Morgan Stanley Concerned With Margin Pressure, Delayed Restructuring At ChipMOS

• ChipMOS Technologies (Bermuda) Ltd (NASDAQ: IMOS) shares are up 11 percent in the last three months, having risen steadily through October.
• Morgan Stanley’s Charlie Chan downgraded the rating on the company from Overweight to Equal-weight, while reducing the price target from NT$40 to NT$35.
• Margin contraction and a delay in restructuring are expected to restrict the company’s valuation in the near future, Chan stated.

Analyst Charlie Chan mentioned that there are no near-term catalysts to boost ChipMOS’s performance. He expects the company’s earnings from both LCD driver ICs and memory backend to decline in the near future.

The company reported weak 3Q results, with EPS short of expectations. ChipMOS’s gross margins contracted from 22.2 percent in 2Q15 to 18 percent in 3Q and are expected to decline further to 14 percent in 4Q. Chan attributed the margin erosion to pricing pressure from the company’s LCD driver IC customers.

A delay in ChipMOS’s group restructuring, which was expected to create additional shareholder value, is also disappointing, the Morgan Stanley report stated, while adding that the company’s diversification into NAND Flash business is yet to produce any results.

Chan expects the company’s market share to decline as its key competitor Powertech, which has a strategic alliance with Micron Technology, Inc. (NASDAQ: MU), expands its DRAM packaging capacity aggressively in 2016. The EPS estimates for 2015 and 2016 have been reduced by 9 percent and 18 percent, respectively.