Taiwan Semiconductor Manufacturing

08 January 2015 Asia Pacific/Taiwan Equity Research Semiconductor Devices

Taiwan Semiconductor

Manufacturing (2330.TW / 2330 TT) Rating (from Outperform) NEUTRAL Price (08 Jan 15, NT$) 138.00 DOWNGRADE RATING Target price (NT$) 145.00¹ Upside/downside (%) 5.1 Mkt cap (NT$ bn) 3.58 (US$ 111,910 mn) Competition heats up in 2015 Enterprise value (NT$ mn) 3,463,889 ■ Competitive landscape a key focus for 2015. We downgrade TSMC to Number of shares (mn) 25,929.87 Free float (%) 87.3 NEUTRAL from Outperform with TP unchanged at NT$145, toning down our 52-week price range 141.5–100.5 positive view of the past five years. We see increasing customer ADTO - 6M (US$ mn) 148.6 concentration risks where further share gains are limited and may slip, *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. moderating growth from mobile; rising competitors finally lifting their yields; ¹Target price is for 12 months. and valuation back in line with Taiwan tech and its historical average due to

Research Analysts slowing YoY/sequential momentum after the likely strong 4Q14 results report. Randy Abrams, CFA ■ Customers more concentrated but now able to diversify. Qualcomm, 886 2 2715 6366 [email protected] Apple and Mediatek have supplied half of TSMC's growth in the past four Nickie Yue years and to boost TSMC’s growth 700 bp to 16%. Further share is capped 886 2 2715 6364 or might even slip as Apple brings Samsung/GF back in for iPhone, [email protected] Qualcomm relies more on Samsung/GF/UMC/SMIC, and further Mediatek gains are capped with TSMC's share up from 20% to 70% since 2007. Samsung/GF is making yield progress to ramp 14nm in 2015 and 2nd tier foundries are finally viable on 28nm and suited to bid for mobile designs staying on lower cost 28nm LP. ■ Technology, cash flow and GM support keeps us from being too negative. We are not becoming overly bearish as TSMC is controlling what it can to ramp advanced technology well, getting margin support from good yields, easing depreciation burden, NTD tailwind and inventory prebuild to maintain high utilisation. Rising FCF from moderating growth will support a rising dividend yield and its eventual transition from a growth to a value stock. ■ Revising estimates, approaching fair value. We factor in the 5% NTD depreciation (NT$0.57) benefit for 2015 to lift our 2015 EPS from NT$11.00 to NT$11.50, above the street estimate of NT$11.17 (before the NTD move) with most other assumptions unchanged. We now rate TSMC NEUTRAL with a target price of NT$145, placing it at mid-cycle 3x forward P/B (versus its 2.5-3.5x range) and 12.6x P/E (versus a 10.5-15x range).

Share price performance Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 597,024.2 760,337.8 871,866.3 942,619.9 160 140 EBITDA (NT$ mn) 365,611.2 496,006.2 573,608.1 620,902.5 140 120 EBIT (NT$ mn) 209,429.4 294,558.2 340,401.6 354,062.4 120 Net profit (NT$ mn) 188,146.8 261,911.8 298,262.6 311,148.1 100 100 EPS (CS adj.) (NT$) 7.26 10.10 11.50 12.00 80 80 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0.5 4.5 0.0 Consensus EPS (NT$) n.a. 10.0 11.1 12.1 The price relative chart measures performance against the EPS growth (%) 13.1 39.2 13.9 4.3 TAIWAN SE WEIGHTED INDEX which closed at 9238.03 on P/E (x) 19.0 13.7 12.0 11.5 08/01/15 On 08/01/15 the spot exchange rate was NT$31.98/US$1 Dividend yield (%) 2.2 2.2 2.9 3.6 EV/EBITDA (x) 9.7 7.0 5.8 5.2 Performance over 1M 3M 12M P/B (x) 4.2 3.5 2.9 2.5 Absolute (%) — 10.4 32.7 — ROE (%) 24.0 27.8 26.4 23.6 Relative (%) -1.2 7.4 24.7 — Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

08 January 2015 Focus charts Figure 1: TSMC volumes with Apple at a two-year high Figure 2: TSMC's Qualcomm allocation now declining US$mn Apple % of TSMC US$mn Allocation % $1,400 14% $9,000 90%

$1,200 12% $7,500 75% $1,000 10% $6,000 60% $800 8% $4,500 45% $600 6%

$400 4% $3,000 30%

$200 2% $1,500 15%

$0 0%

Figure 3: TSMC 28nm share falls as Tier 2 foundries ramp Figure 4: TSMC penetration at Mediatek already high 28nm sales (US$mn) TSMC % NT$mn Allocation % 50,000 80% 3,500 45,000 90% 70% 3,000 40,000 60% 75% 2,500 35,000 30,000 50% 60% 2,000 25,000 40% 1,500 45% 20,000 30% 15,000 20% 1,000 30% 10,000 10% 500 15% 5,000 0 0%

0 0%

4Q12 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

3Q15E 3Q16E 4Q14E 1Q15E 2Q15E 4Q15E 1Q16E 2Q16E 4Q16E

2008 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014E TSMC Volume UMC Volume GF / Chartered Volume SMIC GlobalFoundries UMC TSMC TSMC % (ex-Samsung) TSMC % UMC % GF / Chartered % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: Intel starting to carve out more tablet share Figure 6: TSMC YoY earnings slows after 4Q14 100% Net income YoY (%) Other Other Other NT$mn 90% TI OMAP NVIDIATI OMAP Tegra TI OMAP Qualcomm 100,000 90.0% Samsung NVIDIA Tegra 90,000 80% NVIDIA Tegra Qualcomm Exynos 75.0% Qualcomm Samsung 80,000 70% Samsung Exynos Allwinner Exynos 70,000 60.0% 60% Allwinner Allwinner Intel 60,000 45.0% Intel Intel 50% Mediatek 50,000 Rockchip Mediatek 30.0% Mediatek 40,000 40% Rockchip 30,000 15.0% 30% Rockchip 20,000 0.0% 20% Apple Ax 10,000

Apple Ax - -15.0%

2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 10% Apple Ax 1Q13

0% 2012 2013 2014 Net income YoY Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 7: Rising cash flows can support rising dividends Figure 8: TSMC managing utilisation to hold up GMs Dividend FCF and Dividends Gross margin Utilization Yield per Share 55% 110% 10.0% $10.00 50% 100% 8.0% $8.00 45% 90% 6.0% $6.00 40% 80% 4.0% $4.00 35% 70% 30% 60% 2.0% $2.00 25% 50% 0.0% $0.00 20% 40%

15% 30%

CY05 CY03 CY04 CY06 CY07 CY08 CY09 CY11 CY12 CY13

CY10A CY14E CY15E CY16E

3Q96 4Q01 1Q95 4Q95 2Q97 1Q98 4Q98 3Q99 2Q00 1Q01

1Q07 2Q12 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 1Q13 4Q13 3Q14

Dividend Yield (%) (lhs) FCF / Share (rhs) 2Q15E TSMC gross margin (lhs) TSMC quarterly utilization Dividend / Share (rhs) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 2 08 January 2015 Competition heats up in 2015 We are downgrading TSMC to NEUTRAL from Outperform with TP unchanged at NT$145, Downgrading to Neutral as toning down our positive view since the financial crisis due to increasing customer competitive challenges concentration risks, moderating growth, rising competition and valuation being back in line again rise with Taiwan tech and its historical average. More specifically, (1) TSMC's business is growing more concentrated at its top three mobile customers where further share gains are limited, (2) tier two foundries are finally ramping the high volume 28nm node at better yields, (3) mobile continues to mature and shift down market, with TSMC gaining less high-end share after penetrating Apple last year, and (4) sequential sales and earnings momentum are now slowing through 2015. We are not overly negative due to TSMC's own good technology execution and rising cash flows and yields as growth moderates. Customers more concentrated and diversifying as Tier 2 foundries ramp TSMC's top three customers (Qualcomm, Apple and Mediatek) supplied half of its growth TSMC's top three customers over the past four years and boosted TSMC’s growth 700bp to 16%. We now see share have driven half the growth capped or even slipping as Apple brings Samsung/GF back in for iPhone; Qualcomm over the past four years but relies on Samsung/GF/UMC/SMIC; and further Mediatek gains are capped with TSMC's further gains now look share there already up from 20% to 70% since 2007. Samsung/GF is making yield capped progress to ramp 14nm in 2015 and second tier foundries are finally viable on 28nm to capture mobile chips staying on the less complex and lower cost 28nm LP process. Mobile moderates and shifts down market, TSMC's high-end also slows The smartphone/tablet market has powered the communications vertical to rise from 40% TSMC's largest vertical with to 60% of TSMC's sales since 2009, with TSMC adding one extra year of high-end growth smartphones/tablets also adding Apple's processor last year. We now estimate high single digit mobile growth after maturing, with a strong double digit rise in the past few years, with high-end flat or potentially slightly Samsung/Intel also down from market share shifts, and low-cost smartphones to decelerate. At the same time, contending more Samsung may retake some in-house baseband from QCOM (raising insourcing from 30% to 50%) and Intel is emerging in tablets, taking 15% share in 2014 and shifting its low cost smartphone strategy to back Spreadtrum/Rockchip, hoping to insource from TSMC in the longer term. Technology, CFs, and GM support keeps us from being too negative While we downgrade the stock to Neutral, we are not moving into the bear camp as (1) TSMC will still harvest more TSMC is executing well on technology to ensure good yields/margins and reasonable cash flow as growth share and pricing, (2) it has a sizeable mature node base where the technology landscape moderates, supporting rising is more stable, and (3) it is committed to returning free cash flow through rising dividends cash yields as it harvests more cash. Margins will see support from good yields, easing depreciation growth, pre-builds in the low season to maintain utilisation, and NTD depreciation tailwind. Revising estimates, approaching fair value We factor in the 5% NTD depreciation (NT$0.57) benefit to lift our 2015 EPS from Factoring in the NTD NT$11.00 to NT$11.50, above the street's estimate (before the NTD move) of NT$11.17, (NT$0.57) depreciation with most other assumptions unchanged. We now rate TSMC NEUTRAL with a target tailwind to lift estimates, price of NT$145, placing it at mid-cycle 3x forward P/B (versus a 2.5-3.5x range) and maintaining NT$145 target 12.6x P/E (versus a 10.5-15x range). The stock is well owned by QFIIs (always) at 78%. at 3x P/B and 12.6x P/E

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 3 08 January 2015

Taiwan Semiconductor Manufacturing 2330.TW / 2330 TT Price (08 Jan 15): NT$138.00, Rating: NEUTRAL, Target Price: NT$145.00, Analyst: Randy Abrams Target price scenario Key earnings drivers 12/13A 12/14E 12/15E 12/16E Scenario TP %Up/Dwn Assumptions Capacity (8"" WPM Kpcs) 16,856 18,812 20,628 22,199 Upside 123.35 (10.61) 17x 2013 EPS Shipment (8"" WPM Kpcs) 15,666 18,585 19,333 20,163 Central Case 145.00 5.07 15x 2013 EPS Utilization rate (%) 0.93 0.99 0.94 0.91 Downside 87.07 (36.90) 12x 2013 EPS ASP (USD) 1,173 1,259 1,338 1,387

