05.22.2001
Bleak outlook for GaAs demand through 4Q01, Taiwan players may benefit in the long run

• Taiwan's compound semiconductor foundry sector has been the source of exciting news recently. Win Semiconductor (unlisted) announced its first wafer-out on 6-inch 0.15um GaAs pHEMT, CSMC (unlisted) said its 4-inch fab would start sampling in June and start pilot production in 2H01, and Procomp (2398 'Buo Da') subsidiary Suntek (unlisted) will kick off pilot production of its 4-inch fab in 3Q01 and see volume production in 4Q01.

• Suntek holds technology transfer agreements with Mitsubish Electronics (ME, JP), one of the three major global GaAs players along with Conexant (US) and RFMD (US). Suntek's products and equipment are in full alignment with ME. Our industry sources indicate that Suntek has already secured ME orders on low-end HBT power amplifiers for handsets, despite the fact that equipment move-in is still not yet complete. Qualification on these orders will begin once production capacity is available in 3Q01. We believe its strong ties with ME will jump start Suntek's operations.

• However, we also hear from industry insiders that the GaAs market is to continue weak through 4Q01 due to inventory correction and soft demand on handsets. ASP has declined by 30% since 4Q00 and is not likely to pick up any time soon.

• Meanwhile, cancellation and deferral of the capacity expansion plans of US IDMs continues. Several of Taiwan's GaAs epi and foundry projects have also been written-off, including Arima's (2381 'Hua Yu') Hua Jing and President Group's G-Advanced projects.

• VB Primasia Investment Opinion: We believe recovery in the GaAs market will likely be deferred to 2H02. However, Taiwan players will come through having established for themselves a strong industry position where they will play a pivotal role in driving GaAs component prices down and keeping demand up. We are NEUTRAL on Procomp given GaAs' unpromising prospects.

LindaLiu@Primasia.com +886-[0]2-2547-8867