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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.

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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. 

Valuation:

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%. 

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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.