Jonathan Hopfner EE Times (02/28/2007 9:52 $A EST)

SINGAPORE ? After impressing industry watchers with strong 2006 results, Singapore's United Test and Assembly Center (UTAC) Ltd. believes regional alliances and recent acquisitions will spur growth this year, despite rapid pricing declines in the flash memory market. UTAC is pinning part of its growth strategy on a joint assembly and test facility in Chengdu, China, with foundry Semiconductor Manufacturing International Corp. (SMIC). The JV got off to a "cautious" start in 2006, but "we expect that this year (it) should be able to break even, maybe be slightly profitable," said UTAC President and CEO Lee Joon Chung in an interview with EE Times.

Lee said escalating costs, high attrition rates and a relative lack of industry experience made China a "tough market" for electronics manufacturers.

"To build a plant there with the same level of quality you have in Singapore takes time," he said. "We're very prudent on investment in China. We know that the opportunity is big, but we don't want to rush."

UTAC is one of four bidders seeking to team up with South Korea's Hynix Semiconductor for a joint assembly and test venture in Wuxi, China, according to recent media reports. An announcement on the facility is expected in the coming weeks.

Despite weaker than anticipated demand weighing on the group's mixed-signal business in the middle of the year, UTAC's 2006 revenues shot up 75 percent to $569.9 million, beating the group's 70 percent growth target. Profits rose more than 80 percent to $76.2 million, a far cry from the blistering 245 percent growth registered in 2005, but a performance still impressed analysts.

Local brokerage OCBC Securities described the results as "much better than expected," while UBS Investment Research said UTAC had delivered a set of "very strong numbers," with a "healthy increase" in capacity utilization and margins.

The memory segment has proved UTAC's star performer, with strong demand for consumer devices helping both DRAM and flash sales beat expectations in the final quarter.

Despite the looming threat of oversupply, Lee said the memory business would continue to serve UTAC well in the future, with lower prices spurring demand and helping the market burn off excess inventory.

He also dismissed concerns about new entrants heightening competition in the memory sector, which UBS cited as one of the biggest risks facing the group in its recent research note.

Ongoing consolidation and the high costs associated with the migration to 65nm technology mean "we don't foresee new players jumping on the DRAM bandwagon," Lee said.

Expected seasonal weakness has prompted UTAC to issue a cautious outlook for early 2007, with revenues likely to remain flat or drop slightly in the first quarter. But the company is still aiming to outdo the general industry growth rate, in part because of its Bangkok-based subsidiary UTAC Thai Ltd., which it acquired in June 2006 for $175 million.

The group has since worked on concentrating mature packaging activities in Thailand, devoting its Singapore facilities to substrate-based packaging and test. Lee said the Thai operations will bring even more to the group's bottom line in the second half of 2007 as the two facilities exchange more customers.

In December, UTAC gave the go-ahead for a new test operations and distribution center in Thailand that will be up and running by mid-2007. The group plans to spend some $260 million this year to expand production and boost R&D.

A joint wafer bumping venture in Singapore with South Korea's Nepes is also ramping up and should start generating significant revenues this year after focusing on customer qualifications in 2006, he said.

Analysts appear to be backing further tie-ups for UTAC, with UBS calling the company's focus on M&A an "upside risk" and noting the recently acquired Thai business "has been successfully integrated and is delivering on its promise."

Further buyouts could help UTAC address what UBS sees as its greatest vulnerability ? the company's relatively small size. Compared to market leaders like Taiwan's ASE Group, UTAC lacks scale and has a concentrated customer base. UBS warned its increasing focus on mixed signal and logic products would put it in direct competition with much larger players.