TSMC May Kick Off Conservative in the Near Term, but Staying Positive on Future Opportunities
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16 April 2015 Asia Pacific/Taiwan Equity Research Semiconductor Equipment / Semiconductor Devices (Technology - Foundries CN (Asia)/Technology - Semiconductors CN (Asia)/Technology - IC Deisgn TW Asia Semiconductor Sector Research Analysts SECTOR REVIEW Randy Abrams, CFA 886 2 2715 6366 (Asia)/Small Cap HK (Asia)) [email protected] 1Q15 Preview: Upstream outgrowth pauses Nickie Yue Figure 1: Foundry sales having a sales deceleration through 2015 886 2 2715 6364 Foundry YoY (%) Backend YoY (%) [email protected] 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% 2Q15E 2Q03 4Q04 3Q14 1Q01 4Q01 3Q02 1Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 Foundry YoY sales Backend YoY sales Source: Company data, Credit Suisse estimates, Bloomberg consensus We summarise key themes through the results season for our semiconductor coverage and preview each of our covered companies in this preview report. ■ Mixed earnings season for upstream. We expect a conservative results tone for Asian semis due to mixed consumer tech product cycles, with China smartphone exports impacted by slowing 3G and a strong USD, PCs and tablets decelerating back to a YoY decline, and TV being weaker post 4Q pull- ins and in the absence of major sports events. Foundry/back-end outperformed fabless and downstream in 1Q15 despite higher fabless inventory YoY. ■ TSMC may kick off conservative in the near term, but staying positive on future opportunities. TSMC may acknowledge a pause from a strong 2014 and 1Q15 due to mixed consumer tech, higher fabless inventory and 20nm impact from Samsung's in-house silicon, but turn focus on the development of 16nm and 10nm, as well as a more cost effective 16nm (FFC) to keep more low- to mid-end smartphone, consumer and IoT applications at TSMC. TSMC's 16nm will ramp steeply from mid-3Q15 with Apple's A10 processors also returning in 2H16. ■ Estimate revisions. We recently revised down TSMC, Vanguard and MediaTek 2Q15, and in this preview note revise WPG 1Q15 estimates to reflect China smartphone weakness and revise up Powertech 2015 estimates above street to reflect better DRAM/NAND and short-term shifts of commodity DRAM from ASE into Micron, with target price lifted from NT$55 to NT$56 based on 1.3x forward P/B. We also lift SMIC TP from HK$0.86 to HK$1.00 on multiple expansion for the Shanghai-HK connect. ■ Stock outlook. We maintain positive view on: (1) ASE for its SiP exposure and value to unlock with USI Shanghai, (2) SMIC for its exposure to China IC industry support and (3) Hua Hong – 8” foundry in China with supply outstripping demand and trading at a discount. We also see UMC/Powertech performing better than low expectations into results. We trim back on MediaTek due to 3G weakness and competition offsetting the 4G ramp and expectation for TSMC to weather some mixed trends near-term but improve into 2016. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 16 April 2015 Focus table and charts Figure 2: Asian Semis valuation metrics Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 15-Apr Local Curcy Rating upside 2014 2015 2014 2015 2014 2015 Foundry TSMC 118,633 143.0 145.0 NTRL 1.4% 14.1 11.8 3.5 3.0 28.1% 27.5% UMC 5,819 14.6 18.0 NTRL 23.7% 15.0 12.2 0.8 0.8 5.6% 6.5% SMIC 4,051 0.87 1.00 OPFM 14.9% 28.7 23.5 10.6 10.1 5.2% 5.7% Vanguard Semi 2,560 48.5 56.0 NTRL 15.5% 14.7 13.9 2.9 2.8 20.9% 20.5% Hua Hong Semi 1,372 11.60 14.00 OPFM 20.7% 13.7 16.8 6.8 8.0 7.4% 6.3% Total 131,063 14.3 12.0 4.0 3.5 26.1% 26.6% Packaging & testing ASE 10,829 42.0 47.0 OPFM 11.9% 14.2 12.7 2.2 2.1 17.3% 17.3% SPIL 5,008 50.0 60.0 OPFM 20.1% 13.4 12.2 2.2 2.1 17.4% 17.3% Powertech 1,325 54.2 56.0 NTRL 3.3% 12.8 11.4 1.3 1.3 10.6% 11.3% Amkor 2,042 8.6 9.0 NTRL 4.4% 9.9 9.6 