March 22, 2018
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM: NYSE) $43.69/ADR
Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 4Q17 Earnings Update
Prev. Ed.: Nov 8, 2017; 3Q17 Earnings Update
Firms’ Recommendations: Neutral: 75% (3 firms); Positive: 25% (11); Negative: 0.0%
Prev. Ed: 1, 1, 0
Firms’ Target Price: $45.50 (↑$1.50 from last edition; 2 firms) Firms’ Avg. Expected Return: 5%
Note: A flash update was done on Jan 19, 2018 (4Q17 Earnings Update)
Portfolio Manager Executive Summary
Taiwan Semiconductor Manufacturing Company Ltd. (TSM) manufactures semiconductors using its advanced production processes based on its own or third-party proprietary integrated circuit (IC) designs. The company offers a range of wafer-fabrication processes, including those required to manufacture complementary metal oxide semiconductor (CMOS) logic, mixed-signal, radio frequency (RF), and embedded memory bipolar CMOS (BiCMOS) mixed-signal and other semiconductors. Taiwan Semiconductor also offers design, mask-making, probing, testing and assembly services.
Key factors for evaluating an investment strategy for Taiwan Semiconductor are as follows:
Taiwan Semiconductor Manufacturing Company holds a strong position in advanced technology production and will continue to gain design wins from leading global fabless houses and IDMs.
Taiwan Semiconductor, the largest foundry in the world, is more than three times the size of its nearest competitor, United Microelectronics Corporation (UMC), in terms of sales.
The company aims to gain market share in the long run.
Long-Term Outlook: According to the analyst, Taiwan Semiconductor is accelerating the deployment of its advanced process technology to maintain the competitive edge. The company is also progressing well with the development of the next generation 45-nanometer (nm) technology based on a new immersion technology. The novel 45-nm technology places Taiwan Semiconductor ahead of its competitors.
Jul 25, 2017
© Copyright 2018, Zacks Investment Research. All Rights Reserved. Overview
Taiwan Semiconductor Manufacturing Company Limited (TSM) is a semiconductor foundry based in Hsinchu, Taiwan. The company manufactures semiconductors using processes based on its own or third- party integrated circuit (IC) designs. The company offers a range of wafer fabrication processes, including processes to manufacture complementary metal oxide semiconductor (CMOS) logic, mixed-signal, radio frequency (RF), and embedded memory and bipolar complementary metal oxide semiconductor (BiCMOS), mixed-signal and other semiconductors. It also offers design, mask making, probing, and testing and assembly services. The company's e-foundry customer service program features real-time, online information exchange during manufacturing and logistical support, which is sub-contracted to third parties before products are shipped to customers for handling, assembly and final testing. Taiwan Semiconductor’s website is www.tsmc.com.
The analysts identified the following key factors for evaluating the investment merits of Taiwan Semiconductor:
Key Positive Arguments Key Negative Arguments Dominant market position in the 45-nm market Taiwan Semiconductor is subject to the volatile provides Taiwan Semiconductor with a steady semiconductor cycle risk. revenue stream. The foundry industry is highly competitive. The company has begun full production of its 45-nm The company faces stiff competition in the Chinese process technology for high-performance designs. semiconductor market. The company is expected to strengthen its Emerging IDM foundries (IBM, Samsung and customer relationships with 90-nm and 65-nm Toshiba) confirmed plans to expand their foundry programs. service businesses. The company is a leader in the foundry industry, The company is exposed to customer concentration supplying high-volume wafer capacity with cutting- risk with the top 10 customers providing the bulk of edge technology. its revenues. Any pricing improvement could further add to the The company has a history of paying stock options company’s margin leverage. to employees, which can dilute earnings. The company is highly dependent on Philips and Taiwan’s development fund. Earthquakes pose a constant threat to the island of Taiwan.
Note: The company’s fiscal year references coincide with the calendar year. The company reports results in New Taiwan dollars (NT$). 1 ADR equals 5 ordinary shares.
