Apple and the Taiwan Suppliers
Last week, Apple unveiled three new iPhones; the XS, XS Max and XR, scheduled for launch later this year. The new product lineup offers customers more choices with both a high-end functionality option (the XS Max) and lower priced phone (the XR). Apple bulls think this combination will solve the problem of last year’s expensive iPhone X where there were fewer upgrades than expected. Some analysts have already upped expectations for revenues and earnings over the next two fiscal years on higher unit sales and ASPs.
The biggest surprise from the event was the next generation of the Apple Watch, the Series 4. This product will offer a 30% bigger screen, but its most remarkable new feature is health-oriented. With new sensors, it can act as an EKG, detect heart abnormalities and even call for medical assistance.
Some of the biggest beneficiaries of this new series of launches, which will commence at the end of October, will be the Taiwanese suppliers, particularly TSMC (2330 TT). The world’s largest contract manufacturer has rebounded sharply in the last month after struggling in the 2Q on concerns over smartphones, margin pressure and a computer virus that shut down several fabs at the beginning of August.
Despite these problems, the trend seems to be shifting with the company reporting strong August consolidated revenues of NT$91.06 billion (US$2.95 billion), the second highest this year. This represents a 0.9% decrease compared to a year ago, but a 22.4% increase sequentially. With the Apple launch and the expected ramp of their 7-nanometer technology, momentum is expected to increase this year and next.
In an Apple press release discussing the new iPhones, it announced that all three would incorporate “the first 7-nanometer chip in a smartphone." TSMC is the world’s most advanced company in this technology and is the only one capable of economically mass producing these high-end chips. At this juncture, TSMC is believed to be the sole supplier of this component to Apple.
Local brokerage firms in Taiwan have been upgrading the stock on the back of the ramp of their higher end technology with one broker predicting (local Taiwan law requires that the name of the brokerage company can’t be published) that the 7mn process, that was launched in the first half of 2018, will produce 10% of sales in the third quarter and 20% in the fourth quarter. Not only will this be driven by smartphone orders from Apple, but also from Qualcomm and potentially Huawei.
TSMC’s dominance in this process is expected to continue showing the difficulty of other firms in keeping up with the R&D and capex required to upgrade to higher generations of technology. In August, GlobalFoundries, the world’s second-largest foundry by sales, said they would halt their development of 7mn capabilities, following a similar move last year by UMC. Already, AMD has announced that it will shift their current higher-end business with Global Foundaries to TSMC, thereby, increasing their sales to the American based chip maker from 2-3% to 10%.
The VFTP Thematic Model Portfolio holds a basket of Japan/Asian based technology firms geared towards the semiconductor segment. We believe that TSMC will be a primary beneficiary of a shift towards more sophisticated chips during this prolonged cycle. The company’s share price has been volatile this year tracking the uncertainty in smartphones, but we think will perform well going into the end of the year on the ramp of their 7mn technology and higher orders from global smartphone makers.