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I wanted to pass along a couple of sobering notes on the semiconductor equipment sector amid the partying over the better-than-expected outlook for orders from Applied (AMAT).

Citigroup’s Timothy Arcuri yesterday noted that Korean chip-maker Hynix has canceled several orders relating to NAND flash capacity additions at two of its fabs. Arcuri says this mars “the first sizable NAND-related cancellation relating to recent price weakness.” The canceled orders involved two 200 mm fabs in South Korea. Arcuri says that the companies most vulnerable to the Hynix news include Lam Research (LRCX) and Novellus (NVLS).

In another note yesterday, Merrill Lynch’s Hiroshi Yoshihara forecasts that Japanese semiconductor capital spending will decline 6% in the March 2008 fiscal year, reversing expected 13% growth in the March 2007 year. Yoshihara expects NEC Electronics to announce a 30% cut in cap ex at a planned February 22 management strategy meeting; the analyst also notes that Sony (SNE) Tuesday laid out plans to cut semiconductor cap ex 30% over three years. Yoshihara also expects Fujitsu to postpone plans for a second 300 mm fab.

Yoshihara notes that the exposure of the Japanese semiconductor equipment companies to the memory sector is extremely high, accounting for 71% of fiscal third quarter orders at Tokyo Electron and over 50% at Dainippon Screen. “The risk of a correction is increasing,” Yoshihara writes, “and we recommend maintaining a cautious stance on the sector.”

Source: Semi Equip: Troubling Signs Despite AMAT Order Forecast