The decline in silicon wafer prices is inevitable

GlobalWafers' revenue in January was the same as that in December 2018, and the market interpreted this positively, driving the stock price up sharply on the 12th. However, Morgan Stanley Securities reminded that the price pressure faced by bare wafers is ongoing, especially as some semiconductor wafer foundries are facing the risk of turning losses into profits this quarter, and the probability of renegotiation is high. It is too early to be optimistic about the future of GlobalWafers (6488).

GlobalWafers announced that its revenue in January was 5.197 billion yuan, which was roughly the same as the previous month and increased by 9.7% year-on-year. GlobalWafers also stated that the silicon wafer industry is still healthy in 2019 and is moving towards the goal of record revenue and profit. The market also gave a positive interpretation, encouraging the stock price to recover the "3" figure. However, conservative foreign investors have set their sights on the renegotiation of long-term contract prices, reminding their customers not to ignore the concerns of weak demand and wafer foundries requiring price adjustments.

Morgan Stanley Securities semiconductor industry analyst Chia-Hung Chan pointed out that all of Taiwan's major foundry manufacturers mentioned that they "intend to renegotiate contracts with bare wafer suppliers" to explain why they are conservative about GlobalWafers.

First, TSMC pointed out at its January earnings conference that the supply and price of bare wafers had been determined through previous long-term contracts, but it was seeking to renegotiate the contracts. Then, UMC also mentioned at its earnings conference that it was considering renegotiating the contracts, and World Advanced Semiconductor has already begun renegotiating the 2019 contract, but the outcome is still uncertain.

Not only do all wafer foundries have the same idea, but given that UMC suffered a shocking loss in the fourth quarter of 2018 and its relatively conservative outlook for this quarter, Morgan Stanley believes that UMC may still be under pressure to make losses this quarter. It is not surprising that it would start with cost control in order to ease operating pressure. Therefore, the pressure on GlobalWafers from its wafer foundry customers to renegotiate contracts or cut prices in the next few quarters is likely to continue to increase.

UBS Securities also worried in 2018 that once demand weakened, customers would turn to GlobalWafers to renegotiate long-term contracts and redefine the price-volume relationship. It now seems that this worry has come true. Although GlobalWafers' management is relatively optimistic about the market outlook, UBS still believes that the price of 12-inch wafers will fall, while the price of 8-inch wafers will remain relatively stable. However, if the demand for terminal products such as smartphones or servers further declines, the price pressure on bare wafers will be greater.

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