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TSMC Summary

Core Content

TSMC (2330 TT/TSM US) is a leading semiconductor manufacturing company with a market capitalization of USD104.5B and an average daily trading volume of USD543M. The current share price is TWD121.00/USD20.72, with a target price of TWD120.00/USD20.00. The report highlights the potential impact of QCOM and Apple diversifying their 14nm production, which could result in significant revenue loss for TSMC.

Main Points

• Revenue Impact from QCOM and Apple:
  QCOM and Apple are estimated to generate USD6b and USD4b of foundry sales in FY15, representing 37% of TSMC’s total sales. However, due to QCOM's diversification to Samsung, TSMC could lose USD2b of revenue. In the worst case, if both companies outsource half of their 14nm production to Samsung, TSMC could lose up to USD5b, leading to a potential 2-3% YoY decline in sales.

• Sales Growth Slowdown:
  The loss of QCOM and Apple’s business may slow TSMC's sales growth from 24% in FY14 to 10% in FY15 (case 1), or even further to 5% (case 2). This would be the first decline in sales since 2009.

• Capex Intensity Increase:
  TSMC's capex intensity is expected to rise to 50% in FY15, up from 40% in FY14. This increase is attributed to the significant capital investment required for the transition to 14nm/16nm+ nodes, which is critical for maintaining competitiveness in the foundry industry.

• Technology Roadmap Delays:
  TSMC's 14nm/16nm+ node is delayed by 6-9 months compared to customer and rival timelines. This delay is due to the company's decision to enhance its 16nm node to match Intel and Samsung's 14nm baselines. TSMC's 14nm/16nm+ node is considered equivalent to the industry standard 14nm node, but its late start may impact its market share.

• Market Share Projections:
  TSMC's market share in the 14nm node in FY15 is expected to be minimal, with Samsung likely capturing over 50% of the global market. Intel and TSMC may follow, with TSMC possibly securing only 20% of the market share. Apple's potential shift to Samsung's 14nm node could further reduce TSMC's market share.

• Customer Concentration:
  TSMC's revenue is heavily dependent on its top two customers, QCOM and Apple, which together account for 40% or more of its sales. This high concentration poses a risk to TSMC's financial stability, especially if these customers diversify their production.

• Industry Dynamics and Competition:
  The race to 7nm and 10nm nodes is expected to be more dynamic and unpredictable than the 14nm/16nm+ race. This uncertainty may have a negative impact on TSMC's stock valuation and overall business performance.

• Samsung's Strategic Shift:
  Samsung's System LSI division has undergone significant reorganization, with Dr. Kim now leading the semiconductor division. This shift indicates a move towards a foundry business model, targeting high-volume customers like QCOM and Apple. Samsung is also expanding its 14nm production capacity, potentially reaching 50,000 wafers per month in FY15.

• QCOM's 14nm Strategy:
  QCOM is under pressure from Intel and MediaTek to adopt the 14nm node for its next-generation products. It is expected to use the 14nm node for its high-end devices in FY15, with the mainstream devices following in 2H15. The company is also adopting ARM's A57 and A53 cores for its 64-bit APs, signaling a shift away from its proprietary Krait architecture.

• MediaTek's Catch-Up:
  MediaTek is rapidly catching up with QCOM in the mainstream market, with plans to move to the 20nm node in FY15 and the 14nm node in FY16. This could pose a challenge to TSMC's market position in this segment.

• TSMC's Earnings Model:
  TSMC's earnings model is expected to see continued growth in capacity, with a projected increase from 15.08 million wafers in 2012 to 20.90 million wafers in 2015. However, the shift to 14nm/16nm+ nodes may require a significant increase in capital expenditure and R&D investment.

Key Information

• Customer Impact: QCOM and Apple are critical to TSMC's revenue, with QCOM accounting for 22% of FY13 sales and Apple expected to contribute over 9% in FY14.
• Technology Challenges: TSMC's delayed 14nm/16nm+ node rollout and the need for significant changes in design and manufacturing processes could affect its competitiveness.
• Financial Outlook: TSMC's capex intensity is expected to rise to 50% in FY15, which could impact its cash flow and dividend distribution strategy.
• Market Share: TSMC's market share in the 14nm node is projected to be limited, with Samsung likely dominating the market.
• Strategic Shifts: Samsung's focus on foundry services and TSMC's emphasis on technology migration and capacity expansion highlight the evolving dynamics in the semiconductor industry.

Summary Table

Conclusion

TSMC faces significant challenges in maintaining its market share due to the potential loss of key customers like QCOM and Apple. The delayed introduction of its 14nm/16nm+ node and the increased competition from Samsung and Intel may lead to a slowdown in sales growth and higher capex intensity. Despite these risks, TSMC remains a leader in the foundry industry, and its strategic focus on technology migration and capacity expansion is crucial for long-term competitiveness.