— — — — Income statement (NT$ mn) 12/13A 12/14E 12/15E 12/16E Per share data 12/13A 12/14E 12/15E 12/16E Sales revenue 597,024 760,338 871,866 942,620 Shares (wtd avg.) (mn) 25,929 25,930 25,930 25,930 Cost of goods sold 316,058 383,872 438,036 486,224 EPS (Credit Suisse) 7.3 10.1 11.5 12.0 SG&A 23,398 24,907 25,579 28,153 DPS(NT$) (NT$) 3.00 3.00 4.00 5.00 Other operating exp./(inc.) (108,043) (145,084) (165,357) (192,660) BVPS (NT$) 32.7 39.9 47.4 54.4 EBITDA 365,611 496,006 573,608 620,903 Operating CFPS (NT$) 13.4 15.0 20.3 21.8 Depreciation & amortisation 156,182 202,084 233,207 266,840 Key ratios and valuation 12/13A 12/14E 12/15E 12/16E EBIT 209,429 294,558 340,402 354,062 Growth(%) Net interest expense/(inc.) 811 1,214 (750) (1,697) Sales revenue 17.8 27.4 14.7 8.1 Non-operating inc./(exp.) 2,897 3,262 4,000 4,000 EBIT 15.6 40.6 15.6 4.0 Associates/JV 3,972 3,972 — — Net profit 13.1 39.2 13.9 4.3 Recurring PBT 215,487 300,579 345,151 359,760 EPS 13.1 39.2 13.9 4.3 Exceptionals/extraordinaries — — — — Margins (%) Taxes 27,468 38,630 46,889 48,612 EBITDA 61.2 65.2 65.8 65.9 Profit after tax 188,019 261,948 298,263 311,148 EBIT 35.1 38.7 39.0 37.6 Other after tax income 91.5 (36.4) — — Pre-tax profit 36.1 39.5 39.6 38.2 Minority interests (36.4) — — — Net profit 31.5 34.4 34.2 33.0 Preferred dividends — — — — Valuation metrics (x) Reported net profit 188,147 261,912 298,263 311,148 P/E 19.0 13.7 12.0 11.5 Analyst adjustments — — — — P/B 4.22 3.46 2.91 2.54 Net profit (Credit Suisse) 188,147 261,912 298,263 311,148 Dividend yield (%) 2.17 2.17 2.90 3.62 Cash flow (NT$ mn) 12/13A 12/14E 12/15E 12/16E P/CF 10.3 9.2 6.8 6.3 EBIT 209,429 294,558 340,402 354,062 EV/sales 5.96 4.56 3.85 3.46 Net interest (811) (1,214) 750 1,697 EV/EBITDA 9.7 7.0 5.8 5.2 Tax paid (27,468) (38,630) (46,889) (48,612) EV/EBIT 17.0 11.8 9.9 9.2 Working capital (18,393) (74,247) 1,401 (20,093) ROE analysis (%) Other cash & non-cash items 184,626 208,369 231,717 279,251 ROE 24.0 27.8 26.4 23.6 Operating cash flow 347,384 388,836 527,380 566,306 ROIC 24.0 29.3 30.6 29.2 Capex (287,595) (289,775) (318,150) (348,440) Asset turnover (x) 0.47 0.53 0.53 0.51 Free cash flow to the firm 59,789 99,060 209,230 217,866 Interest burden (x) 1.03 1.02 1.01 1.02 Disposals of fixed assets 173.6 163.0 — — Tax burden (x) 0.87 0.87 0.86 0.86 Acquisitions — — — — Financial leverage (x) 1.49 1.39 1.33 1.30 Divestments — — — — Credit ratios Associate investments — — — — Net debt/equity (%) (2.1) (11.1) (18.3) (22.6) Other investment/(outflows) 6,367 7,347 (6,506) (6,506) Net debt/EBITDA (x) (0.05) (0.23) (0.39) (0.51) Investing cash flow (281,054) (282,266) (324,656) (354,946) Interest cover (x) 258 243 (454) (209) Equity raised — — — — Dividends paid (77,773) (77,786) (103,718) (129,647) Source: Company data, Thomson Reuters, Credit Suisse estimates. Net borrowings 109,388 18,564 — — Other financing cash flow 491 2,931 1,190 1,250 12MF P/E multiple Financing cash flow 32,106 (56,290) (102,527) (128,397) 18 Total cash flow 98,435 50,280 100,197 82,963 16 Adjustments 850 2,277 — — 14 Net change in cash 99,285 52,557 100,197 82,963 12 Balance sheet (NT$ mn) 12/13A 12/14E 12/15E 12/16E 10 Cash & cash equivalents 245,343 362,112 472,815 566,284 8 Current receivables 71,942 120,561 118,819 133,334 6 Inventories 37,495 69,928 70,440 78,794 4 Other current assets 3,708 17,604 17,350 19,469 2 Current assets 358,487 570,206 679,424 797,881 0 Property, plant & equip. 792,666 819,720 904,663 986,263 2010 2011 2012 2013 2014 2015 Investments 89,184 28,846 28,846 28,846 Intangibles 11,490 11,738 11,738 11,738 Other non-current assets 11,228 8,871 8,871 8,871 12MF P/B multiple Total assets 1,263,055 1,439,381 1,633,542 1,833,600 Accounts payable 16,359 23,235 23,404 26,180 4.0 Short-term debt 15,645 35,883 35,883 35,883 3.5 Current provisions — — — — 3.0 Other current liabilities 157,774 120,691 118,947 133,478 2.5 Current liabilities 189,778 179,809 178,235 195,541 2.0 Long-term debt 211,584 211,797 211,797 211,797 Non-current provisions — — — — 1.5 Other non-current liab. 13,918 13,067 14,257 15,507 1.0 Total liabilities 415,280 404,673 404,289 422,845 0.5 Shareholders' equity 847,508 1,034,570 1,229,115 1,410,616 0.0 Minority interests 266.8 138.0 138.0 138.0 2010 2011 2012 2013 2014 2015 Total liabilities & equity 1,263,055 1,439,381 1,633,542 1,833,600

Source: IBES

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 4 08 January 2015 Customers more concentrated and diversifying as Tier 2 foundries ramp The emergence of more foundries could shift the pricing landscape and begin eating into TSMC's top customers TSMC's market share on projects and customers in 2015. A look at TSMC's customer driving a sizeable portion of base at 28nm and below shows a concentrated profile with the top six contributing about its leading edge business half of the company's sales. TSMC can protect pricing where it has a dominant position but may increasingly need to face rivals' aggressive actions to fill their capacity through the large strategic customers that have the resources and volume to multi-source.

Figure 9: Large customers a concentrated piece of TSMC's advanced technology 28nm & below TSMC 28nm & below US$mn (%) $5,000 70% $4,500 63% $4,000 56% $3,500 49% $3,000 42% $2,500 35% $2,000 28% $1,500 21% $1,000 14% $500 7% $0 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Qualcomm QCT Apple Mediatek NVIDIA AMD Broadcom Altera Xilinx Spreadtrum TI LSI Freescale Avago Oracle Marvell % of TSMC wafer sales Source: Company data, Credit Suisse estimates Top three customers have driven half of TSMC's growth but are accelerating their diversification A substantial portion of TSMC's sales are being driven by the company's top three Top three customers, in customers that have gained substantial share in the mobile market: Apple, Qualcomm and particular, have added 700 Mediatek. These customers grew their production at TSMC at a 47% growth rate during bp to TSMC's growth the TSMC's 2010-14 post the financial crisis growth spurt, outpacing the 9% growth rate for past four years the rest of the customer base to accelerate TSMC's overall growth by 700 bp to 16%.

Figure 10: The top three mobile customers propelled TSMC's growth Sales NT$mn YoY (%) 600,000 60% 50% 500,000 40% 400,000 30% 300,000 20% 10% 200,000 0% 100,000 -10%

0 -20%

2009 2010 2011 2012 2013 2014E

Top 3 mobile customers Rest of TSMC Top 3 YoY Growth Rest of TSMC YoY Growth Source: Company data, Credit Suisse estimates These top three customers have represented half of TSMC's growth during this period, a result of TSMC executing well to capture high share of these winning customers, with

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 5 08 January 2015

Apple leading high-end smartphones, Qualcomm dominating 3G and 4G baseband, and Mediatek leading the mass market brands emerging in China.

Figure 11: TSMC's top three mobile customers drove 50% of its 2010-14 growth, adding 7 points to its sales CAGR TSMC top 3 customers 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E CAGR '10-14 TSMC sales 257,213 266,565 317,407 322,630 333,158 295,742 419,538 427,081 506,249 597,024 759,097 16.0% YoY Growth 3.6% 19.1% 1.6% 3.3% -11.2% 41.9% 1.8% 18.5% 17.9% 27.1% Qualcomm 22,115 24,718 33,950 37,731 46,523 33,026 37,962 60,412 87,099 130,564 145,867 40.0% Mediatek 3,135 1,809 2,623 3,318 6,257 12,647 14,119 12,611 23,749 31,734 45,292 33.8% Apple 0 0 0 0 0 0 0 0 0 0 49,189 NA Top 3 mobile customers 25,250 26,527 36,573 41,049 52,780 45,672 52,081 73,023 110,848 162,298 240,348 46.6% YoY Growth 5.1% 37.9% 12.2% 28.6% -13.5% 14.0% 40.2% 51.8% 46.4% 48.1% Rest of TSMC 231,963 240,038 280,834 281,581 280,378 250,070 367,457 354,058 395,401 434,726 518,749 9.0% YoY Growth 3.5% 17.0% 0.3% -0.4% -10.8% 46.9% -3.6% 11.7% 9.9% 19.3% % of TSMC's revenue from top 3 9.8% 10.0% 11.5% 12.7% 15.8% 15.4% 12.4% 17.1% 21.9% 27.2% 31.7% % of TSMC's growth from top 3 13.7% 19.8% 85.7% 111.4% 19.0% 5.2% 277.6% 47.8% 56.7% 48.2% 50.3% Source: Company data, Credit Suisse estimates Apple and Qualcomm share looks to be peaking after a strong 2014 TSMC's strong outgrowth in 2014 was lifted further by the ramp into Apple's aggressive Strong out-growth lifted iPhone 6 refresh, also wins in iPad, and continued share of near 70% of Qualcomm's further in 2014 with the US$7 bn foundry production TAM, as competitors lagged on 20/28nm. TSMC ramped ramp of Apple's processors Apple's 20nm business well and maintained most of Qualcomm's high-end Snapdragon 600/800 series and split some of the mainstream Snapdragon 200/400 with GlobalFoundries. For 2015, the situation changes and TSMC's market share at these customers looks set to 2015 may reverse the trend drop from 4Q14 peak levels. At Apple, we expect Samsung to pick up the majority of the somewhat as Apple multi- iPhone business for the A9 processor from mid-2015 with the iPhone 6S refresh along sources, Qualcomm brings with 1st Gen Apple Watch S1 processor, with GlobalFoundries coming in 1-2 quarters later in other foundries and as a second source for the iPhone. We still see TSMC securing the next iPad Air on 16nm further Mediatek gains look FF+ and some phone share (potentially 4" iPhone 6C on 20nm and a higher-end plus limited model on 16nm FF+ if GlobalFoundries lags as a back-up source). Even with the iPad and modest iPhone share, TSMC's market share and sales dip here through 2015 and it may take it two years to get back to the 4Q14 highs at this ~10% customer. Our expectations for iPad and some iPhone business though are consistent with TSMC management's tone for initial sales in 3Q15, and steep ramp toward high single digit to 10% sales in 4Q15 and toward 20% of sales in 1H16, though they are still below some more optimistic views on TMSC’s Apple share and down from TSMC’s sweep of the 2014 refresh

Figure 12: TSMC volumes with Apple at a two-year high Figure 13: TSMC's Qualcomm allocation now declining US$mn Apple % of TSMC US$mn Allocation % $1,400 14% $9,000 90%

$1,200 12% $7,500 75% $1,000 10% $6,000 60% $800 8% $4,500 45% $600 6%

$400 4% $3,000 30%

$200 2% $1,500 15%

$0 0%

2Q15 4Q16 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q14 $0 0% 2010 2011 2012 2013 2014 2015 2016 Samsung Apple share TSMC Apple share Qualcomm Production Qualcomm TSMC TSMC Share of QCOM Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates For Qualcomm, the company continues to highlight its multi-sourcing strategy once it can ramp multiple foundries on advanced nodes to provide upside capacity buffer, diversification and better pricing. To give TSMC strong credit here, it has executed better on 28nm and 20nm and offered the effective capacity to dominate the business over the past few years while competitors struggled to improve yields and match TSMC's delivery.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 6 08 January 2015

