Company Reports

We keep our TWD 950 per share fair value estimate for wide-moat Taiwan Semiconductor Manufacturing (lowered to USD 146 per ADR from USD 151 with an updated exchange rate) as there is no change in the company’s long-term thesis. TSMC’s disciplined approach to capital spending in 2024—and possibly in the next few years—reduces risks of oversupply, and allows more flexibility in cutting-edge research to maintain its leadership. TSMC’s shares remain attractive, as artificial intelligence-related demand continues to pleasantly surprise us, and there is limited downside to sentiment for the automotive and industrial markets.

We retain our fair value estimate of TWD 950 per share (USD 151 per ADR) for Taiwan Semiconductor Manufacturing after the firm received preliminary approval for up to USD 6.6 billion in grants and USD 5 billion in loans under the Chips Act. We intend to finalize our forecasts after TSMC’s earnings call on April 18, during which management will likely provide more information on the grant. Regardless of the Chips Act funds, TSMC is undervalued as the firm’s dominant position in cutting-edge chips is sometimes overshadowed by geopolitical risks, which is partially addressed in this grant.

We retain our fair value estimates on Taiwanese technology companies in our coverage following a powerful earthquake and multiple strong aftershocks near the eastern city of Hualien on April 3, namely: Advantech at TWD 337; Delta Electronics at TWD 331; GlobalWafers at TWD 710; Largan at TWD 3,000; MediaTek at TWD 1,400; Sino-American Silicon at TWD 281; Taiwan Semiconductor Manufacturing Co at TWD 950 (USD 151 per ADR); United Microelectronics Corp at TWD 70; and Win Semiconductors at TWD 245 per share.

We lifted our fair value estimate for Taiwan Semiconductor Manufacturing to TWD 950 per share (USD 151 per ADR at current exchange rates) after management provided a better full-year 2024 outlook than we foresaw thanks to strong artificial intelligence-related growth and lowered 2024 capital expenditure budget. The release of AI-capable consumer devices strengthens our belief that AI is here to stay, and the high growth phase will not be over soon. TSMC’s disciplined approach to capital spending in 2024 should reassure investors concerned with an underwhelming recovery and potential gluts two to three years ahead. With the stock undervalued to our fair value, we don't think it is too late for investors to jump on the stock.

Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated contract chip manufacturer, or foundry. It makes integrated circuits for customers based on their proprietary IC designs. The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.

We raise our fair value estimate on Taiwan Semiconductor Manufacturing, or TSMC, to TWD 900 per share (USD 139 per ADR at current exchange rates) after management gave upbeat fourth-quarter guidance fueled by stronger-than-expected smartphone sales, and we cut capital expenditure forecasts. We now expect TSMC to stop increasing capital expenditure in 2024 to brace for a weak economy and focus on addressing bottlenecks for artificial intelligence applications that will bring the same revenue growth. By doing so, TSMC has more room to increase dividends. Better shareholder returns and an improving consumer electronics outlook should improve sentiment soon, and investors are presented with a solid entry point while the stock remains very undervalued.

Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated contract chip manufacturer, or foundry. It makes integrated circuits for customers based on their proprietary IC designs. The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.

Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated contract chip manufacturer, or foundry. It makes integrated circuits for customers based on their proprietary IC designs. The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.

We maintain our fair value estimate on Taiwan Semiconductor Manufacturing, or TSMC, at TWD 850 per share (USD 137 per ADR at current exchange rates) after revising down our 2023 forecasts but retaining later-year projections. We believe TSMC remains cheap as a significant beneficiary in high performance computing, or HPC, which includes generative artificial intelligence. Although tapered guidance may pose short-term downside, market sentiment seems to be moving away from concerns of inventory correction and weak macro to consumer electronics rebound and the potential addressable market of AI.

We maintain our fair value estimate on Taiwan Semiconductor Manufacturing, or TSMC, at TWD 850 per share (USD 139 per ADR at current exchange rates) as the effects of our lower 2023-27 revenue and 2023 capital expenditure forecasts offset each other. We believe TSMC remains undervalued as it is a significant beneficiary in high performance computing, or HPC, with upside surprise potential from generative artificial intelligence, or AI. While its first-quarter revenue and second-quarter guidance trailed our expectations, we see limited share price downside as inventory correction is priced in, but confidence in its long-term outlook has been renewed by its resilient capital spending budget.

