iPhone boost is prelude to bumper year for TSMC

Oct 20, 2017

An iPhone boost is prelude to a bumper year for Taiwan’s TSMC. Quarterly results show the world’s top contract chipmaker recovering after a lacklustre first half, aided by Apple’s new phones. TSMC’s next task is to gain a lead in a new generation of even smaller semiconductors. It looks well positioned to stay ahead of emerging rival Samsung.

A few months ago, the $204 billion Taiwanese giant was grappling with slowing smartphone sales, which led to top-line growth falling short of expectations. To make matters worse, currency moves hit margins. TSMC’s sales are in U.S. dollars, but 70 percent of operating expenses are in local currency. So, even a small appreciation in the Taiwan dollar against the greenback drags down operating margins.

Things are starting to turn around. The dollar has stabilised, and thanks partly to strong demand from Apple as it launches the iPhone 8 and iPhone X, earnings in the three months to end of September beat expectations to top NT$89.9 billion ($2.9 billion).

Next year TSMC will start mass production of so-called 7nm chips, named for the tiny internal distances – down to just 7 nanometres, or 7 billionths of a metre – that define these semiconductors. These 7nm chips will probably not only power the world’s next generation of phones and gadgets, but also gaming consoles and data centres that enable artificial intelligence.

That will help TSMC stand out from Samsung, which Bernstein analysts say will stick to making 10nm chips in 2018. That could lead to TSMC gaining more important business with Apple and should allow it to win back Qualcomm, another key customer which analysts say defected earlier this year to Samsung for some of its chips. Given the latter has major ambitions in contract chipmaking, this will be an important counterblow by TSMC.

So it should be a good year: Eikon data shows analysts forecast double-digit growth in sales and earnings in 2018. The problem for investors is that the market has already priced in the good news. Shares have surged more than 27 percent in six months and trade at 3.7 times forward book value, a near-24 percent premium to their five-year average. Co-Chief Executive Mark Liu, who succeeds founder Morris Chang as chairman next year, has high expectations to meet.

Source: Breakingviews