  By Mark LaPedus Silicon Strategies 08/17/2004, 12:40 $Ä ET NEW YORK — Semiconductor stocks remain depressed in the marketplace, including those in the booming silicon foundry sector.
Cristina Osmena, an analyst with Jefferies & Co., an investment banking firm in New York, initiated coverage — and put separate "hold" ratings — on foundry rivals Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and Semiconductor Manufacturing International Corp. (SMIC). In addition, one of China's first foundries, CSMC Technologies Corp., suffered an opening day setback for its initial public offering in Hong Kong last Friday (Aug. 13), affected by an overall slump in technology shares and a more cautious view of the China foundry market (see Aug. 16 story). TSMC, the world's largest silicon foundry vendor, is expected to earn $0.60 per ADS in 2004 and $0.65 per ADS in 2005, Osmena said in a report, which was issued on Tuesday (Aug. 17). "We are initiating coverage on TSMC with a rating of 'hold' and a price target of $6.70, essentially in line with the current share price, based on three times book value per share," she said. TSMC's stock price reflects the company's defensive strategy. "Since the company has adopted a new focus [initiated during the downturn] of generating a return on equity, it has added capacity more rationally, ceding market share during an environment of tight utilization," she said. "As utilization eases, we expect share to migrate back to TSMC, given its superior process technology," she added. "TSMC, in our opinion, is a defensive play during times of sector decline and should perform better than its peer group.
" Meanwhile, Chinese foundry startup SMIC is expected to earn $0.33 per ADS in 2004 and $0.49 per ADS in 2005, Osmena said. "We are initiating coverage on SMIC with a rating of Hold and a and a price target of $8.80, down slightly from the current share price, based on 1 times projected book value per share," she said. "SMIC is the up-and-comer foundry, growing share to the fourth largest among pure-play foundries only two years after generating revenues," she said.
"SMIC, in our opinion, is an upturn play and stands to benefit from the buildout of technology infrastructure in China and the high growth of indigenous demand in that nation. " The foundry vendor faces some challenges, however. "Meanwhile, this newly formed company faces the burden of increased depreciation costs during a potentially challenging year. Dependence on long-term IDM contract business has yet to be tested by a downturn," she added. 
