20000205

Rohm sparkles as Japan niche chip maker

TOKYO: After quadrupling in value last year, do shares of Japanese custom chipmaker Rohm Co Ltd have any momentum left?

Depends on your time perspective, analysts say. The 12-month outlook is mixed, with Rohm's shares already trading at a hefty premium to other Japanese chipmakers. But earnings of the Kyoto-based chip designer and maker are expected to grow briskly over coming years, rewarding investor buying the stock for the longer haul, electronics analysts believe.

The niche chip maker focuses on producing value-added, customised chips for a variety of consumer electronics and communications equipment.

"Rohm maintains high profitability by focusing on niche areas where it has expertise without major competitors," Nikko Salomon Smith Barney analyst Hisanori Shimoi said. "As long as the company keeps its sharp focus, it can boost profit by more than 20 percent a year over the long term."

Although Rohm is not a household name outside Japan like Sony Corp, it is well-known among foreign investors, who own 43.5 percent in its shares.

At 4.2 trillion yen ($39.03 billion), Rohm's current market capitalisation already makes it worth more than NEC Corp, Japan's biggest chipmaker with a market cap of 3.7 trillion yen.

Toshiba Corp, another major Japanese chip maker, is valued at 2.6 trillion yen, although its sales are more than 16 times greater than Rohm's.

OUTSTANDING PROFIT GROWTH

The secret to its success? Unlike other Japanese chip makers, whose earnings are vulnerable to wild swings in the prices of dynamic random-access memory (DRAM) chips, Rohm has posted consistently strong earnings growth by focusing on customised chips such as system-on-a-chip semiconductors.

"Many electronic parts makers are considered cyclicals because of their volatile earnings", said Schroders Japan analyst Dan Lucas. "But Rohm is highly resistant to market downturns since it specialises in customised products."

Rohm offers advanced, unique devices used in many cutting edge electronics products made by its customers. Rather than competing in the brutal commodity chip end of the business, Rohm makes custom-order chips that command fat premiums.

Rohm's advanced linear technology, which is essential for developing chips for growing digital consumer electronics products, also helps to keep profit margins high.

Consolidated net profit at Rohm, which was founded in 1958, increased nearly nine-fold over the past decade, on sales that doubled.

It earned a group operating profit of 90billion yen in the past year to March, on sales of 328.6 billion yen. That gave it a operating profit to sales ratio of 27 percent, compared to five percent at Sony.

It posted a return on equity of 12.22 percent, the highest among Japan's top electronics manufacturers including Sony, which earned a 9.84 percent return.

For the current business year to March 31, analysts expect Rohm's group operating profit to be somewhere in the 115-125 billion yen range, exceeding the company's own estimate of 111 billion yen.

"Rohm managed to improve its profit margin by an impressive five percentage points over the April-September period from a year earlier. This should boost market consensus for its long-term earnings potential," Nikko Salomon's Shiomi said.

HIGH VALUATION

Rohm shares are currently trading around 35,800, down from a record high of 42,000 yen hit on December 30.

Despite that 14.8 percent decline, some analysts believe the shares may still be overvalued, given the stock is trading at a price earnings ratio (PER) of 37.

ABN Amro senior analyst Hiroshi Takada sees any PER above 30 as cause for some concern. But other analysts argue Rohm is a good buy in comparison to the valuations given to other global niche chip makers such as Franco-Italian company STMicroelectronic

"We will consider raising our current target price of 32,000 yen because Rohm has a higher profit-to-sales ratio than STMicro," Warburg's Izumi said. Rohm's price earnings ratio is lower than STMicro's, he added.

Nikko Salomon's Shimoi said he had already lifted his 12-month target price target for Rohm to 38,000 yen, 45 times estimated earnings per share for 2001/02.

"We picked Rohm as one of the 'BUY' stocks for 2000," Shimoi said. "Rohm warrants a higher valuation than its competitors because it has better long-term growth prospects."-Reuters