Figure 14: Qualcomm highlighted its multi-source strategy at its analyst day

Source: Qualcomm For 2015, however, we also see Qualcomm more successfully bringing in other foundries as it will keep 28nm on a now mature node in its fourth year, giving other foundries time to work out issues and build up a competitive process. We estimate it already has passed US$1 bn with GlobalFoundries last year on 28nm LP. Qualcomm's strategy and urgent need to produce lower cost chips to compete with Mediatek in emerging markets implies it uses the cheaper 28nm LP rather than 28nm HKMG process, keeping GlobalFoundries an alternative option through the year and also helping the ramp up for UMC and, later in the year, SMIC. Qualcomm's management noted multiple times at its analyst day that SMIC is a focus foundry and a key partner for China built smartphones and also to help it navigate the local Chinese political environment. The mass market Snapdragon 400 using the 28nm LP process represents the higher Low cost smartphone chips growth area for 2015, more closely tracking the +24% emerging market unit growth and staying on the less complex the LTE upgrade cycle as against the +6% developed market growth. At the high-end, 28nm LP keeps the door TSMC's share may also fall from 100% by late in the year. We believe Qualcomm will split open for more foundries some Snapdragon 800 business to Samsung by 4Q15 on 14nm, and also bring in GlobalFoundries by 2016 once the technology is transferred successfully. While TSMC's yield is high (we believe over 80% on 20nm and achieving 80% on 16nm logic test chips), Samsung's yield is improving and we believe it is now in the 50-60% range on its internal Exynos versus 30-40% a few months back; this looks to be at acceptable levels for production, with 40k-50k WPM getting shifted to 14nm in Austin. We acknowledge a fair upside case for TSMC will be if competitors slip again when advanced technology enters high volume, an area that has kept business moving back to TSMC in the past few years, though at this stage Samsung/GF 14nm looks on track to move into production. Revised sensitivity to Qualcomm and Apple allocations We have updated our sensitivity of the Apple and Qualcomm allocations as TSMC's largest two customers factoring in some share erosion from 2014 peak levels.

■ Apple share dipping from 2H14. We estimate TSMC's Apple share reached 80% in Factoring in the 2H14 (all the new products, with prior models at Samsung on 28nm) but could dip to 40% Samsung/GF alliance with in 3Q15 as Samsung ramps up iPhone on 14nm and also produces the S1 processor for majority of iPhone, with the low volume watch. The implication is Apple would fall from 13% of sales in 4Q14 to 5% TSMC ramping iPad in late by 3Q15, creating a drag on sequential momentum off a high 1H15 base. From there, 2015, and potentially a TSMC is working to regain allocation for 16nm FinFet+ in 2016 and 10nm in 2017, but this minor part of the phone is still a swing factor. business

Figure 15: Apple share dips to 40-45% by 2H15 before rebounding in 2016 TSMC potential 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2013 2014 2015 Wafer demand (thousands) 123 100 95 150 122 98 103 136 118 104 115 156 487 468 459 Revenue per 12" wafer, US$ 8,400 8,190 7,985 7,786 7,591 7,401 8,141 7,938 7,739 7,546 8,300 8,051 5,662 8,074 7,777 Apple Processor Sales (US$ mn) $1,031 $817 $758 $1,170 $927 $722 $840 $1,079 $911 $788 $953 $1,259 $2,755 $3,777 $3,568 TSMC share: 0% 20% 70% 80% 80% 80% 40% 45% 70% 70% 70% 70% 0% 43% 60% TSMC Apple assumption: $0 $163 $531 $936 $741 $578 $336 $486 $638 $552 $667 $881 $0 $1,631 $2,141 Apple % of TSMC 0.0% 2.7% 7.6% 13.0% 11.3% 8.3% 4.6% 7.1% 9.3% 7.4% 8.5% 11.4% 0.0% 6.5% 7.7% Rest of TSMC $4,900 $5,912 $6,437 $6,255 $5,803 $6,424 $6,911 $6,399 $6,247 $6,919 $7,176 $6,845 $20,111 $23,505 $25,537 QoQ / YoY -0.7% 20.7% 8.9% -2.8% -7.2% 10.7% 7.6% -7.4% -2.4% 10.7% 3.7% -4.6% 16.9% 8.6% TSMC sales (US$ mn) $4,900 $6,076 $6,968 $7,191 $6,544 $7,002 $7,247 $6,885 $6,885 $7,470 $7,844 $7,726 $20,111 $25,135 $27,678 QoQ / YoY -0.7% 24.0% 14.7% 3.2% -9.0% 7.0% 3.5% -5.0% 0.0% 8.5% 5.0% -1.5% 25.0% 10.1% Source: Company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 7 08 January 2015

For Qualcomm we still expect it to ramp up second-source foundries and estimate its allocation to TSMC slipping from 68% in 2014 to 65% in 2015 and 60% by 2016 as additional foundries ramp 28nm and the Samsung/GF camp comes in on 14nm. Our base case is 10% US$-based wafer sales growth for TSMC in 2015 due to easy compares in 1H15, though by 4Q15, YoY growth could turn slightly negative.

Figure 16: Factoring in some decline of TSMC's share at Figure 17: TSMC 2015 growth sensitivity to Qualcomm QCOM/Apple—65% QCOM and 60% Apple in 2015 and Apple share 2010 2011 2012 2013 2014 2015 2016 TSMC's Qualcomm allocation Qualcomm Production $2,508 $3,318 $4,352 $6,260 $7,111 $7,781 $8,715 Qualcomm TSMC $1,205 $2,057 $2,948 $4,398 $4,835 $5,058 $5,229 $0 40% 45% 55% 65% 75% 80% TSMC Share of QCOM 48% 62% 68% 70% 68% 65% 60% 0% -6.1% -4.6% -1.5% 1.6% 4.7% 6.2% Apple Production $445 $1,440 $2,582 $2,755 $3,777 $3,568 $3,706 20% -3.3% -1.8% 1.3% 4.4% 7.5% 9.1% Apple TSMC $0 $0 $0 $0 $1,631 $2,141 $2,594 40% -0.5% 1.1% 4.2% 7.3% 10.4% 11.9% TSMC Share of Apple 0% 0% 0% 0% 43% 60% 70% 50% 1.0% 2.5% 5.6% 8.7% 11.8% 13.3% Rest of TSMC $12,117 $12,486 $14,189 $15,713 $18,670 $20,480 $22,102 YoY Growth 3.0% 13.6% 10.7% 18.8% 9.7% 7.9% 60% 2.4% 3.9% 7.0% 10.1% 13.2% 14.8%

Total TSMC $13,323 $14,543 $17,137 $20,111 $25,135 $27,678 $29,924 Allocation 70% 3.8% 5.3% 8.4% 11.5% 14.6% 16.2%

YoY Growth 9.2% 17.8% 17.4% 25.0% 10.1% 8.1% TSMC's Apple 80% 5.2% 6.8% 9.9% 13.0% 16.1% 17.6% 100% 8.1% 9.6% 12.7% 15.8% 18.9% 20.4% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates In our base case, TSMC would generate NT$11.50 EPS factoring in the boost from the recent NTD depreciation.

Figure 18: TSMC 2015 sales growth sensitivity to Figure 19: TSMC 2015 stock price sensitivity to allocation allocation of Qualcomm and Apple’s manufacturing of Qualcomm and Apple’s manufacturing TSMC's Qualcomm allocation TSMC EPS basedTSMC on EPS QCOM/Apple based on QCOM/Apple share share $12 40% 45% 55% 65% 75% 80% $8.50 $9.50 $10.50 $11.50 $12.50 $13.50 0% $8.45 $8.73 $9.29 $9.87 $10.45 $10.75 9.6x $82 $91 $101 $110 $120 $130 15% $8.84 $9.12 $9.69 $10.27 $10.86 $11.16 10.6x $90 $101 $111 $122 $133 $143 25% $9.09 $9.38 $9.95 $10.54 $11.14 $11.44 11.6x $99 $110 $122 $133 $145 $157 40% $9.48 $9.77 $10.35 $10.95 $11.55 $11.86 12.6x $107 $120 $132 $145 $158 $170 55% $9.88 $10.17 $10.76 $11.36 $11.98 $12.29 13.6x $116 $129 $143 $156 $170 $184

Allocation 60% $10.01 $10.30 $10.90 $11.50 $12.12 $12.43 TSMC TSMC multiple

TSMC's TSMC's Apple 14.6x $124 $139 $153 $168 $183 $197 80% $10.55 $10.85 $11.45 $12.07 $12.69 $13.01 100% $11.10 $11.40 $12.02 $12.64 $13.28 $13.60 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Corporate margins would be at a few points risk if pricing grows fiercer for the important leading edge designs Our base case is margins hold up near corporate average at 48% on 180nm and above Competition could pressure and on the mature 12" nodes from 40-130nm where TSMC has held its market share advanced technology reasonably well. The risk, if it competes more aggressively on price on the 14nm and margins if Samsung/GF 10nm space over the next few years and faces a lower 35% margin on those nodes, is a emerges as a stronger dip in corporate margins to 44% by 2017. 14nm rival

Figure 20: TSMC's margins would fall if it responds to 14nm and below competition TSMC 2009 2010 2011 2012 2013 2014 2015 2016 2017 00-17 03-08 08-14 14-17 180+ 2,661 3,412 3,639 3,659 3,969 4,238 3,944 3,498 3,147 -2.8% -7.6% 3.4% -9.4% 40-130nm 5,440 8,807 9,623 10,121 8,865 9,311 8,028 7,349 6,752 94.5% 7.0% -10.2% 28-20nm 0 0 80 1,912 5,500 9,865 13,561 12,152 11,678 5.8% 14-10nm 0 0 0 0 0 0 752 5,947 9,449 Total 8,101 12,219 13,342 15,691 18,334 23,414 26,285 28,947 31,026 11.3% 12.5% 15.9% 9.8% YoY % -16.2% 50.8% 9.2% 17.6% 16.8% 27.7% 12.3% 10.1% 7.2%

TSMC Share 2009 2010 2011 2012 2013 2014 2015 2016 2017 180+ share 53% 54% 59% 57% 56% 57% 56% 54% 52% 40-130nm share 54% 54% 54% 52% 53% 57% 55% 55% 56% 28-20nm share 48% 49% 57% 61% 69% 63% 62% 14-10nm share 25% 57% 55% Total 54% 54% 55% 53% 55% 59% 59% 58% 57%

TSMC 2014 2015 2016 2017 Gross Profit (20nm+): 48% 11,239 12,256 11,040 10,357 Gross Profit (14/10nm) 35% 0 263 2,081 3,307 Total Gross Profit 11,239 12,519 13,121 13,664 GM % 48.0% 47.6% 45.3% 44.0% Source: Company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 8 08 January 2015

TSMC's Mediatek position has already ramped up to a high level, capping upside While low cost smartphones should be a natural driver for market share, TSMC's share penetration into the largest customer Mediatek has largely played out. A look at Mediatek's annual filings show TSMC's foundry share has ramped up from 20% to 70% from 2007 to 2013, growing that customer from NT$1 bn/year to NT$45 bn/year (US$1.5 bn incremental sales). We expect TSMC to retain about 70% share, but see UMC finally being viable with good yields on 28nm and GlobalFoundries growing share off a lower base.

