TSMC, the world's biggest contract chip maker, said third-quarter sales rose by a fifth from the previous three months, matching its own forecast, thanks to growing chip demand.

TSMC and smaller cross-town rival UMC are widely expected to show slight declines in fourth-quarter sales from the strong third quarter, while a stronger Taiwan dollar also threatens to hurt their profit margins.

The Taiwan dollar has been strong for a while, and that will inevitably have some impact, said Tom Tang, a vice president at Taiwan's Masterlink Investment Advisory.

If we all know sales might slow in the fourth quarter and even the first quarter next year, there won't be too much upside for tech shares, including foundries.

Most analysts remain optimistic on TSMC's business for the whole of 2010, as the foundry giant ramps up production of new chips using more efficient technology to win orders from foreign chip makers that are seeking to cut costs by stepping up outsourcing.

Under its Open Innovation Platform, TSMC aims to keep reducing costs by sharing R&D efforts with its clients.

TSMC is also diversifying into the energy-saving solar industry and beefing up its presence in the power management chip segment to ensure future growth.

As demand gathers speed, Merrill Lynch has raised its forecast on TSMC's 2009 capital spending to $2.5 billion from $2.3 billion, and said the budget could rise 16 percent next year to help boost TSMC's sales by 20 percent.

Merrill Lynch, which has a buy rating on TSMC, said the company could issue a forecast for a 2 percent sequential decline in its fourth-quarter sales at its quarterly investor conference later this month.

In September alone, Taiwan Semiconductor Manufacturing Co (TSMC) had unconsolidated sales of T$28.02 billion ($870 million), down 0.8 percent from a year ago, the company said in a statement on Friday.

July-September consolidated sales totaled T$89.9 billion, according to Reuters calculations, up 21 percent from the second quarter. That was at the higher end of TSMC's own forecast of between T$88 billion and T$90 billion made in July.

A day ago, cross-town rival UMC posted an 18 percent annual rise in its September sales.

In Taipei, TSMC shares closed up 0.33 percent on Friday, lagging the main TAIEX's 0.91 percent. UMC shares jumped 0.65 percent.

Merrill Lynch Investment