EQUITIES UPDATE - Asian earnings: TSMC

Cindy reviews TSMC, that reported consolidated earnings last which were slightly better than analysts' expectations.

Asian earnings: TSMC

TSMC is up about 3% in local terms in 2018 despite a volatile string of news flow which saw the stock down 9% at one point over concerns over smartphones and additional capex; and then up 17% year-to-date on the prospects of its 7-nanometer process and being the exclusive supplier to Apple for a new generation of chips.

Last week, TSMC reported consolidated Q3 2018 revenues of NT$260.3 million (US$8.41 million), up 11.6% sequentially and 3.2% y/y, a bit better than analysts’ and company expectations that have been steadily revised up since July. Management guided the market between US$8.28 billion and US$8.38 billion, which had been revised up from its original range of US$8.45-8.55 billion after the firm concluded that the impact of a computer virus that impacted its production in August was minimal.

The market commentary concerning these results has been mixed. Skeptics pointed out that the better-than-expected figures were primarily due to the continued depreciation of the Taiwan dollar, not a pick-up in chip orders. Looking forward, they believe that the company will struggle with the ongoing US-China trade tensions and the uncertainty of the smartphone cycle, specifically the upcoming Apple iPhone launches. There were also some reservations about the potential growth from cryptocurrency customers after the recent rout of their prices.

Alternatively, there are a group of analysts who view the Q2 as a cyclical bottom in the company’s earnings cycle as the world’s largest foundry ramps its next generation 7-nanometer process. This technology, which was launched in the first half of the year, is already starting to hit the monthly numbers. Last Tuesday, TSMC reported September sales of NT$94.92 billion (US$3.06 billion), its second highest on record. This represented a 4.2% m/m and 7.2% y/y increase. One local broker is predicting (Taiwan law requires that the name of the brokerage firm can’t be published) that the 7mn technology will produce 10% of sales in Q3 and 20% in Q4.

Much of this optimism stems from the prominence of TSMC’s products in Apple’s new iPhone offerings. The smartphone maker announced that all three would incorporate “the first 7-nanometer chip in a smartphone." Additionally, last week it was reported by the local press that they TSMC would win all orders for Apple A13 chips in 2019, extending its dominance as their exclusive supplier. The article speculated that the Taiwan-based firm could see its share of the global foundry market breach 60% next year, after grabbing 50% in the first half of 2017.

Another point made by TSMC bulls is that their success in the development and implementation of 7mn shows that it is one of the only companies globally that can keep 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 program to build 7mn capabilities, following a similar move last year by UMC. Already, AMD has announced that it will shift their current higher-end business currently with Global Foundries to TSMC, thereby, increasing its sales to the American based chip maker from 2-3% to 10%. Other customers will include Qualcomm and potentially Huawei.

This Thursday, TSMC will hold its widely followed quarterly investors meeting and conference call to discuss its Q3 performance and provide guidance for the rest of 2018.

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.

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