Mobile Devices Providing Future Growth Support For TSMC

The burgeoning global demand for mobile devices amid ubiquitous connectivity has been a major boom for manufacturers such as Apple and Samsung Electronics . However, as seen by the rise and fall of Taiwan's HTC , the mobile handset industry is highly competitive and the level of competition will continue to intensify as more companies vie for market share . One firm that has been benefi ting regardless of consumers' preference of mobile devices is Taiwan Semiconductor Manufacturing Company (TSMC) . TSMC's dominant position in the chip-making sector should ensure the firm remains highly profitable as long as it is able to continue with its technological advancements and meet the rapidly growing demand.

TSMC was established in 1987 and it claimed to be the world's first dedicated semiconductor foundry. The company's total managed capacity reached 15.1mn eight-inch equivalent wafers in 2012. TSMC operates three advanced 12-inch wafer fabs, four eight-inch wafer fabs, and one six-inch wafer fab in Taiwan. It also manages two eight-inch fabs at wholly owned subsidiaries: WaferTech in the US and TSMC China Company . TSMC also obtains eight-inch wafer capacity from other companies in which it has an equity interest.

In 2012, TSMC reported consolidated revenue of TWD506.3bn (US$17.1bn), up by 18.5% from TWD427.1bn (US$14.4bn) in 2011. Similarly, net profit grew by 23.8% to TWD166.2bn (US$5.6bn) with the net profit margin improving from 31.4% in 2011 to 32.8% in 2012.

Betting On The Right Markets
TSMC Wafer Sales By Application (LHS) And Technology (RHS), 2010-2012 (%)

Wafer sales breakdown provided by TSMC reflects the direction that the global demand for chips is heading towards. By application, demand from the communication segment reached 54% of the total in light of demand from mobile devices. Demand for computer chips, which is a rapidly fading market, accounted for only 16% of total sales in Q412, down from 20% in Q411. Meanwhile, TSMC's 28nm process technology is highly sought after, rising to 22% of total wafer sales in Q412, up from 2% in Q411.

Outlook Remains Rosy

TSMC has more than 600 clients, which includes major companies such as Apple, Nvidia , Qualcomm and Texas Instruments . While Sams ung Electronics has its own in-house processor chips (Exynos) , which is used in several mobile devices, the South Korean firm is reported to be planning to use Qualcomm's 28nm-based Snapdragon 600 quad-core processor for its new Galaxy S4 smartphone (for the US market).

While Apple's share price has declined by 37% as of March 1 2013 since its September 2012 peak, it does not hide the fact that the company sold a record 47.8mn iPhones in the quarter ended December 29 2012 as well as 22.9mn iPads. Meanwhile, Samsung Electronics has sold 40mn Galaxy S3 units (as of January 2013), and it has lofty ambitions for the Galaxy S4 smartphone, which is scheduled to be unveiled in March 2013.

The importance of TSMC in the global smartphone market is clearly evident from Apple's and Qualcomm's attempt to secure exclusive access to the chipmaker's production output. In August 2012, Bloomberg reported that TSMC rejected the two companies' individual offer s of US$1bn . TSMC's CFO said that the company wants to retain control of its plants and it does not need the cash for investments. Apple's desire to work closer with TSMC stems from Apple's complicated relationship with Samsung Electronics. Apple relies heavily on Samsung Electronics for iPhone components such as chips, but the two compete in the same consumer electronics market, which has also shifted to legal battles over intellectual property rights issues. Apple announced in January 2013 that it will shift manufacturing of its mobile processors away from the South Korean firm, and TSMC is expected to be the main beneficiary. Additionally, TSMC is unlikely to move down the supply chain and compete directly with Apple.

TSMC's technology edge will ensure that it has a firm foothold in the dynamic smartphone market, which is engaged in an aggressive arms race. In order to differentiate from the competition, smartphone makers are pushi ng for faster, smaller and more efficient chips so that consumers are able to have a better experience at processes such as multi-tasking and gaming. TSMC said in January 2013 that the company has almost 100% market share on the 28nm process, and it plans to invest US$9bn in 2013. The firm is also investing in the 20nm process, and it expects full production in 2014-2015.

Moreover, demand for processor chips will continue to surge as the industry moves towards a world where everything is connected. TVs and cars are already part of the process and we can expect more traditional devices to be connected (eg, wireless sensors have been placed on cattle for health monitoring) , which will be beneficial to TSMC and other foundries - Ericsson and Cisco predict that there will be approximately 50bn int ernet-connected devices by 2020, while IBM forecasts 1trn by 2015.

Flying High On Mobile Devices And 28nm
Taiwan Semiconductor Manufacturing Company Share Price (TWD)

As seen from the chart above, TSMC has recovered well from the global financial crisis and has been on a phenomenal run . Despite trading at historical highs, TSMC does not carry a significant premium. TSMC has a price-to-earnings ratio of about 16.3x, which is lower than United Microelectronics Corporation (UMC) 's 17.7x and the MSCI World Technology & Hardware Index's 14.1x .

Risks To Outlook

As aforementioned, TSMC has a near monopoly on the highly demand 28nm market, although rival foundries are playing catch up. UMC has been investing in the 28nm process, although it still has yield issues. Samsung Electronics is also upgrading its facilities to add 28nm capabilities . In mid-2012, GlobalFoundries announced that although it was late to the 28nm market, it will ramp up its production. In mid-2012, TSMC struggled to meet demand for its 28nm, resulting in clients such as Nvidia and Qualcomm to considering shifting chip products to rivals. This resulted in a slight decline in TSMC's outlook and share price, although the impact was not long lasting given that the competition was still a distance behind TSMC.

Besides providing competition, there is a risk that the sector could be blinded by the current, high demand for 28nm chips and over-invest in facilities, resulting in a glut of supply and declines in selling price s. The pursuit of technological advancements (eg, 20nm and 14nm) is not a risk-free investment as there is still a need for balance among the improvement, cost and yield. However, even as the market moves towards more advanced technology, the 28nm technology seems to be in a 'sweet spot' and it could become the norm, especially with the growing demand for smartphones in emerging markets.

The semiconductor industry is also historically cyclical and TSMC has seemingly defied the trend given the boom in mobile device demand. It is hard to foresee a collapse in the near term, but a n overall slowdown in the global economy would negatively affect TSMC, reminiscent of the situation in 2008.

This article is tagged to:
Sector: Telecommunications, Consumer Electronics
Geography: Taiwan, Taiwan, Taiwan, Taiwan

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