Figure 21: Low-end smartphones driving more unit Figure 22: TSMC penetration at Mediatek already high growth 100% NT$mn Allocation % 50,000 80% 90% 45,000 70% 80% $500+ 40,000 60% 70% 35,000 $400<$500 50% 60% 30,000 25,000 40% 50% $200<$400 20,000 40% 30% 15,000 $100<$200 20% 30% 10,000 20% 5,000 10% <$100 10% 0 0%

2008 2009 2010 2011 2012 2013 2014

2015E 2016E 2017E

2008 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014E TSMC Volume UMC Volume GF / Chartered Volume TSMC % UMC % GF / Chartered %

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Mediatek's choice to lower its manufacturing costs to compete with Qualcomm using 28nm LP technology rather than 28nm HKMG (10-15% lower wafer price) for most of its LTE products, also lowers the entry barrier for Mediatek to multi-source or at the very least may force TSMC to be more aggressive to protect business at this strategic customer. Mediatek looks committed to multi-sourcing or at least politically using Chinese foundries similar to SMIC. This was evident in its recent announcement to cooperate with Huali (HLMC – Hua Hong's minority owned 300mm fab) on 28nm baseband, extending its feature phone cooperation down to smartphone basebands. Tier 2 suppliers are finally viable options on 28nm The 28nm technology node, a high volume process that ramped starting 2012 at very high market share, is now maturing and facing more competition as second tier foundries ramp. The node remains very important, holding at US$2 bn/quarter for TSMC, about one-third of its revenue and a node in which TSMC has held about 80% market share, ex-Apple, through 2014. The node remains a high volume node as the last process technology node that does not require the added complexity of multiple patterning on the lithography and high-k metal gates and is still not a mandatory option on the LP process for cost sensitive products. As the node matures, we are seeing second tier foundries making progress and moving ahead with capacity additions:

■ UMC: 28nm yielding well now and ramping up, 12" in China ahead of TSMC. We UMC's 28nm is finally believe UMC has reached mid-80% yields on some products for 28nm high-k metal gates ramping well, with HKMG and is poised to more than double 28nm to potentially reach 7% of sales in 4Q15 and over yields in the mid-80%, now 10% of sales in 2015. We believe the company will be in volume with leading fabless an option for customers to including Qualcomm, Marvell, Broadcom, Realtek, Mediatek and still some small TI and also leverage for better Intel/Infineon wireless volume. UMC capacity has been expanded from 12k to 20k WPM foundry pricing and could be expanded further to 24.5-29k WPM by mid-2015 if its volume ramp remains smooth; enough to reach 15-20% of sales and annualised US$800 mn, up from a little over US$100 mn in 2014.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 9 08 January 2015

UMC is also ahead of TSMC in getting Taiwan approvals and plans are in place for 50K UMC also ahead of TSMC WPM of 12" fab capacity in China (US$1.8 bn revenue power), a potentially important on fab plans in China asset for securing Chinese business as China works to narrow the production consumption gap. The company is planning for 1H16 equipment move-in and volume starting at 55nm but with tools that can upgrade to 28/40nm as the node is deemed mature enough by Taiwan, potentially by 2017.

■ GlobalFoundries: 28nm already sizeable, 14nm finally making progress. GF already GlobalFoundries already has about US$2 bn in 28nm business, about 20% market share with 15% of Qualcomm's sizeable for Qualcomm and allocation, about half the AMD's business with most of the processors, and now some AMD on 28nm; 14nm finally GPUs, and is also growing its position in Mediatek in the low- to mid- range SoCs. The making some progress with company has 70k WPM capacity in Dresden and is moving up to 60k WPM once its first Samsung's support phase of Malta New York is complete. GlobalFoundries should grow its Qualcomm business as that customer keeps more allocation on 28nm. We also believe execution is improving on advanced technology, with the Samsung-GF cooperation finally achieving positive results, far improving on the challenges it felt trying to produce with the gate-first 28nm high-K metal gates process. While TSMC has been trying to catch up on certifying new tools, it has ~30k WPM capacity planned for New York installation on 14nm and we estimate is running about 60k WPM capacity on 28nm.

■ SMIC starting up 28nm for Qualcomm in 2H15. SMIC is also targeting 28nm production SMIC working to bring up by 2H15, bringing up 6K WPM at its Shanghai mini-fab and the first 10K WPM at its Beijing 28nm in 2H15 for JV fab. Execution is still a swing factor, although Qualcomm has four years of experience Qualcomm now manufacturing on 28nm to help bring up SMIC's process. SMIC is strategic to Qualcomm for its localisation strategy to compete on chipsets and licence its technology in the China market. We also see SMIC potentially tying up with Samsung and GlobalFoundries as an alliance member for FinFet, creating some more scale and multiple foundry options on an alternative process to TSMC. TSMC's 28nm capacity and revenue share is dipping a bit from 2015 On Tier 2 foundry ramp, we expect 28nm competition to be fiercer at strategic customers 28nm capacity adds in 2015. We project 28nm capacity growth may re-accelerate from 10% YoY to 17% YoY reaccelerating in 2015, in 2015 with the new additions from GlobalFoundries and UMC. With UMC ramping off a second tier foundries can low base from 1H15 and SMIC from 2H15, we also expect TSMC's market share to dip also cut into TSMC's high from 75% to 65% over the next two years. TSMC's capacity share also looks to be falling share slightly on our supply bottom rising with second tier foundry capacity additions.

Figure 23: TSMC 28nm share falls as tier 2 foundries ramp Figure 24: TSMC's capacity share also dipping in 2015 28nm sales (US$mn) TSMC % Capacity % of TSMC capacity share 3,500 3,500 60% 90% 3,000 3,000 50% 75% 2,500 2,500 40% 2,000 60% 2,000 30% 1,500 45% 1,500 20% 1,000 30% 1,000

500 15% 500 10%

0 0% 0 0%

4Q12 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

3Q15E 3Q16E 1Q15E 2Q15E 4Q15E 1Q16E 2Q16E 4Q16E 4Q14E 2011 2012 2013 2014 2015 TSMC UMC SMIC GlobalFoundries SMIC GlobalFoundries UMC TSMC TSMC % (ex-Samsung) Samsung TSMC's Capacity Share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The space maintains fierce and well-backed indirect and direct competitors Intel and Samsung (which is also now supporting GlobalFoundries technology migration), China backed SMIC, and now UMC finally having higher yields on high volume 28nm. These factors should lead to moderation of earnings and volatility will hinge on fewer large customer designs-wins (Apple Ax, Snapdragon 800 series) and more price competition for the mass market mainstream designs driving the critical advanced nodes.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 10 08 January 2015 Mobile moderates and shifts down market, TSMC's high-end also slows An ongoing issue, more pronounced each year, is the maturation of the smartphone An ongoing and well market, a key driver for TSMC lifting its revenue from the communications vertical—from publicised theme but still 40% to 60% of the company's revenue since the financial crisis. A key support in 2014 real—the mobile market is when the high-end smartphone market slowed down was ramp up of the Apple processor moderating and IoT still which allowed TSMC to continue to grow its high-end content even in a slowing market. fragmented and modest For 2015, we project its high-end sales will flatten as Apple dual sources and Qualcomm's share comes down a bit. The low cost mobile market is also decelerating, with low cost smartphones projected +24% YoY in emerging markets but down from 50% the prior year.

Figure 25: High-end growth for TSMC now stalling Figure 26: Low-end of the market also maturing (Unit: NT$) Unit: mn YoY (%) $6,000 20% 1400 120% 18% 1200 100% $5,000 16% 1000 $4,000 14% 80% 12% 800 $3,000 10% 60% 8% 600 $2,000 40% 6% 400 4% $1,000 20% 2% 200 $0 0% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2012 2013 2014 2015E 2016E 2017E TSMC high-end Non-Apple TSMC high-end Apple Sub $200 smartphones $200+ smartphones High-end smartphone % of TSMC Sub $200 YoY Growth (%) $200+ YoY Growth (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We believe TSMC's blended smartphone content will slow, from 43% in 2014 to 12% in High-end smartphone 2015 and high single digits in 2016-17 due to the combination of high-end share no longer content for TSMC grew one growing and moderating growth in the mass market. A result is TSMC's communications extra year adding Apple last sales (a key end market that stepped up from 2010-14) will slow as an incremental driver year, but now also matures to high single digit growth. We could see this rate at least sustain for a longer period with with the market IoT extending growth for processing, connectivity and sensing but it will be difficult to replicate the high growth period when TSMC was also gaining a lot of share into customers that now dominate the mobile space.

Figure 27: TSMC smartphone sales growth slows Figure 28: Communications—growth moderates for TSMC (Unit: NT$) NT$mn 14,000 70% 160,000 140,000 12,000 60% 120,000 10,000 50% 100,000 8,000 40% 80,000

6,000 30% 60,000 40,000 4,000 20% 20,000 2,000 10% -

0 0%

1Q05 1Q08 1Q11 4Q99 3Q00 2Q01 1Q02 4Q02 3Q03 2Q04 4Q05 3Q06 2Q07 4Q08 3Q09 2Q10 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 2010 2011 2012 2013 2014 2015E 2016E 2017E 1Q99 Computer Communication TSMC smartphone content TSMC smartphone sales YoY Consumer Other/Industrial Memory Linear (Communication) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 11 08 January 2015

Intel and Samsung may also now take a slice of the mobile market TSMC's customers also still face an indirect challenge from Intel and Samsung with their internally designed mobile processors. Intel has already used its low power Bay Trail chipset and accelerated focus on reference designs, marketing support and subsidies to grow tablet share from 4% to 15% in 2014, matching Mediatek at 40mn+ units as #2 supplier after Apple. Intel is targeting base case at least tracking market growth, although it is also now partnering with #4 player, Rockchip, on a SoFIA 3G design (35mn units).

Figure 29: Intel starting to carve out more tablet share Figure 30: Intel ties Mediatek in market share after Apple

100% Tablet Chipset Market Units (mn) Market Share (%) Other Other Other 2012 2013 2014 2012 2013 2014 90% TI OMAP NVIDIATI OMAP Tegra TI OMAP Qualcomm NVIDIA Tegra Samsung Apple Ax 65.8 74.3 62.3 42% 29% 23% 80% NVIDIA Tegra Qualcomm Exynos Mediatek 3.0 21.9 41.9 2% 8% 15% Qualcomm Samsung 70% Samsung Exynos Allwinner Exynos Intel 2.0 11.0 40.0 1% 4% 15% Allwinner 60% Allwinner Intel Rockchip 12.4 35.0 35.0 8% 14% 13% Intel Intel 50% Mediatek Allwinner 18.3 35.0 35.0 12% 14% 13% Rockchip Mediatek Mediatek Samsung Exynos 12.6 20.0 20.0 8% 8% 7% 40% Rockchip Qualcomm 3.9 10.0 10.0 2% 4% 4% 30% Rockchip NVIDIA Tegra 13.4 20.0 5.0 8% 8% 2% 20% Apple Ax TI OMAP 12.0 10.0 0.0 8% 4% 0% Apple Ax 10% Apple Ax Actions 1.0 7.0 8.0 1% 3% 3%

0% RDA, AMLogic, Ingenic, Via 14.1 14.7 16.7 9% 6% 6% 2012 2013 2014 Total 158.5 258.8 273.9 100% 100% 100% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Intel has not yet taken the same approach on low cost smartphones as it has lacked low Intel has taken a slice of cost integrated solutions and reference design support for this channel. The company has tablets with Bay Trail and is accelerated its strategy to compete in this channel by partnering with Spreadtrum for a 4G supporting Spreadtrum/ integrated LTE chipset SoFIA for ramp in 2H15. Intel can combine its marketing support Rockchip taking a slice in and design resources with Spreadtrum's channel, local position and SoC design for lower China, potentially insourcing cost solutions. While the chipsets are at TSMC through 2015, Intel still plans internal a piece long term manufacturing on the Spreadtrum and Rockchip solutions from 2016, potentially taking a piece of the growth opportunity from low cost smartphones.

