In this briefing:
- A Bear Investment Case for TSMC (In-Depth Version)
- A Bull Investment Case for TSMC (In-Depth Version)
- A Bear Investment Case for TSMC (Summary Version)
- A Bull Investment Case for TSMC (Summary Version)
- M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court
1. A Bear Investment Case for TSMC (In-Depth 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 (In-Depth Version)
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. 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]
4. 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.
5. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court
M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a voluntary conditional offer (VGO) at S$2.06 cash per share from Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH). KCL-SPH said on Tuesday that they wouldn’t increase their S$2.06 offer price “under any circumstances whatsoever.”
KCL-SPH’s stance not to increase their S$2.06 offer price is a clever ploy to the put the ball in Axiata Group (AXIATA MK)’s court. Axiata has three options, in our view. We believe that the probability of a material bid to KCL-SPH’s offer is low with Axiata most likely to retain its stake as a minority shareholder.
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