SINGAPORE (Dow Jones)--Shares of United Test & Assembly Center Ltd. (U12.SG) have languished this year but the stock is the best 2007 pick among Singapore's big chip sector stocks, with surging earnings potentially sweetened by the company's first dividend. The chip tester and assembler is down 1% this year, hurt by high inventories at chip makers, but has about 26% upside over the next 12 months based on the S$0.93 median price target of 13 analysts surveyed by Thomson Analytics. The stock closed Monday at S$0.74.

Having lagged its rivals, UTAC is cheap compared with its peers, while recent expansion to Thailand has enhanced the company's growth potential, adding capacity at a time demand for chips is expected to rise.
Rival chip tester STATS ChipPAC Ltd. has a median price target of 91 Singapore cents from 11 analysts, 22% lower than its closing price of S$1.17, with some analysts saying some of the company's growth projections are overly optmistic.

Chip foundry Chartered Semiconductor Manufacturing is projected to gain 11% from Monday's close of S$1.32 based on its median price target of S$1.47.

Thomson Analytics shows that UTAC's stock is cheaper, trading at only nine times projected 2006 earnings, compared with 20 times for STATS and 35 times for Chartered.

JP Morgan recently downgraded STATS to Underweight from Neutral, saying its recent stock rally, boosted by merger speculations, is unsustainable.

JP Morgan added that STATS' small revenue growth for 2007 and its overhead costs make it "unattractive to invest in".
Meanwhile, OCBC forecasts Chartered to post "weak" fourth quarter revenue, down 5.8% from last year.

Chartered said in October that it expects lower demand for its semiconductors used in the Xbox game consoles of Microsoft Corp., which itself is facing stiff competition from rivals Nintendo and Sony Corp.
A key reason for analysts' bullishness on UTAC is its recent foray into Thailand, where its acquisition in June of NS Electronics Bangkok Ltd., has given a huge boost to production capacity.

An improving picture for chip demand is also positive for UTAC, with Credit Suisse regional technology analyst Manish Nigam predicting that three-quarters of excess chip inventory will be cleared by the fourth quarter and the first quarter of 2007 will see stronger demand.

The Semiconductor Industry Association forecasts global chip sales to rise 9.4% to $248.8 billion this year, 10% to $273.8 billion in 2007, 10.8% to $303.4 billion in 2008 and 5.8% to $321 billion in 2009.

Analysts say demand will be driven by personal computers, Microsoft Corp's new Vista operating system, new game consoles and 3G-enabled communication devices.

The acquisition in Thailand allowed UTAC to raise its 2006 revenue growth target to 70% from 40% and analysts forecast net profit to rise nearly 75% to $72.9 million.

For 2007, analysts forecast net profit to grow 15% to $83.9 million and revenue to rise 28.5% to $711.7 million.

After the company released its third quarter results in October, CIMB-GK warned that higher depreciation and other expenses related to UTAC's new facilities could weigh down on the company's medium-term growth.
Still, CIMB-GK gave UTAC an Outperform rating even though it also expected lower margins due to a change in revenue mix brought by the Thai operations.

A recent ruling by Thailand's central bank may also shield UTAC from potentially higher costs or currency losses in Thailand, an analyst at a foreign bank said.

"If anything, the rules against speculation on the baht would be good for UTAC because a stronger baht is not good for them," he said.
The Bank of Thailand said that from Tuesday, all banks in Thailand would be required to hold in reserve for one year 30% of capital inflows that aren't trade- or services-related or aren't a repatriation of Thai residents' investments abroad.

Phillip Capital Management investment analyst James Chua said the expansion in Thailand will allow UTAC to "leverage on the cheap labor cost" that the Kingdom offers.

UTAC Chief Executive Lee Joon Chung says the company can produce more for less in Thailand and estimates that labor costs are only a fifth of Singapore and Taiwan, where some of UTAC's six plants are located.
UTAC said recently it will invest $100 million over the next three years in Thailand to boost production capacity and hire 1,000 workers for a third plant that will open by the second half of next year.

The head of UTAC's Thai operations, Udom Udompanyavit, has ambitions to invest even more, by adding a fourth plant in 2007, which isn't part of the US$100 million budgeted for expansion. He said this plant would expand the service they're focusing on - an advanced packaging technology called quad-flat non-lead or QFN packaging.
The Thai business, which now produces more than 5 million QFN units per day is expected to double its QFN capacity to 10 million units per week by 2008, Udompanyavit said.

BNP Paribas analyst Bryan Yeong, who has a buy call on the stock, said he was encouraged by UTAC's cross selling strategy, which should boost 2007 earnings.

Cross-selling refers to various chip-packaging services which UTAC could offer to its expanded pool of customers.
Out of its more than 110 major customers, at least 20 new ones are from UTAC Thailand.

Yeong said that UTAC is expanding its QFN capacity to meet rising demand from customers.

UOB-Kay Hian analyst Jonathan Koh, who also has a Buy call on UTAC, said the company's efforts at streamlining its operations, including focusing on specific types of packaging in Singapore and Thailand, is helping it become more efficient.
UTAC's strong growth prospects may also see it pay its first dividend in 2007.

"We haven't fixed a schedule on when we're going to pay dividends...but we're working towards that possibility after 2006," Lee told Dow Jones Newswires.

He has said the company also needs to ensure it has sufficient funds for further investment.

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