Jul 25, 2017
Long-Term Growth
The analyst expects Taiwan Semiconductor to benefit from the improving fundamentals of the industry and its strength in the communications end market. The company retains a competitive advantage in the advanced chip process technology.
According to the analyst, Taiwan Semiconductor is accelerating the deployment of its advanced process technology in order to stay ahead of its peers. The company is also progressing well with the development of
Zacks Investment Research Page 2 www.zackspro.com next generation 45-nm technology based on a new immersion technology. As 45-nm is a leap ahead in technology, the analyst believes that it will provide Taiwan Semiconductor a competitive edge over its peers. Moreover, the analyst believes that Taiwan Semiconductor’s scheduled launch of 40-nm and 28-nm processes will enhance its competitive position in the long term.
Jul 25, 2017
Target Price/Valuation (In US$/ADR)
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating Distribution In US$ Positive 25.0% Neutral 75.0 %↑ Negative 0.0% Average Target Price $45.50↑ Digest High $49.00↑ Digest Low $42.00↑ No. of Analysts with Target Price/Total 2/4
Risks to the target price include slower-than-expected global economy growth, margin and market share decline due to price competition, project/customer losses, intensifying competition, inventory correction and NT dollar appreciation. Furthermore, a slowdown in the macroeconomic environment, natural calamities, excess foundry capacity resulting from government-funded projects in China and technical difficulties in the U.S. with the ramping up of new process technology and loss of customers are also risks to the target price.
Recent Events
On Jan 18, 2017, Taiwan Semiconductor announced 4Q17 results. Highlights are as follows:
Total revenues were NT$277.6 billion, up 5.9% from the prior-year quarter and 10.1% sequentially.
Earnings per share (EPS) were NT$3.83 (US$0.64 per ADR unit) in 4Q17, down 1% year over year(y/y) but up 11% sequentially.
Revenues
According to the press release, total revenues were NT$277.6 billion, up 5.9% from the year-ago quarter and 10.1% sequentially.
The sequential increase was primarily driven by major mobile product launches and continuing demand for cryptocurrency mining.
Zacks Investment Research Page 3 www.zackspro.com North America accounted for 67% of total revenues. Asia Pacific, China, EMEA (Europe, Middle East, and Africa), and Japan accounted for 7%, 13%, 7%, and 6% of total revenues, respectively.
By application, Computer, Communication, Consumer and Industrial/Standard increased 11%, 62%, 5% and 22%, respectively.
By technology, 10-nanometer (nm) process technology contributed 25% of total wafer revenues. The combined 16/20-nm contribution was 20% of total wafer revenues.
Outlook
For 1Q18, revenues are expected in the range of $8.40-$8.50 billion.
Margins
Per the press release, gross margin was 50.0%, up 10 basis points (bps) sequentially but down 230 bps year over year. The sequential increase was mainly attributable to a higher level of capacity utilization and inventory valuation adjustment, partially offset by margin dilution from higher 10nm contribution and an unfavorable exchange rate.
Total operating expenses were NT$28.8 billion compared with NT$27.2 billion in 4Q16. Research and development (R&D) expenses were NT$21.2 billion compared with NT$20.0 billion in the year-ago quarter. General and administrative expenses (SG&A) increased to NT$7.6 billion from NT$7.2 billion in the year-ago period.
Operating income was NT$108.9 billion in 4Q17, down 1% y/y but up 11% sequentially. Net income was NT$99.3 billion, down 0.9% from the year-ago quarter but up 10.4% on a sequential basis.
Outlook
For 1Q18, gross margin is expected in the range of 49.5-51.5%, while operating margin is expected within 38-40%.
Earnings per ADR
According to the press release, earnings per share were NT$3.83 (US$0.64 per ADR unit) in 4Q17, down 1% year over year but up 11% sequentially.
Outlook
The company did not provide any earnings per share guidance for 1Q18.
Research Analyst Shalu Saraf Copy Editor Shremoyee Mandal Content Ed. QCA/ Lead Analyst Aniruddha Ganguly No. of brokers reported/Total brokers Reason for Update 4Q17 Earnings Update
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