Strong 3Q22 but weaker 2023 outlook
- 3Q22 beat expectations; Net profit surged 80% y-o-y to NT$281bn on stronger-than-expected margins
- 4Q22 expected to be flattish sequentially; Destocking to take a toll on demand and capacity utilisation through 1H23; trim 2022 capex by 10% in anticipation of slower growth, a negative read through for semiconductor equipment.
- Longer-term prospect intact; maintaining guidance of 15-20% revenue CAGR and >53% gross margin on TSMC’s strong technology leadership
- TSMC remains the bluechip name to bottom-fish in near term weakness; Reiterate BUY; TP NT$670 (US$120)
3Q22 results review
- 3Q22 beat expectations. TSMC’s 3Q22 net profit surged 80% y-o-y to NT$281b on the back of 48% increase in revenue and 9.1ppt margin expansion. Revenue comes in at NT$613bn (S$20.23bn), the higher end of its guidance (US$19.8-20.6bn) while gross margin of 60.4% exceeded its guidance (56.5-59.5%), aided by favourable forex and cost reduction.
- The strong performance was underpinned by continued strong demand for Smartphone, Internet of Things (IoT) and Automotive, which saw 25%, 33% and 15% q-o-q growth respectively.
- Advance nodes (<7nm) accounts for 54% of group revenue in 3Q22.
- 4Q to be flattish sequentially. 4Q22 is expected to remain strong, similar to 3Q22. Management guided revenue to be US$19.9 – 20.7bn and gross margin around 59.5-61.5%, with favourable forex, offset by lower utilisation.
- Destocking to persist through 1H23. Management expects demand to slow down as customer continues destocking the next few quarters before picking up again in 2H23. As a result, its utilisation especially for N6 and N7 won’t be as high as past 2-years, during this inventory correction period. Though, overall, TSMC still expects to deliver growth in 2023, albeit slower.
- Longer-term outlook intact. Management stresses that this is just short-term cyclicality. TSMC’s business would be less volatile and more resilient relative to peers, thanks to its much stronger technology leadership and product differentiation today. It remains confident to achieve its 15-20% revenue CAGR and >53% gross margin the next few years.
- Lowered 2022 capex guidance by 10%. Last quarter, TSMC guided 2022 capex to fall in the lower end of its US$40-44bn guidance range. This quarter, management lowered 2022 capex to US$36bn, representing a 10% reduction from last guidance, to align with demand growth outlook. This would implied a ~5ppt decline in capital intensity to low 50s. Management seems to be suggestive of continued capex tightening in 2023. This has a negative read through on demand outlook and semiconductor equipment market.
- N3 and N3E schedule as well as overseas expansion remain on track. Management expects smooth ramp up of N3 to achieve full utilisation in 2023 with mid-single digit revenue contribution. Management has earlier guided for 2-3ppt gross margin dilution for FY23. TSMC continues to see a high level of customer engagement with its N3E. its overseas diversification and expansions are also on track.
Reiterate BUY and TP NT$670 (US$120), based on 6.5x P/Bv or 1SD above mean. TSMC will likely to be the preferred pick in such operating environment. The high technological barrier will sustain TSMC’s leadership, sharpen its cost competitiveness, and better weather the industry cyclicality.