1.8 1.5 20.0% 17.4% ASM Pacific 32,581 81.0 97.0 OPFM 19.8% 17.7 17.0 4.2 3.9 25.3% 23.9% Total 17,162 5.6 4.9 1.2 1.1 20.7% 21.2% IC design MediaTek Inc. 19,744 398.5 425.0 NTRL 6.6% 13.3 15.7 2.5 2.5 20.9% 15.8% Realtek Semiconductor 1,551 96.0 98.0 NTRL 2.1% 12.5 13.7 2.1 2.1 18.5% 15.4% WPG Holdings Ltd 2,132 40.3 43.0 NTRL 6.8% 11.5 10.5 1.5 1.4 13.8% 14.2% Total 23,427 13.1 14.8 3.2 2.9 23.0% 17.3% Source: Company data, Credit Suisse estimates Figure 3: Fabless/foundry customers rising YoY Figure 4: Taiwan inventory depleted further for downstream than upstream Inventory Days Inventory days 110 110 100 100 90 90 80 80 70 70 60 60 50 40 50 30 40 20 30 10 - 3Q08 2Q91 1Q92 4Q92 3Q93 2Q94 1Q95 4Q95 3Q96 2Q97 1Q98 4Q98 3Q99 2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2000/1C 2003/1C 2006/1C 1995/1C 1996/1C 1997/1C 1998/1C 1999/1C 2001/1C 2002/1C 2004/1C 2005/1C 2007/1C 2008/1C 2009/1C 2010/1C 2011/1C 2012/1C 2013/1C 2014/1C Fabless IC Total Downstream Total Taiwan Chain Fabless IDMs (hybrid) Foundry Customers Source: Company data, Credit Suisse estimates Source: MIIT Figure 5: China 3G declining more than 4G pick-up Figure 6: Total LTE up 2% QoQ, 3G down 58% QoQ Shipments: mn Mkt share Qtrly Ship: mn 180 100% 70 100% 90% 160 90% 60 80% 140 80% 50 70% 120 70% 40 60% 60% 50% 100 30 50% 40% 80 30% 40% 20 60 20% 30% 10 10% 40 20% 0 0% Jan Jan Jan Jan Jul Jul Jul Mar Mar Mar Mar Sep Nov Sep Nov Sep Nov May May May 20 10% - - - - 12 - 13 - 14 - - - - - - - - - - - - - - 0 0% 12 13 14 15 1Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 12 13 14 15 12 12 13 13 14 14 12 13 14 LTE % 2G 3G LTE Total LTE % 2G 3G LTE Total Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Asia Semiconductor Sector 2 16 April 2015 1Q15 preview: Upstream tech pauses from the outgrowth We expect a more mixed earnings season for the Asian semiconductor stocks coming up Foundry and backend the next two weeks as consumer tech decelerates from 2014 with the refresh of iPhone 6, outperformed downstream Apple and China share gains from Samsung, and reacceleration of PCs. The foundry in 1Q15, but now pausing sector and to a lesser extent back-end packaging sector outperformed fabless companies post the early builds due to and downstream in 1Q15—both sequentially and relative to consensus expectations sluggish consumer tech despite higher fabless inventory coming into this year as the supply chain reserved demand capacity ahead of the peak season. We expect TSMC to acknowledge a more mixed near- term and pause in sequential momentum from a strong 2014 and 1Q15, but turn focus toward the development of 16nm and 10nm, as well as a more cost-effective version for 28nm (HPC+) and 16nm (FFC) to keep more low- to mid-end smartphone, consumer and IoT applications at TSMC. Demand has remained sluggish across consumer tech, with China smartphone exports impacted by slowing 3G and a strong USD, PCs and tablets decelerating to a YoY decline, and TV sell-through weaker post 4Q pull-ins and in the absence of major sporting events. While the broad-based industrial, automotive and infrastructure related supply chains remain stable, our coverage and Taiwan tech has less leverage. We would also note the TWD is less of a tailwind for earnings upgrades, holding stable the past few months after 7% depreciation and 10-15% lift to earnings coming out of 4Q14. For 1Q15, results broadly tracked in-line for upstream, with foundry, back-end and IC We have already revised design all within 1% of consensus vs 3-7% light sales for downstream and components down TSMC, Vanguard and and a -21% QoQ decline for our Taiwan tech universe vs CS/Street expectations for -19% MediaTek 2Q15, and now QoQ. Upstream was one of the few areas meeting expectations due to early builds, with trim WPG to reflect lower hardware and components seeing deeper declines and falling short of consensus.