We maintain our fair value estimate on Taiwan Semiconductor Manufacturing, or TSMC, at TWD 850 per share (USD 140 per ADR at current foreign exchange rates) after making minor changes to our model. TSMC’s expansion plans around the globe bolster our confidence in the company’s long-term outlook not only in high performance computing, or HPC, but also in automotives, hence we still view TSMC’s shares as very undervalued. The company’s conservative capital spending budget and recent weak operational data in the supply chain suggest TSMC’s share price may have bottomed—and we believe market sentiment may improve once more positive economic data from China are reported.

Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated contract chip manufacturer, or foundry. It makes integrated circuits for customers based on their proprietary IC designs. The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.

We have cut our fair value estimate for Taiwan Semiconductor Manufacturing Co. to TWD 850 per share/USD 133 per ADR as we bake in more conservative assumptions on high-performance computing demand in 2023 and 2024. We anticipate 2023 demand to be affected by sluggish PC demand and rebalancing of enterprise computing operations in light of fresh U.S. restrictions on doing business with Chinese customers. Nonetheless, we believe these do not change the long-term addressable market for HPC, and we still view TSMC’s shares as grossly undervalued. Having seen TSMC’s sequential decline in inventory days and management reducing capital expenditure by 10%, we foresee lower inventory dollars and a cautious 2023 capital expenditure budget (say flat year on year) as signs of the stock bottoming.

Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated contract chip manufacturer, or foundry. It makes integrated circuits for customers based on their proprietary IC designs. The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.

We retain our fair value estimates for TSMC at TWD 990 (USD 166 per ADR), UMC at TWD 62, and SMIC at HKD 21 per share respectively after the U.S. Department of Commerce introduced new rules to restrict semiconductor-related exports to China on Oct. 7. We intend to update our forecasts for both companies once they announce financials later this month. We believe short-term uncertainties over foundry demand will increase, as China is the world’s second-largest cloud computing market, and local cloud service providers may struggle to secure chips for their expansion initiatives. The new shock may further dampen sentiment in a sector that is already ravaged by weak consumer electronics demand. However, our long-term outlook remains positive, since export licenses are still possible under the new rules, and unfulfilled demand can be met by overseas peers. Although we believe TSMC is undervalued as an outsize beneficiary in cloud services over the long term, its near-term share performance may be weaker than UMC and SMIC given its exposure in cutting-edge nodes.

We maintain our fair value estimate of TWD 990 on Taiwan Semiconductor Manufacturing Company, or TSMC. The ADR fair value estimate is updated to USD 166 in line with the current spot exchange rate. The main model changes are higher 2022 top and bottom lines to account for market share gains from Samsung and weaker 2023 revenue growth and gross margin assumptions due to ongoing semiconductor inventory correction and raw material cost pressure. We reiterate TSMC’s shares are very undervalued at around 14 times 2023 P/E, as we continue to expect TSMC’s diluted EPS to attain 16.7% 2021-26 CAGR even after factoring in a 10% EPS drop in 2023. TSMC’s P/E is now the lowest in the past five years, including a period of weak demand in late 2018.

Taiwan Semiconductor Manufacturing, or TSMC, is the world’s largest dedicated contract chip manufacturer, or foundry. It makes integrated circuits, or ICs, for customers based on their proprietary IC designs. The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand that can result in underutilization during downturns that hampers profitability.

After TSMC presented at its annual Technology Symposium event, we remain confident on the company’s technology leadership and execution of cutting-edge chip manufacturing. We view this translates into strong pricing power that can more than offset macroeconomic inflationary pressures, which is in line with our investment thesis. The event can also dispel some of the concerns arising from TSMC confirming its roadmap later than Samsung and Intel. Subsequent to the event, we maintain our fair value estimate of TWD 990 and wide moat rating, and see shares as undervalued.

We maintain our fair value estimate of TWD 990 for Taiwan Semiconductor Manufacturing Company, or TSMC, in the absence of a change in the capital expenditure budget (up to USD 44 billion) and long-term revenue guidance. Our ADR fair value estimate is trimmed to USD 171 with an updated spot exchange rate. We think the Ukraine-Russia conflict, sluggish smartphone outlook, and macroeconomic uncertainty have together created enticing entry points to the stock, which is now trading at under 20 times 2022 P/E.

Our fair value estimates for: United Microelectronics Corp, or UMC (TWD 52); Taiwan Semiconductor Co, or TSMC (TWD 990), and Semiconductor Manufacturing International, or SMIC (HKD 21), are unchanged amid war in Ukraine and raw material markets' volatility. We believe foundries’ inventory of raw materials and gases, and their long-term agreements with suppliers help cushion most short-term supply shocks and buy time for securing alternative sources if the conflict drags on. Today’s risk aversion serves as an entry point for TSMC, in our view.