TAIPEI - UMC, the world's No.2 contract chip maker, said on Wednesday it would spend $285 million buying China-based chipmaker Hejian to tap robust demand on the mainland, which it expects to help return it to profit after three quarters in the red.

Since late last year, most tech customers have reduced orders due to sluggish sales of personal computers, cellphones and flat-screen TVs, but sector leader TSMC (2330.TW) and UMC (UMC.N) have benefited from a recent rise in orders from China.

That's a good deal, said Eddie Chen, vice president of Taiwan's National Investment Trust.

UMC can serve more clients there and we all know that labor costs are cheaper there.

As demand gathers speed in the second quarter, UMC said its wafer shipments would more than double from the first quarter, with its capacity utilization rate shooting up to about 75 percent from the first quarter's 30 percent. Average selling prices were expected to fall by less than 5 percent.

UMC expects Q2 revenue to grow significantly, with loss turning into profit, UMC Chief Executive Sun Shih-wei told an investor conference, without specifying whether it was net or operating profit.

On the same day, ASE (2311.TW) (ASX.N), the world's largest chip packager and Taiwan's chip designer Mediatek (2454.TW) also predicted a brighter second quarter.

Taiwan's government restricts local semiconductor makers from exporting their most advanced technologies to China. Currently TSMC has one chip factory using older technology in Shanghai, while UMC's facilities are in Taiwan.

UMC, which owns 15 percent of Hejian now, said it still needs final approval from shareholders in June to allow it to acquire the remaining 85 percent stake.

Q1 LOSS WORSE THAN FORECAST

UMC posted a net loss of T$8.16 billion ($242 million) in January-March, reversing a year-earlier profit of T$206 million and compared with a record loss of T$23.5 billion in the fourth quarter of 2008.

That was worse than analyst consensus estimates for a loss of T$5.78 billion, according to Reuters Estimates.

For a graphic on UMC's results, click: here

And despite some signs of an uptick in demand, price competition still exists in the chip foundry market, where key players are racing to use more advanced process technologies to further cut costs and boost production of new chips.

UMC has been a second source for customers after TSMC and the company really needs a bigger customer base, said Bevan Yeh, a fund manager at Prudential Financial Securities Investment Trust in Taiwan.

But I don't think that can be changed any time soon, said Yeh, who owns TSMC and UMC shares in his portfolios now. On average, UMC has been selling its chips about 10-15 percent cheaper than TSMC's, he said.

Analysts say Taiwan Semiconductor Manufacturing Co Ltd (TSMC) (TSM.N) is set to report its weakest quarterly profit in nearly eight years on Thursday, but TSMC could also give an upbeat note for the current quarter as its business is bottoming out.

Singapore-based Chartered Semiconductor (CSMF.SI) also said last week it expects sales and capacity utilization rates to improve in the second quarter.

Ahead of the results, UMC shares rose 3.6 percent and TSMC shares gained 1.2 percent on Wednesday, outperforming the main TAIEX's 0.3 percent rise.

Investors are already betting on a recovery, pushing TSMC's Taipei-listed shares to a six-month high in April. UMC shares hit their highest level in nearly eight months this month.

($1=T$33.8)

(Editing by Lincoln Feast)

Electronics China