath. Eric Gomberg, an analyst with
United States-based brokerage Thomas Weisel Partners, says in a
recent report, ". . . barring a robust semiconductor recovery, this
company will face ongoing challenges and a significant cash burn .
. . the balance sheet will degrade over time." Adds Lau of HSBC:
"Instead of preserving capital, their new strategy seems to be
expanding capacity."
One of the simplest strategies for Chartered, analysts say, is to
form partnerships and technology alliances with integrated-device
manufacturers. In addition, it has already tied up with SMIC, a
foundry in Shanghai, and isn't ruling out others.
Chartered's new CEO is listening. He recently told reporters that
Chartered hoped to speed up discussions with potential partners on
its newest fab. The tie-up "could be technological cooperation or a
partnership on the physical assets" of the fab. "We are always
looking for new business models and opportunities to evolve the
company," he said. Chia knows the makeover can't wait. Time is not
on Chartered's side.
