Company Overview 

Headquartered in Hsinchu, Taiwan, Taiwan Semiconductor Manufacturing Company Limited is the world’s largest dedicated foundry in the semiconductor industry and was founded in 1987. The company is engaged in the manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and semiconductor devices to its clients worldwide. TSM has ~5.19 billion American Depositary Shares (ADS) listed and outstanding on NYSE, with each ADS representing five ordinary shares.

TSM Details

Revenue Segments and Client Base

Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) operates in various geographical regions, including North America, China, Asia Pacific, Europe, Middle East, and Africa (EMEA), and Japan. By platforms, TSM’s revenues are segregated into smartphones, high-performance computing (HPC), internet of things (IoT), automotive, digital consumer electronics, and others. During FY20, the company’s production attributed to 24% of the total world semiconductor (excluding memory output) value, compared to 21% in the previous year.

TSM’s client base includes some leading semiconductor and integrated device manufacturing companies worldwide, including Intel Corporation, MediaTek Inc., NVIDIA Corporation, Advanced Micro Devices, Inc., Broadcom Limited, etc.

Latest Developments

On June 02, 2021, the company, along with NXP Semiconductors N.V., a leading automotive processing company, announced the launch of NXP’s S32G2 vehicle network processor and the S32R294 radar processor into volume production on TSM’s advanced 16 nm FinFET process technology. The move to TSM’s 16nm technology allows S32G2 to consolidate multiple devices into one, creating a powerful System-on-Chip (SoC) that reduces the processor’s footprint.

The S32G2 is a vehicle networking processor which enables service-oriented gateways for secure cloud connectivity and over-the-air updates for data-driven services, including usage-based insurance and vehicle health management. S32G2 processors also enable next-gen vehicle architectures to incorporate advanced driver assistance and autonomous drive systems.

Q2FY21 Key Results Highlights

During Q2FY21 (ended June 30, 2021), TSM reported earnings of TWD 5.18 per share (USD 0.93 per ADS unit), representing an 11.2% YoY increase. Revenue increased 19.8% to TWD 372.15 billion from TWD 310.70 billion in Q2FY20, primarily due to increased and resilient HPC and Automotive-related demand. During Q2FY21, shipments of 5 and 7 nanometers (nm) technologies comprised 18% and 31%, respectively, of the total wafer revenue, and the more advanced technologies accounted for 49% of the total wafer revenue. Net Income for Q2FY21 was TWD 134.36 billion, 11.2% higher than TWD 120.82 billion in Q2FY20.  

Revenue & Gross Profit; Analysis by Kalkine Group

Key Update

On the social front, TSM, on July 12, 2021, announced that it completed the purchase of 5.0 million doses of BioNTech (BNT) 162b2 vaccine and donated them to the Taiwan Centers for Disease Control (CDC) of the Executive Yuan Ministry of Health and Welfare for epidemic prevention.

Key Metrics, Liquidity & Balance Sheet Details

The company exited the quarter with a cash balance (including investments in marketable financial instruments) of TWD 870.84 billion. Its property, plant & equipment increased to TWD 1,722.68 billion from TWD 1,493.56 billion reported at the end of Q1FY20. Net long-term debt stood at TWD 410.47 billion as of June 30, 2021. The company generated TWD 187.44 million from cash flow from operating activities during Q2FY21.

In Q2FY21, the EBITDA margin stood at 67.0%, higher than the year-ago figure of 65.0%. Operating and net margins were 39.1% and 36.1%, compared to the industry median of 17.6% and 17.8%, respectively. ROE in Q2FY21 was 6.8% vs. the industry median of 3.7%. Debt/Equity of the company was 0.28x as of June 30, 2021, vs. the industry median of 0.03x.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders

The top 10 shareholders together form around 24.92% of the total shareholding, while the top 4 constitute the maximum holding. National Development Fund, Executive Yuan, and Capital World Investors hold the maximum stake at 6.38% and 3.96%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

The semiconductor and electronics markets are cyclical, and any significant fluctuation in the TSM’s product demand could impact its business. Further, revenue from ten top customers in FY19 and FY20 contributed ~71% and 74%, respectively to the total revenue, and its largest customer accounted for 25% of the total revenue in FY20, making the company susceptible to losses if any of these customers change their relationship or reduce their purchases with TSM.

Outlook

Based on the exchange rate assumption of USD 1.0 = TWD 27.9, TSM expects the Q3FY21 total revenue to range between USD 14.6 billion to USD 14.9 billion, driven by the strong market demand for its 5nm and 7nm technologies in all four of its growth platforms (smartphone, HPC, internet of things (IoT) and Automotive-related applications). As a result, the company's gross profit and operating profit margins for Q3FY21 are estimated to be in the range of 49.5 - 51.5% and 38.5 - 40.5%, respectively.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation 

Over the last six months, the TSM’s share price has gone down by ~7.89%. The stock is currently quoting in the mid-band of its 52-week trading range of USD 65.80 to USD 142.19. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of an upside of high teens (in percentage terms). We believe that the company can trade at a premium compared to its peer average, despite the risks involved with customer concentration, competition from peers, and cyclicality of the business. We have taken peers such as United Microelectronics Corp. (NYSE: UMC), ASE Technology Holding Co. Ltd. (NYSE: ASX).  Considering the company’s decent Q2FY21 performance, robust demand for automotive and HPC, the recent collaboration with NXP, and current valuation, we give a “Buy” recommendation on the stock at the closing price of USD 115.35, down ~0.34% on July 19, 2021.  

TSM Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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