Figure 31: Intel moving toward in-house production Figure 32: Intel also now supporting Spreadtrum's push

Source: Intel Source: Intel Samsung may also insource some baseband away from TSMC's customers According to CS Samsung analyst Keon Han, Samsung's smartphone division historically Samsung also may see a had about 50% of its application processor content in-house with Exynos and about 50% rebound of internal using external solutions, historically ranging from NVIDIA, Qualcomm, Intel and originally allocation of smartphone TI. In 2014, Qualcomm ramped up well on its LTE global solutions and Samsung slipped basebands against with Exynos, allowing external vendor share to rise to 70%. We believe Samsung targets Qualcomm bringing some more share back in-house and will also have its integrated ModAP baseband and AP for mid-range smartphones. A scenario of Samsung securing 20% more application processor and baseband would result in a 2% headwind for TSMC's sales.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 12 08 January 2015

Figure 33: TSMC's content into Samsung smartphones/tablets may fall in millions, unless otherwise stated TSMC Content 2010 2011 2012 2013 2014 2015 Smartphones 25.4 97.1 212.6 314.5 350.1 398.4 Integrated SoC $3.36 $3.2 $3.0 $2.9 $2.7 $2.08 TSMC customer share of APs 80% 70% 50% 50% 70% 50% Application processor content $2.0 $1.7 $1.2 $1.1 $1.6 $1.1 Connectivity (assume 70% share) $1.72 $1.6 $1.5 $1.3 $1.11 $0.90 Content per phone $7.9 $7.2 $6.2 $5.9 $6.1 $4.6 TSMC Manufacturing $201 $697 $1,312 $1,845 $2,137 $1,819 TSMC sales (US$ mn, CS estimate) $13,323 $14,543 $17,137 $20,111 $25,135 $27,678 % of TSMC 1.5% 4.8% 7.7% 9.2% 8.5% 6.6% TSMC share of Samsung Logic 80.5% 77.2% 69.9% 70.0% 76.6% 60.3% Source: Company data, Credit Suisse estimates Wearables: Nothing too substantial in 2015 Total unit shipments for wearables was only about 20 mn units in 2014 as per IDC despite a high number of product launches and innovation coming into the category. The bulk of these smart devices fell under the fitness device category. While smart watches and other smart accessories have been launched in 2013 and 2014, so far the traction for such products has been limited.

Figure 34: Worldwide wearable shipments* by product category (mn) So far fitness-related accessories have constituted the bulk of the units in wearables

Source: IDC * Note: These forecasts were made by IDC before the announcement of the Apple Watch In 2015, focus will be on the Apple Watch from Apple, likely to be launched by late 1Q15, with the S1 processor starting at Samsung. Apple announced the product in late 3Q14 (link) and the product will be launched in two sizes and will ship in three different collections with multiple bands and with a starting price of US$349. While details on various apps are still sketchy, the Watch will come with a newly developed application ecosystem. We believe that the key apps will probably be health and fitness focused. Given that the Watch will only work in conjunction with Apple's iPhone 5 or later products and will initially only be launched in the US, we believe that the ramp for the units will be modest with an estimated 25-35 mn units being sold in the first year of launch. We believe that eventually wearables could lead to the next major consumer tech cycle, though for it to gain full momentum we need to wait another couple of years.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 13 08 January 2015 Technology, CFs, and GM support keeps us from being too negative While we no longer see strong sales momentum and margin expansion on the back of Not moving into an overly high growth smartphone/tablet growth and share gains from struggling competitors, we are bearish camp—good still constructive on TSMC retaining the stock for its ability to use strong technology to technology execution and maintain margins, harvest cash flows as growth moderates with rising dividends. TSMC rebounding cash flows will will have several supporting factors for its profitability due to high yields, some advantage support rising dividends still sustaining over peers, moderating depreciation growth, and tailwind from the NTD depreciation. Technology execution still intact as 20nm yields ramp up and 16nm pulls in TSMC is controlling what it can, executing on its technology roadmap and building up its TSMC controlling what it IP and ecosystem to attract customers to its advanced process, which is also yielding well. can on its roadmap to stay The company has seen a strong 20nm yield ramp-up to 80% level and development on competitive and ramp up the 16nm FF+ where logic test yields are now over 80%, resulting in good design-in traction. new process nodes well Since the node shares over 90% of tools and the same back-end interconnect with 20nm, the ramp-up can come through at higher yields. We still believe TSMC can maintain 20% of sales on 20nm as Apple's business is still with the company in 1H15 and high-end Qualcomm and some graphics and game console backfill in 2H15. The company is also looking to maintain a strong position on 28nm by offering more TSMC expanding its 28nm options to retain customers with competitive cost and performance options. A few of the and mature 12" nodes to options that should sustain business and protect market share include: support more IoT applications (1) 28nm LP: TSMC believes its 28nm LP offers competitive cost and better performance for low-end smartphones and has attracted a long-term commitment to sustain the life of this original low cost 28nm option. (2) 28nm HPC: TSMC introduced the 28nm High-K metal gate compact version to offer a lower cost High-K option to keep customers at TSMC relative to other foundries struggling on 28nm High-K. TSMC previously announced that it has the volume production of several customers on its lower cost 28nm HPC process with 70 product tape-outs scheduled. (3) 28nm ULP: TSMC's 28nm ULP expands its business on ultra-low power for Internet of Things, as applications shift from mature nodes to 28nm. The company has launched the ultra-low-power process across the 28, 40, and 55nm nodes as an alternative to FD-SOI. TSMC’s 55nm ULP is already available and 40nm will be available shortly, both seeing good customer traction. The 28nm process is still pending the embedded flash, but is expected to be available by end of 2015. TSMC’s 10nm is also progressing for tape-outs in 4Q15 and guided risk production by the TSMC also aggressive on end of 2015 to enable ramp up by the end of 2016 for meaningful sales in 1H17. TSMC is 10nm to maintain a good building up the 10nm design ecosystem, with 35+ EDA tools certified and IP validation position on the next process starting six months earlier than prior nodes. It also cited activities with ten generation as it ramps in customers on 10nm product designs, including application processors, baseband, CPU, 2017 server, graphics, network processor, FPGA, game console, pledging to have its process offer leading speed, power and gate density. Its current 10nm planning is still multiple patterning, but will insert EUV as an opportunity for a follow-on process for simplification if it is ready.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 14 08 January 2015

Builds through the low season and moderating depreciation support profitability TSMC has changed its manufacturing strategy since 2013 to better use its fab capacity to Profitability has good minimise its low season margin decline. GMs during mid-cycle corrections in 2004, 2006, support from good yields, and 2011 dropped to the high 30%/low 40% as utilisation dipped to 80% as inventory low season pre-builds, NTD adjusted, supply freed up and customers' trimmed orders. Since 2013 management has depreciation and an easing been more proactive in pre-building product through the low season to limit the under- depreciation growth rate loading charge to maintain higher utilisation. Capacity has also been structurally tighter as cost to add capacity is now almost US$1 bn for TSMC to grow its supply 1% (versus only US$200 mn before the financial crisis when TSMC was also much smaller), making it much more expensive and difficult to massively overshoot demand. TSMC is building up WIP over a longer period to avoid over-building high season capacity, staging 20/28nm production (also due to longer cycle times) which helps keep utilisation tight. We would caution though that TSMC, at 50 days inventory versus its normal 30 days level, has about three weeks higher than historical balance sheet inventory (two weeks normalizing for the new nodes longer cycle times). The company could face some margin headwind for 1-2 quarters if it unwinds inventory back toward historical levels, as each 1% of utilisation (about one-day inventory unwind if other demand not available) would be 40bp to GMs.

Figure 35: TSMC managing seasonal utilisation better Figure 36: 20nm WIP inventory staged over multi-quarters —though a headwind if inventory unwinds to normal Gross margin Utilization Inventories Days (NT$mn) 55% 110% 70 60 50% 100% 60 50 45% 90% 50 40% 80% 40 40 35% 70% 30 30% 60% 30 20 25% 50% 20 20% 40% 10 10 15% 30%

0 0

3Q96 4Q01 1Q95 4Q95 2Q97 1Q98 4Q98 3Q99 2Q00 1Q01

1Q07 2Q12 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 1Q13 4Q13 3Q14

1Q13 1Q14 2Q00 2Q01 2Q02 2Q03 2Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 3Q13 3Q14

2Q15E Raw Material Work in Process Finished Goods TSMC gross margin (lhs) TSMC quarterly utilization Days of Raw Material Days of WIP Days of Finished Goods Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC’s depreciation past its highest hurdle TSMC's fab equipment (85% of its PP&E balance) is depreciated on a five-year life while buildings are depreciated on 10-20 years and land improvement on a 20-year period. The company significantly accelerated its capex after the financial crisis but benefited from a depreciation dividend from the financial crisis as low depreciation from the financial crisis years was still keeping the depreciation balance down. 2014 was the year of the most significant rise in depreciation, up 30% YoY as the low 2008/2009 capex spending dropped off deprecation and was replaced by the high depreciation from 2014. The company guided to about mid-teens depreciation in 2015. Based on a high base for depreciation exiting 2H14, sequential QoQ depreciation is flat from 2014 levels, creating a cushion for gross margins in 2015 as TSMC absorbed its biggest depreciation increase already supported by the incremental ramp of Apple production and staged WIP inventory build.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 15 08 January 2015

Figure 37: TSMC sequential depreciation not increasing much based on mgmt. guidance 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2013 2014 2015 Sales $209,049 $218,812 $201,241 $211,303 $217,642 $221,995 $597,024 $759,097 $852,181 QoQ / YoY 14.2% 4.7% -8.0% 5.0% 3.0% 2.0% 17.8% 27.1% 12.3% Depreciation (52,540) (53,590) (53,629) (53,595) (53,616) (53,711) (142,157) (186,046) (214,550) QoQ / YoY 24.7% 2.0% 0.1% -0.1% 0.0% 0.2% 18.8% 30.9% 15.3% Dep/Sales 25.1% 24.5% 26.6% 25.4% 24.6% 24.2% 23.8% 24.5% 25.2% Non-Dep / Wafer $9,985 $11,432 $11,432 $10,975 $10,646 $11,710 $11,101 $10,645 $11,186 Total COGS $103,471 $110,964 $106,700 $107,229 $107,558 $112,192 $316,058 $384,094 $433,679 Gross Profit $105,578 $107,849 $94,541 $104,074 $110,084 $109,803 $280,966 $375,003 $418,502 GM% 50.5% 49.3% 47.0% 49.3% 50.6% 49.5% 47.1% 49.4% 49.1% Source: Company data, Credit Suisse estimates One risk: Some depreciation still may be carried forward into future years We do note a cumulative gap between depreciation based on a five-year average capex Some additional and actual depreciation as more of TSMC’s assets are depreciated as buildings/land depreciation is on a longer improvements or other longer life assets over 15-20 years. In 2014, TSMC’s prior five- life time and may gradually year average capex was US$7.9 bn vs actual depreciation +30% YoY to US$6.5 bn, come in the next few years implying depreciation expense was still running US$1.4 bn below a five-year straight line depreciation (5.6% of sales). Using a depreciation schedule of 85% equipment, 15% building/land, waterfall depreciation would be US$7.5 bn—still implying depreciation could rise US$1 bn further beyond 2015 as it catches-up to prior investments.

