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DBS: TSMC – Buy TP US$120, NT$670

Posted on July 15, 2022July 15, 2022 By alanyeo No Comments on DBS: TSMC – Buy TP US$120, NT$670

Reaching new heights

1H22 record revenues. 2Q22 revenues came in at NT$534bn (approx. US$18.16n), at the higher end of its quarterly guidance of US$17.6-18.2bn. Overall, management attributes the strong performance to continued strong demand underpinned by the industry megatrends of 5G,High Performance Computing (HPC), Automotive and Internet of Things (IoT). Furthermore, management expects HPC and automotive-related demand to continue to drive its revenue growth with HPC being the main engine of its revenue growth. Strong demand for HPC, IoT and Automotive led the way with 13%, 14% and 14% q-o-q growth while Smartphones, Digital Consumer Electronics (DCE) and Others grew 3%, 5% and 7% q-o-q respectively in 2Q22.

Overall, 1H22 revenues came in at a record NT$1,025bn, growing by 39.6% y-o-y growth. As of 1H22, TSMC’s HPC platform has become its largest revenue contributor at 42% of revenues while its Smartphone platform contributed approximately 39%. Advanced technologies, 7nm and below, contributed approximately 51% of its 1H22 wafer revenues.

Gross margins exceeded 2Q22 guidance, coming in at 59.1%, 1.1ppt higher, while operating margin also exceeded its higher-end guidance of 47%, coming in at 49.1%. Management attributed the improvement of its margins to cost improvements, its value selling, and very favorable exchange rates. In 1H22, gross margins at 57.4% was 6.2ppts y-o-y higher.

1H22 EBIT and net profits grew 64% and 60.5% y-o-y to NT$485.9bn and NT$439.7bn respectively. As a result, 1H22 EBIT and net profit margins came in at 47.4% and 42.9% respectively. As of 1H22, cash and marketable securities increased by NT$143.5bn to NT$1425.5bn while net cash reserves increased by NT$47.74bn to NT$535.72bn. Capital expenditures amounted to USD$16.72bn. 

Remains optimistic on long-term structural demand; higher quarterly guidance.

Management maintains an optimistic view of sustained growth momentum in the face of macroeconomic headwinds and rising geopolitical tensions that threatens to further disrupt the supply chain as well as plunging the global economy into a recession. Strong demand for its 7nm and below technology will continue to support TSMC’s growth against the backdrop of excess demand and tight capacity.
 

Going into 3Q22, management guided higher revenue,  increasing by 9.0-13.4% q-o-q to US$19.8-20.6bn, and gross margins that are expected to stay elevated at 57.5-59.5% in 3Q22. Management continues to remain confident in achieving its long-term gross margin guidance of >53% as high utilization rate, technology leadership, cost improvements and the ramping up and development of advanced technology continues to drive the improvement in its margins. Operating margins for 3Q22 are also expected to expand to 47-49%.

Sustained growth momentum amidst macroeconomic headwinds. 

Management maintains its view that structural growth, spurred by increasing demand and requirements for computational power, energy efficiency and increasing silicon content from their customers, remains strong as it guided for 15-20% revenue CAGR, in USD terms, over the next several years. Though TSMC still maintains its capital expenditures at US$40bn-44bn for FY22, its FY22 capex is expected to be closer to the lower end of its guidance due to delays in some tools deliveries, resulting in some of its capex overflowing into FY23. TSMC’s HPC platform is expected to be the largest contributor and its main engine revenue growth driver for the next several years.

While global consumer demand has softened amid a highly inflationary environment thus far, on the back of inventory correction that’s expected to persist till 1H23, management remains optimistic about FY22 and the longer-term outlook as demand from its customers continues to exceed TSMC’s capacity to supply. 

N3 and N3E schedule remains on track.

TSMC’s N3 is on track to begin volume production in 2H22 and its revenue contribution is expected to be reflected in FY23. Though management has guided for 2-3ppt gross margin dilution for FY23, management has already taken this into consideration and remains confident of achieving the long-term gross margins guidance of >53%. Furthermore, TSMC continues to see a high level of customer engagement with its N3E and is on track to begin volume production in 2H23.

N2 is progressing well and on track for production.

TSMC’s N2 also remains on schedule to begin its risk production in 2024 and subsequently, volume production in 2025. Management is confident that its N2 will be the most advanced technology in the market upon its introduction.

TSMC-1H22_15juy2022Click here to Download Full Report in PDF

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Research - Equities Tags:TSM, TSMC

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