Staying on the cutting edge
• World’s largest foundry with 53% market share
• Wide economic moat – leadership in cutting-edge chips to stay, propelling steady long-term growth
• Impressive 3-year CAGR of 15% and ROE of ~30%; decent dividend yield of 2%
• Initiate coverage with BUY; TP NT$710 / US$140
World’s largest foundry with leading-edge technology. Taiwan Semiconductor Manufacturing Company (TSMC), the linchpin of the semiconductor industry, commands 53% of foundry market share and produces the most advanced chips in the world. It is one of the best proxies to ride the semiconductor secular uptrend.
Wide economic moat. TSMC has been at the forefront in providing next-generation, leading-edge process technologies. The gap with the next player in the race looks set to widen as it accelerates R&D expenses and capex in the next few years. The high technological barrier sustains TSMC’s leadership, sharpens its cost competitiveness, enhances return to investors and better weather industry cyclicality.
Stellar growth; strong pricing power. Earnings are projected to grow 15% p.a. in 2020-2023F, driven by capacity and margin expansion on the back of favourable industry trends – global supply shortages, rapid growth of AI, 5G, IoT and EV, and increase in Integrated Device Manufacturers’ (IDMs) outsourcing, as well as commercialisation of advanced nodes at higher margins.
We derive a fair value of NT$710 and US$140 (10% ADR premium) for TSMC based on 2SD above mean of 26x FY22F PE. This translates into 7.1x P/BV (1.5SD above mean), which is fair against its ~30% ROE. It also offers a decent dividend yield of ~2%.
Key Risks to Our View:
Change in industry dynamics, loss of competitive advantage. Global consumer demand, utilisation and ASP trends head south; loss of its leadership in cutting-edge chips; geopolitical risks – US/China and China/Taiwan tensions.