Figure 38: 2014 the worst year for depreciation growth Figure 39: TSMC depreciation lags five-year capex Depreciation and YoY Depr. Depreciation & Depr/Capex Gap (NT$mn) YoY Depr Increase capex (NT$) 5 year equip $300,000 35% $350,000 depreciation 45% 40% $200,000 25% $300,000 period 35% 15% $250,000 30% $100,000 $200,000 25% 5% 20% $0 $150,000 15% -5% -$100,000 $100,000 10% -15% 5% $50,000 0% -$200,000 -25% $0 -5%

-$300,000 -35%

2004 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2004 2007 1997 1998 1999 2000 2001 2002 2003 2005 2006 2008 2009 2010 2011 2012 2013

2014E 2015E 2016E Capex Depreciation Depreciation / Sales YoY Increase 5 year average capex Actual depreciation expense Cumulative Gap YoY

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Taiwan currency depreciation also is a tailwind The Taiwan dollar’s 5% depreciation since 3Q14 results will be a notable tailwind for TSMC and its Taiwan foundry/back-end peers. TSMC benefits from pricing most of its wafers in US$ so it receives close to 1% boost to NTD sales from translation. On the cost side, the company has most of its fixed and labour costs in NTD as well, providing an additional 40bp GM and operating margin boost; this would prove to be a 200bp lift to margins if TSMC can retain it. The tailwind from currency provides a 5% or NT$0.57 boost to 2015E EPS. Moderating growth lifts free cash flows and yields TSMC is starting to move into a harvest period as it reaps the benefit of its higher scale FCF poised to rebound and and technology investments made during the past few years. The company indicated FCF support a payout increase would double next year, consistent with our model. We also project TSMC's FCF growing which could move at least from US$3.2 bn in 2014 to US$6.7 bn in 2015, and FCF/share growing from NT$3.82 to from NT$3.00 to NT$4.00 NT$8.07 during the same period, substantially above the NT$3.00 dividend per share it has held since 2007.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 16 08 January 2015

Figure 40: FCF yields set to rebound in 2015 Figure 41: Cash flows can support rising dividends Capex and FCF (NT$mn) FCF Yield (%) Dividend FCF and Dividends 600,000 8% Yield per Share 10.0% $10.00 500,000 6% 8.0% $8.00 400,000 6.0% $6.00 300,000 4% 4.0% $4.00

200,000 2.0% $2.00 2% 100,000 0.0% $0.00

0 0%

CY05 CY03 CY04 CY06 CY07 CY08 CY09 CY11 CY12 CY13

CY10A CY14E CY15E CY16E

CY02 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13

CY03 Dividend Yield (%) (lhs) FCF / Share (rhs)

CY15E CY14E Dividend / Share (rhs) Operating cash flow Capital spending FCF Yield (%)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The company will never want to cut the dividend, so we expect a moderate increase to NT$4.00 next year. FCF should rise further again in 2016 based on an increase in capex to NT$11.5 bn, taking FCF/share to NT$9.63/share. We believe the stock could start on a path toward dividend growth with step-up by about NT$1/year for several years.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 17 08 January 2015 Revising estimates, approaching fair value We factor in the 5% NTD depreciation (NT$0.57) benefit for 2015 to lift our 2015 EPS from Factoring the NTD NT$11.00 to NT$11.50, above the street's estimate of NT$11.17 but leave most other depreciation lift (NT$0.57) assumptions relatively unchanged as we had factored in some multi-sourcing on the into our estimates) to raise Apple/Qualcomm business in our slowing sequential growth assumption. EPS from NT$11 to NT$11.50 Results will still be strong reflecting the 2014 ramp and Apple still at TSMC in 1H15 We expect a strong 4Q14 result at the analyst meeting on 15 January due to the good ramp of 20nm production with Apple through 4Q14. We model TSMC up 5.3% QoQ to NT$220 bn, at the high-end of the company's NT$217-220 bn guidance and margins to also reach the high-end at 49.7% vs guidance of 48-50% due to the higher sales, good process yields and favourable NTD.

We expect the company to guide 1Q15 sales down mid single digits QoQ and model - 4Q14 results should be 6.3% QoQ, similar to the normal seasonal profile, vs the street's -8.5% QoQ. We believe strong with sales/margins the company will encourage customers to build in the low season to keep capacity full potentially at the high-end of through the year. TSMC will see a slightly sharper decline of the high-ASP 20nm Apple guidance and 1Q15 holding business, dampening ASPs but this could be offset that by the depreciating NTD. We raise up as TSMC encourages 1Q15 margins from 47.0% to 48.4% to reflect the rising NTD. Margins could hold up as the customers to build early company again manages capacity through the low season to keep utilisation high. On the ahead of high season to currency tailwind, we increase our 2015 sales estimates from +12.3% YoY to +14.7% balance capacity YoY, taking full-year EPS to NT$11.50. We maintain 2016 EPS at NT$12 with revenue decelerating to +8% YoY.

Figure 42: Raising TSMC 4Q14-1Q15 and 2014-2016 estimates 4Q14 1Q15 2014 2015 2016 (NT$ mn) CS CS(old) Street Guidance CS CS(old) Street CS CS(old) Street CS CS(old) Street CS CS(old) Street Sales 220,053 218,812 218,654 NT$217-220bn 206,138 201,241 201,342 760,338 759,097 758,236 871,866 852,181 867,567 942,620 938,489 946,753 Chg (%) 5.3 4.7 4.6 +4.3-5.7% QoQ -6.3 -8.0 -8.5 27.4 27.1 27.0 14.7 12.3 14.4 8.1 10.1 9.1 GM (%) 49.7 49.3 49.3 48-50% 48.4 47.0 47.9 49.5 49.4 49.4 49.8 49.1 49.0 48.4 48.6 48.5 OpM (%) 39.5 39.0 39.1 38-40% 37.9 36.2 36.5 38.7 38.6 38.6 39.0 38.1 38.3 37.6 37.7 38.8 Net Inc. 78,150 76,849 76,400 FX NT$30.31 70,467 65,760 66,112 261,923 260,622 259,597 298,263 285,298 288,936 311,148 311,086 312,980 EPS (NT$) 3.01 2.96 2.94 2.72 2.54 2.53 10.10 10.05 10.02 11.50 11.00 11.17 12.00 12.00 12.09 ADR EPS 0.49 0.49 0.49 0.43 0.42 0.42 1.69 1.68 1.68 1.83 1.82 1.87 1.90 1.98 2.03 Source: Company data, Credit Suisse estimates, Bloomberg consensus TSMC noted that 2015 capex will also be 'slightly' up from 2014 levels at US$9.6 bn for a Capex may be up slightly in front-end loaded spend to ramp up 16nm and few billion spend on 10nm development for 2015 to support some 16nm late 2016 initial volume/1H17 material volumes. Capital intensity should come down from FinFet ramp and initial 10nm 2013/2014's 48%/40% to 36%/37% in 2015/2016. However, utilisation should also come risk production down from 2014's peak of 101% to mid-90% as 2H15 loadings could also dip as some of the leading customers multi-source.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 18 08 January 2015

Figure 43: TSMC operating metrics NT$ mn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014E 2015E 2016E Capacity (8" WPM, Kpcs) 4,313 4,490 4,998 5,012 5,051 5,093 5,204 5,280 15,246 16,856 18,583 20,628 22,199 Sequential change (%) -2% 4% 11% 0% 1% 1% 2% 1% 12% 11% 10% 11% 8% Shipment (8" WPM. Kpcs) 3,865 4,620 5,101 4,999 4,608 4,919 5,112 4,693 14,045 15,666 18,779 19,333 20,163 Sequential change (%) 0% 20% 10% -2% -8% 7% 4% -8% 12% 12% 20% 3% 4% Utilization rate (%) 90% 103% 102% 100% 91% 97% 98% 89% 92% 93% 101% 94% 91% ASP (US$) 1,173 1,217 1,277 1,344 1,327 1,330 1,325 1,371 1,117 1,173 1,247 1,338 1,387 Sequential change (%) 1% 4% 5% 5% -1% 0% 0% 3% 5.1% 5.0% 6.2% 7.3% 3.7% Wafer Revenue (US$ mn) 4,537 5,626 6,512 6,721 6,116 6,544 6,773 6,434 15,691 18,383 23,410 25,868 27,967 Total Revenue (NT$ mn) 148,215 183,021 209,049 220,053 206,138 220,568 228,288 216,873 506,249 597,025 759,441 871,866 942,620

Revenue % of 28nm&below 34% 37% 43% 51% 52% 53% 54% 59% 12% 30% 42% 54% 53% Capex (US$ mn) 3,799 2,434 1,596 1,754 2,589 3,175 3,003 1,333 8,329 9,697 10,135 10,100 11,062 Capex/revenue (%) 78% 40% 23% 24% 40% 45% 41% 19% 49% 48% 40% 36% 37% Gross margin (%) 47% 50% 51% 50% 48% 50% 51% 49% 48.2% 47.1% 49.5% 49.8% 48.4% Operating margin (%) 35% 39% 40% 39% 38% 40% 41% 37% 36% 35% 39% 39% 38% Source: Company data, Credit Suisse estimates Sales growth now decelerating TSMC's YoY sales momentum is decelerating from its peak at 51% YoY in 4Q14 in the Sales growth decelerating near-term through 4Q16 at -1.4% YoY. On an annual basis, YoY revenue growth is also from 4Q14 levels tracking to decrease from +27% in 2014 to 15%/8% in 2015/2016. Along with the slowing sales momentum, we expect earnings YoY growth will decline from +47%/+47% YoY in 3Q14/4Q14 to +10%/-7% YoY in 3Q15/4Q15—less of a catalyst for incremental share performance.

Figure 44: TSMC YoY momentum sales slowing down Figure 45: TSMC YoY earnings momentum slowing down Sales NT$mn YoY/QoQ Net income YoY (%) NT$mn 300,000 60% 100,000 90.0% 90,000 250,000 75.0% 45% 80,000 200,000 70,000 60.0% 30% 60,000 45.0% 150,000 50,000 15% 40,000 30.0% 100,000 30,000 15.0% 0% 20,000 50,000 0.0% 10,000

- -15% - -15.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

2Q16 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 3Q16 4Q16

Sales YoY QoQ Net income YoY Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC's stock has tracked its monthly sales YoY historically, dampening the prior catalyst of strong market growth and share gains driving the outperformance.

Figure 46: TSMC YoY sales historically tracks the shares Figure 47: TSMC stock price tracks monthly sales closely Stock price Monthly revenue (NT$mn) 150% Stock Price (NT$) 140 160 Mo. sales (000) 90,000 120% 120 140 Stock price 80,000 90% 70,000 100 120 60% 60,000 80 100 30% 50,000 80 60 0% 40,000 60 30,000 40 -30% 40 20,000 20 -60% 20 10,000

- -90% - -

2000/12 2011/12 1996/12 1997/12 1998/12 1999/12 2001/12 2002/12 2003/12 2004/12 2005/12 2006/12 2007/12 2008/12 2009/12 2010/12 2012/12 2013/12 2014/12

2002/01 2006/08 2008/04 2012/11 2002/06 2002/11 2003/04 2003/09 2004/02 2004/07 2004/12 2005/05 2005/10 2006/03 2007/01 2007/06 2007/11 2008/09 2009/02 2009/07 2009/12 2010/05 2010/10 2011/03 2011/08 2012/01 2012/06 2013/04 2013/09 2014/02 2014/07 Stock price Monthly sales YoY 2014/12 Source: Company data, Credit Suisse estimates Source: TEJ, Company data

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 19 08 January 2015

Valuation now back in line after strong 2014 performance With top customers' multi-sourcing, second tier foundries catching up on 28nm, and TSMC's valuation in line revenue/earnings growth momentum moderating, we believe TSMC's stock is now fairly with its historical average valued trading at 13.3x/12.2x 2014/2015 P/E and 3.4x/2.8x 2014/2015 P/B. Despite robust process technology, good margins and cash flows, the moderating growth, rising competitor challenges and concentrating customer base may limit further upward multiple expansion, keeping us more balanced on the stock at current levels. We would consider an upgrade on evidence of competitor execution stumbles continuing, new growth/customer drivers emerging, or evidence of TSMC's position strengthening even in the face of stronger competitive challenges as we approach 2016/17.

