On Wednesday, JPMorgan downgraded Vanguard International Semi (5347:TT) stock from Neutral to Underweight, significantly reducing the price target to NT$72.00 from the previous NT$100.00.
The downgrade comes amid concerns over gross margins (GMs) and the potential impact on dividends. According to the firm, gross margins are expected to remain between 25-30% over the next several quarters due to underutilization and pricing pressure.
The analyst highlighted that Vanguard International Semi's new 12-inch fabrication plant, while a notable investment, will only start contributing in 2027. Moreover, the initial years are expected to see margin dilution due to heavy depreciation.
Concerns were also raised regarding the long-term profitability of the 8-inch fabrication facilities, with a shift in product migration to mature 12-inch platforms potentially diminishing the 8-inch operations' viability as a cash flow source.
JPMorgan also pointed out the risk to Vanguard International Semi's dividend payments. The firm currently pays a cash dividend of NT$4.5, but questions about its sustainability could lead to increased selling pressure. This is especially pertinent considering that 27% of the company's ownership lies with Taiwan high-dividend ETF funds, which are sensitive to dividend consistency.
J.P. Morgan Taiwan Financials Analyst Jemmy Huang provided insights into market dynamics, noting that Vanguard International Semi might already be experiencing outflows, with an estimated 5% of outstanding shares possibly being affected in the upcoming rebalancing in November. This financial outlook suggests a cautious stance on the company's stock for the near future.
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