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% 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% 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% since January and more than 92% 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%, better than the low of 18% a year ago but well below its break-even rate of about 75%. By contrast, the utilization rate at rival Taiwan Semiconductor Manufacturing Co., (TSMC), the world's largest chipmaker, is about 65%, and at United Microelectronics Corp. 65%-70%.
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 (see chart below). 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.