Figure 48: TSMC trading near its long-term range Figure 49: TSMC trading at the midpoint of its P/B range (NT$) 17x 14.6x (NT$) 160 160 3.5x 12.6x 140 140 3x

120 10.6x 120 2.5x

100 100 2x 80 80

60 60

40 40

20 20

Jan Jan Jan Jan Jan Jan Jan

Mar Mar

May May May May May May

Oct Oct

Sep Sep Sep Sep Sep Sep

Nov Nov Nov

Jan Jan Jan

Jun May Feb Jun Feb May Jun Feb

Jul Jul

Sep Dec Sep Dec Sep

Aug Aug

Apr Apr Apr

- -

- - -

------

- - -

------

05 10

- - - - -

------

- - -

- -

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06 11

09 14 04

03 08 13

03 05 07 09 11 13 15

03 05 07 08 10 12 13 15

04 05 09 10 14

03 05 07 09 11 13

03 08 13

07 12

06 11

04 06 08 10 12 14

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC's stock is now slightly above its post crisis average, both on consensus forward P/E and P/B, making the stock less attractive now than it was earlier given the competitive inroads.

Figure 50: TSMC fairly valued above avg. post crisis PE Figure 51: TSMC fairly valued above avg. post crisis PB (X) 2330.TW P/E (X) 2330.TW P/B 15.0 3.4

14.0 3.2 13.0 3.0 12.0 2.8 11.0 2.6 10.0

9.0 2.4

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

Oct-13 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Apr-14 Oct-14

Jul-14 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Oct-09 Apr-11 Oct-12 Apr-14 Apr-09 Apr-10 Oct-10 Oct-11 Apr-12 Apr-13 Oct-13 Oct-14

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Forward PE Average +1std -1std +2std -2std Forward PB Average +1std -1std +2std -2std

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC is a well-owned stock at 77% QFII ownership, or +1SD above average of 67%. The QFII holding has actually increased and remained stable at current levels since 2H12. Notably, the consensus rating mix for TSMC is highly positive with 77% having a buy rating vs 23% neutral. TSMC remains well owned, accounting for over 28% of total TAIEX QFII ownership vs the average level of 21%.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 20 08 January 2015

Figure 52: Ownership levels remain high Figure 53: QFII share of ownership on TSMC higher NT$ stock % NT$ stock QFII % 160 90.0% +2 STD 160 40% 140 80.0% 140 +1 STD 35% 70.0% 120 120 30% 60.0% 100 100 -1 STD 2004-2014 Average: 21% 50.0% 80 25% 80 -2 STD 60 40.0% 20% 60 40 30.0% 15% 40 20 20.0% 0 10% 20 10.0%

0 0.0%

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 TSMC QFII as % of TAIEX QFII (%) TSMC Price NT$ (LHS) TSMC QFII % (RHS) TSMC Price NT$ (LHS) TSMC QFII as % of TAIEX QFII (%) Source: TEJ, company data, Credit Suisse estimates Source: TEJ, company data, Credit Suisse estimates Relative to the TAIEX, TSMC has also made up its lower valuation relative to the Taiwan index and now trades in line at 12.5x P/E.

Figure 54: TSMC's P/E now back in-line with the TAIEX Figure 55: Foundry QFII ownership at 28% of TAIEX Forward PE (x) 25.0 40%

35% 20.0 30%

15.0 25%

10.0 20%

15% 5.0 10%

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 TSMC TAIEX Foundry Average +1 std -1 std +2 std -2 std Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC has also widened its premium, trading at 12x 2014 versus Samsung at 7x P/E and TSMC at a wide premium to 3.5x versus Samsung at 1.1x P/B, near an all-time high relative to Samsung. TSMC has Samsung seen a substantial rerating capturing the mobile opportunity at expanding margins, while Samsung held that during the early stages of the Android cycle but has faced more uncertainty on the rebound of Apple's high-end and emergence of China brands at the low-end. We could see some narrowing of that gap if Samsung can stabilise its mobile position and at the same time weaken TSMC a bit with inroads into the foundry market.

Figure 56: TSMC trading at a premium to Samsung Figure 57: TSMC at a premium to Samsung on P/E P/B Ratio TSMC P/B Premium P/E ratio 5.0 3.0 25.0

4.0 2.4 20.0

3.0 1.8 15.0

2.0 1.2 10.0

1.0 0.6 5.0

0.0 0.0 0.0

Jan-05 Jan-06 Jan-07 Jan-03 Jan-04 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Jan-05 Jan-03 Jan-04 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 TSMC/Samsung PB premium (RHS) TSMC PB (LHS) Samsung PB (LHS) TSMC PE Samsung PE Source: TEJ, company data, Credit Suisse estimates Source: TEJ, company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 21 08 January 2015

TSMC Financial statements

Figure 58: TSMC’s income statement summary NT$ mn 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2011 2012 2013 2014E 2015E 2016E Net sales 148,215 183,020 209,049 220,053 206,138 220,568 228,288 216,873 427,081 506,745 597,024 760,338 871,866 942,620 Sequential change (%) 1.7 23.5 14.2 5.3 -6.3 7.0 3.5 -5.0 YoY change (%) 11.6 17.4 28.6 50.9 39.1 20.5 9.2 -1.4 1.8 18.7 17.8 27.4 14.7 8.1 Cost of goods sold 77,836 91,823 103,471 110,742 106,311 109,273 110,899 111,552 232,937 262,608 316,058 383,872 438,036 486,224 Gross profits 70,379 91,197 105,578 109,311 99,827 111,294 117,388 105,321 194,143 244,137 280,966 376,465 433,830 456,396 Gross margin (%) 47.5 49.8 50.5 49.7 48.4 50.5 51.4 48.6 45.5 48.2 47.1 49.5 49.8 48.4 Sales and marketing 1,153 1,235 1,235 1,309 1,270 1,320 1,360 1,387 4,518 4,497 4,517 4,931 5,337 5,978 % of sales 0.8 0.7 0.6 0.6 0.6 0.6 0.6 0.6 1.1 0.9 0.8 0.6 0.6 0.6 General and administrative 4,658 5,635 4,700 4,982 4,833 5,002 5,152 5,255 14,164 17,626 18,881 19,976 20,241 22,175 % of sales 3.1 3.1 2.2 2.3 2.3 2.3 2.3 2.4 3.3 3.5 3.2 2.6 2.3 2.4 Research and development 12,067 13,609 15,206 16,118 15,635 16,964 17,473 17,778 33,830 40,383 48,118 57,000 67,850 74,180 % of sales 8.1 7.4 7.3 7.3 7.6 7.7 7.7 8.2 7.9 8.0 8.1 7.5 7.8 7.9 Total operating expense 17,857 20,483 21,146 22,409 21,737 23,286 23,985 24,421 52,586 62,960 71,537 81,896 93,429 102,334 Income from operations 52,522 70,714 84,432 86,902 78,090 88,008 93,403 80,900 141,557 181,177 209,429 294,570 340,402 354,062 % of sales 35.4 38.6 40.4 39.5 37.9 39.9 40.9 37.3 33.1 35.8 35.1 38.7 39.0 37.6 Depreciation 40,986 45,353 55,606 57,623 57,665 57,629 57,651 57,754 107,682 131,349 153,980 199,568 230,700 264,334 EBITDA 93,508 116,693 140,665 145,152 136,382 146,264 151,681 139,281 249,239 312,526 365,611 496,018 573,608 620,902 % of sales 63.1 63.8 67.3 66.0 66.2 66.3 66.4 64.2 58.4 61.7 61.2 65.2 65.8 65.9 Non operating income -176 1,699 -88 -92 87 213 295 154 2,693 -1,242 1,580 1,342 750 1,697 Investment gains (loss) 955 1,686 1,037 1,000 1,000 1,000 1,000 1,000 898 1,741 4,478 4,678 4,000 4,000 Pretax income 53,302 74,098 85,381 87,809 79,177 89,221 94,699 82,055 145,148 181,676 215,487 300,590 345,151 359,760 % of sales 36.0 40.5 40.8 39.9 38.4 40.5 41.5 37.8 34.0 35.9 36.1 39.5 39.6 38.2 Income taxes exp. /(gains) 5,456 14,438 9,077 9,659 8,709 18,736 10,417 9,026 10,694 15,552 27,468 38,630 46,889 48,612 Tax rate (%) 10.2 19.5 10.6 11.0 11.0 21.0 11.0 11.0 7.4 8.6 12.7 12.9 13.6 13.5 Net income 47,846 59,660 76,304 78,150 70,467 70,485 84,282 73,029 134,705 166,318 188,147 261,923 298,263 311,148 % of sales 32.3 32.6 36.5 35.5 34.2 32.0 36.9 33.7 31.5 32.8 31.5 34.4 34.2 33.0 Net EPS (NT$) 1.85 2.30 2.94 3.01 2.72 2.72 3.25 2.82 5.20 6.41 7.26 10.10 11.50 12.00 EPS per ADR (US$) 0.31 0.38 0.49 0.49 0.43 0.43 0.52 0.45 0.88 1.09 1.22 1.69 1.83 1.90 Adjusted share count 25,930 25,930 25,930 25,929 25,929 25,929 25,929 25,929 25,922 25,928 25,929 25,930 25,930 25,930 Source: Company data, Credit Suisse estimates Figure 59: TSMC’s cash flow summary NT$ mn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2011 2012 2013 2014E 2015E 2016E Net income 47,846 59,660 85,381 78,150 70,467 70,485 84,282 73,029 134,705 166,125 188,019 271,037 298,263 311,148 Depreciation & amortization 41,622 45,979 56,233 58,250 58,292 58,256 58,278 58,381 107,682 131,349 156,182 202,084 233,207 266,840 Dec (inc)-A/R -2,391 -12,554 -39,600 -6,029 7,624 -7,906 -4,229 6,254 2,035 -11,146 -19,848 -60,574 1,742 -14,515 Dec (inc)-inventory -5,986 -7,473 -7,473 -4,591 2,798 -1,871 -1,027 -412 3,565 -12,990 336 -25,524 -512 -8,354 Inc (Dec)-A/P 352 4,987 4,987 1,526 -930 622 341 137 -1,112 3,380 1,120 11,851 170 2,776 LT investment loss (gain) -955 -808 -1,037 -1,000 -1,000 -1,000 -1,000 -1,000 -800 -1,584 -3,972 -3,800 -4,000 -4,000 Investment disposal loss (gain) -45 -2,171 0 0 0 0 0 0 32 3,691 -1,253 -2,215 0 0 Others 14,419 -5,631 -7,246 -5,553 -6,519 12,642 3,822 -11,435 1,830 10,844 26,801 -4,012 -1,490 12,411 Operating cash flow 94,861 81,989 91,245 120,753 130,733 131,228 140,467 124,953 247,937 289,670 347,384 388,847 527,380 566,306

Sale(Pur) of ST inv. 58 324 496 0 0 0 0 0 24,217 -30,562 2,397 878 0 0 Sale(Pur) of LT inv. -572 5,606 3,864 -1,000 -1,000 -1,000 -1,000 -1,000 4,027 3,009 3,247 7,898 -4,000 -4,000 Sale of FA 55 60 48 0 0 0 0 0 698 157 174 163 0 0 Capital spending -114,905 -73,328 -47,882 -53,660 -81,560 -100,000 -94,590 -42,000 -213,963 -246,137 -287,595 -289,775 -318,150 -348,440 Others -495 844 -1,151 -627 -627 -627 -627 -627 2,497 337 723 -1,429 -2,506 -2,506 Investing cash flow -115,860 -66,495 -44,625 -55,287 -83,187 -101,627 -96,217 -43,627 -182,523 -273,196 -281,054 -282,266 -324,656 -354,946 Inc (Dec) of debt 9,206 9,824 -465 0 0 0 0 0 -8,565 6,071 -21,457 18,564 0 0 Bonds issued (redeemed) 0 0 0 0 0 0 0 0 18,000 57,500 130,845 0 0 0 Treasury stock dec(inc) 0 0 0 0 0 0 0 0 -72 0 0 0 0 0 Proceed from new issue 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dividend paid 0 0 -77,786 0 0 0 -103,718 0 -77,730 -77,749 -77,773 -77,786 -103,718 -129,647 Others -1,255 523 -11 3,675 284 536 524 -153 509 367 491 2,931 1,190 1,250 Financing cash flow 7,950 10,347 -78,262 3,675 284 536 -103,194 -153 -67,858 -13,811 32,106 -56,290 -102,527 -128,397 Exchange influence 2,050 -2,245 2,472 0 0 0 0 0 -148 -2,118 850 2,277 0 0 Change in cash flow -10,998 23,596 -29,170 69,141 47,830 30,137 -58,944 81,174 -2,592 544 99,285 52,569 100,197 82,963 Operating cash per share (NT$) 3.66 3.16 3.52 4.66 5.04 5.06 5.42 4.82 9.56 11.17 13.40 15.00 20.34 21.84 Free cash flow per share (NT$) -0.77 0.33 1.67 2.59 1.90 1.20 1.77 3.20 1.31 1.68 2.31 3.82 8.07 8.40 Source: Company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 22 08 January 2015

