In this briefing:
- A Bear Investment Case for TSMC (Summary Version)
- A Bull Investment Case for TSMC (Summary Version)
- RIO & BHP: Valuation Gap Gone; Closing Long-Rio/Short-BHP
- New J. Hutton Exploration Report (Week Ending 18/1/19)
- Itochu Confirms Intent to Deepen Hold over Descente
1. A Bear Investment Case for TSMC (Summary Version)
From end of 2008 to end of 2017, Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) had a remarkable run with the share price up more than 400%. However, TSMC share price has not fared so well in the past year with its share price down nearly 16% during this period. In this report, we provide a BEAR INVESTMENT CASE for TSMC. We do not believe all its troubles are over. Rather, we expect its sales and earnings to be much lower than the consensus in 2020. The following are the seven major reasons that are likely to negatively impact TSMC’s share price and its financials in the next two years:
- Samsung Electronics’ technological edge in 7nm EUV foundry process. [More intense competition]
- SMIC & China [More intense competition]
- The major tipping point period of higher demand for autonomous vehicles (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2023. [Timing of incremental customers demand]
- The major tipping point period of higher demand for 5G service (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2021/2022. [Timing of incremental customers demand]
- Increasing threats to Apple. [Threats to a major customer]
- Major semiconductor memory prices such as DRAM and NAND Flash have been declining in the past few weeks. This could foreshadow a further softening of demand and prices in the entire semiconductor sector, including the foundry. The semiconductor companies increased their capex excessively in 2017 and this is likely to result in further reduced prices in 2019. [Concerns about oversupply/capex]
- Collapsing demand for cryptocurrency mining machines. [Concerns about a customer segment]
2. A Bull Investment Case for TSMC (Summary Version)
Summary
Taiwan Semiconductor Mfg Co has dominated the foundry segment over the past two decades. With revenues of $33 billion in 2017, the company had a 56% share of the foundry market and was over five times the size of its nearest competitor, Globalfoundries. Under the visionary leadership of Morris Chang, TSMC effectively invented the fabless model. Originally mocked by former AMD CEO Gerry Sanders who once famously quipped that “real men own fabs”, the fabless model has evolved into a thriving ecosystem, one which has facilitated the meteoric rise of some of the biggest names in the semiconductor segment including Apple, Qualcomm and Nvidia.
TSMC’s success has been predicated upon the company’s so-called Trinity of Strengths, namely process leadership, manufacturing excellence and customer trust. In today’s highly competitive foundry landscape, those strengths have never been more significant.
While the smartphone processor business has been central to TSMC’s growth in recent years with Apple accounting for some 22% of revenues, the company is well positioned to diversify and benefit from high, secular growth trends in IoT, Automotive and AI acceleration. Even more significantly, TSMC is set to compete for the first time with Intel in the lucrative data center market by virtue of its role in manufacturing server chips for Advanced Micro Devices and a growing swathe of ARM-based server initiatives lead by none other than Amazon.
Between 2006 and 2017, TSMC grew at a CAGR of 9.8% in NT$ terms, easily outpacing growth of both the broader semiconductor segment and its foundry peers. For the period 2019-2022, we model TSMC growing at a slightly lower CAGR of 8.36%, but nonetheless more than double the anticipated CAGR for the semiconductor segment as a whole.
3. RIO & BHP: Valuation Gap Gone; Closing Long-Rio/Short-BHP
Investment Conclusion:
We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP
4. New J. Hutton Exploration Report (Week Ending 18/1/19)
- Launching weekly exploration report
- Initial coverage of 318 companies
- Eventual ASX, TSX & AIM coverage
- Scientific approach to determine prospectivity
- Selective judgement on announcement materiality
- Preference for gold
- Targeting company maker projects
- Best exploration tenements, Magnesium, graphite, metallurgical coal
- Paladin Energy (PDN AU), Admiralty Resources Nl (ADY AU) , Jameson Resources (JAL AU), Golden Rim Resources (GMR AU), Orion Gold Nl (ORN AU) , Talga Resources (TLG AU), Barra Resources (BAR AU), King River Resources (KRR AU), Korab Resources (KOR AU), Lefroy Exploration Ltd (LEX AU)
5. Itochu Confirms Intent to Deepen Hold over Descente
Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).
Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.
Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.
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