Doubts remain about Chartered Semi's recovery

But others are warning that Chartered's recovery — and that of the entire sector — may be jeopardized by continued economic uncertainty.

In its earnings report released April 22, Chartered announced a loss of $84.5 million for the first quarter of 2005, compared to a profit of $1.9 million for the same period a year earlier.

George Thomas, Chartered's senior vice president and CIO, attributed the decline to weakness in the communications sector, but said the company had "seen the trough" of the current cycle and expected business to pick up in the second half of 2005.

His view is supported by industry observers. Tan Kay Yang, principal semiconductor analyst at market researcher Gartner here, said lackluster demand meant Chartered's poor performance was hardly unique. "Most of the industry has suffered as it's in the same situation," he said. "But we're predicting moderate growth in the second half as the macroenvironment gets better."

Tan said Chartered and other chip companies could bank on strong future demand from the consumer sector.

"There will be more orders coming in not because of any 'killer apps,' but some 'killer functions,'" Tan added. "We expect wireless and 3G to really pick up in the second half, stimulating demand for semiconductor design and production."

Daniel Heyler, Merrill Lynch's regional semiconductor analyst, also forecast in an April 25 note to clients that Chartered would again register profits by year-end, raising his rating on Chartered shares from "neutral" to "buy." Chartered's stock has risen about 1.6 percent since its earnings announcement.

Industry sentiment has also been buoyed by the positive results posted by back-end assembly and test firms such as Singapore's United Test and Assembly Center Ltd., which on April 26 announced that first-quarter profits nearly doubled over last year to $3.9 million. Two days later, test and packaging provider Stats ChipPAC announced a net $27.1 million loss for the first quarter, but noted that revenues had soared 77 percent from the prior year to $234.1 million.

But some are sounding alarms for the future. Pearly Yap, an analyst with BNP Paribas here, expects Chartered to underperform in the mid-term, weighed down by its investments and demand fluctuations.

Yap notes that Fab 7, Chartered's 300-mm wafer fab, recorded in its recent results a $15 million start-up loss. Though the company's alliance with IBM may help the plant turn a profit later in the year, she said this could be undercut by execution issues and expected "price declines in mature technologies."

"Essentially the length of the semiconductor recovery is dependent on the overall macro demand environment, but with the slowing U.S. economy and rising interest rates, this is a risk . . . there are also risks that wireless in 3G, etcetera, will not have as strong a take-up" as expected, she said.