Figure 60: TSMC’s balance sheet summary NT$ mn 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2011 2012 2013 2014E 2015E 2016E Cash and marketable securities 234,948 314,594 290,345 362,112 412,569 445,332 389,015 472,815 150,622 150,918 245,343 362,112 472,815 566,284 Inventories 43,481 50,954 65,337 69,928 67,130 69,001 70,028 70,440 24,841 37,830 37,495 69,928 70,440 78,794 Account receivables 74,333 86,887 114,532 120,561 112,937 120,843 125,072 118,819 40,948 52,093 71,942 120,561 118,819 133,334 Other current assets 3,128 6,765 6,016 17,604 16,491 11,764 12,175 17,350 8,850 11,447 3,708 17,604 17,350 19,469 Total current asset 355,890 459,200 476,230 570,206 609,128 646,940 596,291 679,424 225,260 252,289 358,487 570,206 679,424 797,881 LT investment 90,847 28,373 28,846 28,846 28,846 28,846 28,846 28,846 34,459 65,786 89,184 28,846 28,846 28,846 Fixed assets 828,012 837,167 824,310 819,720 842,988 884,732 921,044 904,663 490,375 617,529 792,666 819,720 904,663 986,263 Intangible assets 12,114 11,433 11,738 11,738 11,738 11,738 11,738 11,738 5,694 5,524 11,490 11,738 11,738 11,738 Other LT assets 11,877 8,871 8,871 8,871 8,871 8,871 8,871 8,871 18,477 13,906 11,228 8,871 8,871 8,871 Total non-current assets 942,849 885,845 873,765 869,175 892,443 934,187 970,499 954,118 549,005 702,746 904,568 869,175 954,118 1,035,718 Total assets 1,298,739 1,345,045 1,349,995 1,439,381 1,501,571 1,581,127 1,566,790 1,633,542 774,265 955,035 1,263,055 1,439,381 1,633,542 1,833,600 Accounts payable 16,711 21,697 21,709 23,235 22,305 22,926 23,268 23,404 11,859 15,239 16,359 23,235 23,404 26,180 ST interest bearing liabilities 24,844 34,705 35,883 35,883 35,883 35,883 35,883 35,883 33,889 35,757 15,645 35,883 35,883 35,883 Other current liabilities 132,843 190,233 114,656 120,691 113,059 120,974 125,208 118,947 71,259 91,440 157,774 120,691 118,947 133,478 Total current liabilities 174,397 246,635 172,248 179,809 171,247 179,783 184,358 178,235 117,007 142,436 189,778 179,809 178,235 195,541 LT liabilities 212,621 211,654 211,797 211,797 211,797 211,797 211,797 211,797 20,458 82,161 211,584 211,797 211,797 211,797 Other LT liabilities 13,723 9,795 9,392 13,067 13,351 13,887 14,410 14,257 4,756 4,683 13,918 13,067 14,257 15,507 Total LT liabilities 226,344 221,449 221,189 224,864 225,148 225,684 226,207 226,054 25,215 86,845 225,502 224,864 226,054 227,304 Total liabilities 400,741 468,084 393,437 404,673 396,395 405,466 410,565 404,289 142,221 229,281 415,280 404,673 404,289 422,845 Share capital 259,291 259,294 259,294 259,294 259,294 259,294 259,294 259,294 259,162 259,244 259,286 259,294 259,294 259,294 Share premium & other reserves 188,271 207,278 207,195 207,195 207,195 207,195 207,195 207,195 158,246 171,958 188,295 207,195 207,195 207,195 Retained earnings 433,628 396,730 473,065 551,215 621,683 692,167 672,732 745,760 219,791 294,781 385,757 551,215 745,760 927,261 Preferred stocks 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Treasury stock 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other equity 16,583 13,486 16,866 16,866 16,866 16,866 16,866 16,866 -7,606 -2,786 14,170 16,866 16,866 16,866 Total equity 897,774 876,787 956,420 1,034,570 1,105,038 1,175,522 1,156,087 1,229,115 629,594 723,198 847,508 1,034,570 1,229,115 1,410,616 Minority interest 224 174 138 138 138 138 138 138 2,450 2,556 267 138 138 138 Total liabilities & equity 1,298,739 1,345,045 1,349,995 1,439,381 1,501,571 1,581,127 1,566,790 1,633,542 774,265 955,035 1,263,055 1,439,381 1,633,542 1,833,600 Profitability Ratios 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2011 2012 2013 2014E 2015E 2016E Return on equity (ROE) (%) 5.3 6.8 8.0 7.6 6.4 6.0 7.3 5.9 21.4 23.0 22.2 25.3 24.3 22.1 Return on assets (ROA) (%) 3.7 4.4 5.7 5.4 4.7 4.5 5.4 4.5 17.4 17.4 14.9 18.2 18.3 17.0 Return on net assets (RONA) (%) 4.5 5.8 7.2 7.3 6.5 6.2 7.2 6.3 21.6 20.7 18.5 24.3 25.7 24.6 Return on sales (%) 32.3 32.6 36.5 35.5 34.2 32.0 36.9 33.7 31.5 32.8 31.5 34.4 34.2 33.0 Efficiency Ratios Asset turns (annualized sales / assets) 0.5 0.5 0.6 0.6 0.5 0.6 0.6 0.5 0.6 0.5 0.5 0.5 0.5 0.5 Days sales outstanding (DSO) 45.8 43.3 50.0 50.0 50.0 50.0 50.0 50.0 35.0 37.5 44.0 57.9 49.7 51.6 Days of inventory 51.0 50.6 57.6 57.6 57.6 57.6 57.6 57.6 38.9 52.6 43.3 66.5 58.7 59.1 Cash conversion cycle 77.1 72.4 88.5 88.5 88.5 88.5 88.5 88.5 55.3 68.9 68.4 102.3 88.9 91.1 Per Share Values Book value per common share 34.62 33.81 36.88 39.90 42.62 45.34 44.59 47.40 24.29 27.89 32.69 39.90 47.40 54.40 Net cash total 88,330 96,607 71,511 143,278 193,735 226,498 170,181 253,981 130,733 98,786 107,297 143,278 253,981 347,450 Net cash per common share 3.41 3.73 2.76 5.53 7.47 8.74 6.56 9.80 5.04 3.81 4.14 5.53 9.79 13.40 Source: Company data, Credit Suisse estimates

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 23 08 January 2015

Companies Mentioned (Price as of 08-Jan-2015) ASML Holding N.V. (ASML.AS, €84.95) Actions (ACTS.OQ, $1.95) Advanced Micro Devices, Inc. (AMD.N, $2.58) Allwinner Technology (Unlisted) Altera Corp. (ALTR.OQ, $36.17) Apple Inc (AAPL.OQ, $107.75) Broadcom Corp. (BRCM.OQ, $41.35) Freescale Semiconductor Inc. (FSL.N, $24.29) GlobalFoundries (Unlisted) Google (GOOG.OQ, $501.1) Infineon Technologies AG (IFXGn.DE, €8.61) Intel Corp. (INTC.OQ, $36.02) Marvell Technology Group Ltd. (MRVL.OQ, $15.04) MediaTek Inc. (2454.TW, NT$485.0) Microchip Technology Inc. (MCHP.OQ, $43.26) NVIDIA (NVDA.OQ, $19.135) Oracle Corporation (ORCL.N, $43.15) PT London Sumatra Indonesia (LSIP.JK, Rp1,915) QUALCOMM Inc. (QCOM.OQ, $73.73) Realtek Semiconductor (2379.TW, NT$106.0) Samsung Electronics (005930.KS, W1,314,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.72) Sony (6758.T, ¥2,565) Spreadtrum Communication (SPRD.OQ, $30.93) Taiwan Semiconductor Manufacturing (2330.TW, NT$138.0, NEUTRAL, TP NT$145.0) Texas Instruments Inc. (TXN.OQ, $52.71) United Microelectronics (2303.TW, NT$14.9) Vanguard International Semiconductor (5347.TWO, NT$53.6) Xilinx (XLNX.OQ, $42.195)

Disclosure Appendix

Important Global Disclosures Randy Abrams, CFA and Nickie Yue, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)

2330.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Jan-12 76.70 79.00 O 19-Mar-12 83.70 90.00 27-Apr-12 86.00 95.00 19-Jul-12 77.50 87.00 08-Oct-12 89.10 95.00 N 06-Dec-12 96.60 109.00 O 19-Apr-13 106.50 116.00 19-Feb-14 108.00 122.00 12-Mar-14 113.00 130.00 18-Apr-14 123.00 137.00 OUTPERFORM NEUTRAL 10-Jul-14 134.50 150.00 17-Jul-14 124.50 145.00 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 24 08 January 2015 return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (54% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 14% (43% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW) Method: We rate TSMC NEUTRAL with NT$145 target, placing it at mid-cycle 3x forward P/B (versus 2.5-3.5x range) and 12.6x P/E (versus 10.5- 15x range). We tone down our positive view of the past five years due to increasing customer concentration risks where further share gains are limited and may slip, moderating growth from mobile; rising competitors finally lifting their yields; and valuation back in line with Taiwan tech and its historical average due to slowing YoY/sequential momentum after the likely strong 4Q14 results report. Risk: The risks that may impede achievement of our NT$145 target price and Neutral rating for TSMC would be evidence of competitor execution stumbles continuing, new growth/customer drivers emerging or evidence of TSMC's position strengthening even in the face of stronger competitive challenges as we approach 2016/17.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (2330.TW, 6758.T, LSIP.JK, FSL.N, ORCL.N, MRVL.OQ, IFXGn.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (6758.T, LSIP.JK, FSL.N, ORCL.N, MRVL.OQ, IFXGn.DE) within the past 12 months.

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 25 08 January 2015

Credit Suisse provided non-investment banking services to the subject company (IFXGn.DE) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (FSL.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (6758.T, LSIP.JK, FSL.N, ORCL.N, MRVL.OQ, IFXGn.DE) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (6758.T, LSIP.JK, FSL.N, ORCL.N, MRVL.OQ, 5347.TWO, IFXGn.DE) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (IFXGn.DE) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (6758.T, FSL.N, ORCL.N, MRVL.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2330.TW, MRVL.OQ, 2303.TW, 5347.TWO, 2379.TW, IFXGn.DE). Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd. Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (ORCL.N). As of the date of this report, an analyst involved in the preparation of this report, Sitikantha Panigrahi, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in call options of Oracle Corporation (ORCL.N).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2330.TW, 6758.T, LSIP.JK, FSL.N, ORCL.N, ORCL.N, MRVL.OQ, 2303.TW, 0981.HK, 5347.TWO, ASML.AS, 2379.TW, IFXGn.DE) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (ASML.AS). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (FSL.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Taipei Securities Branch ...... Randy Abrams, CFA ; Nickie Yue

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Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 26 08 January 2015

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Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) TC2078.doc27