Taiwan Semiconductor Manufacturing
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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 US$mn Allocation % Apple % of TSMC $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 $0 0% 2010 2011 2012 2013 2014 2015 2016 Samsung Apple share TSMC Apple share Qualcomm Production Qualcomm TSMC TSMC Share of QCOM Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 3: TSMC 28nm share falls as Tier 2 foundries ramp Figure 4: TSMC penetration at Mediatek already high 28nm sales (US$mn) TSMC % NT$mn Allocation % 50,000 80% 3,500 45,000 90% 70% 3,000 40,000 60% 75% 2,500 35,000 30,000 50% 60% 2,000 25,000 40% 1,500 45% 20,000 30% 15,000 20% 1,000 30% 10,000 10% 500 15% 5,000 0 0% 0 0% 4Q12 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 3Q15E 3Q16E 4Q14E 1Q15E 2Q15E 4Q15E 1Q16E 2Q16E 4Q16E 2008 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014E TSMC Volume UMC Volume GF / Chartered Volume TSMC % UMC % GF / Chartered % SMIC GlobalFoundries UMC TSMC TSMC % (ex-Samsung) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 5: Intel starting to carve out more tablet share Figure 6: TSMC YoY earnings slows after 4Q14 Net income YoY (%) 100% Other Other Other NT$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 Utilization Dividend FCF and Dividends Gross margin 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 Dividend / Share (rhs) TSMC gross margin (lhs) TSMC quarterly utilization 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.