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TSMC Company Update Summary - 4 September 2013

Core Content Overview

This document provides an update on TSMC's business outlook, financial performance, and market dynamics as of 4 September 2013. It highlights the company's position in the global foundry market, challenges from shifting end-market demand, and emerging competition from other foundries and Intel.

Key Financial Information

• Share Price: TWD102.00/USD16.90
• Target Price: TWD111.00/USD18.50
• Market Cap (USD): 88.6 billion
• 3-Month Avg Daily Turnover (USDm): 285.1
• Free Float (%): 92.0%
• Major Shareholders:
  • Capital Group: 9.59%
  • National Development Fund: 6.36%
  • Saudi Arabian MA: 3.14%
  • Blackrocks: 2.25%

Key Indicators (FY13F)

Business Outlook and Market Dynamics

End-Market Demand

• TSMC's business is heavily dependent on end-market demand, particularly in smartphones and tablets.
• High-end smartphone sales have stalled due to high penetration rates in developed markets and limited LTE infrastructure globally (except in North America).
• Low-to-mid-end smartphones and tablets are showing better-than-expected demand, especially in emerging markets.
• IDC has downgraded 2013 global PC and tablet shipment forecasts, citing cannibalization from smart devices.

28nm Node and Capacity Expansion

• TSMC increased 28nm capacity by 40% QoQ in 3Q13, driven by demand for high-end APs like Qualcomm's Snapdragon 800.
• Global Foundry (GF) is expanding its 28nm capacity and gaining traction with second-source customers such as Rockchip.
• GF has qualified Rockchip's APs for 28nm HKMG, signaling a potential shift in market share.
• Intel is introducing new APs (Bay Trail and Merryfield) based on 22nm Fin FET, which could impact TSMC's market share in the tablet and smartphone markets.

20nm Node and Apple's Orders

• TSMC is set to initiate 20nm pilot production in 4Q12 and commercial production in 1Q14.
• Apple is shifting AP orders from Samsung to TSMC, but the demand is uncertain due to market share losses and product mix deterioration.
• The 20nm node is seen as transitional, and TSMC is likely to move to 16nm FinFET by 1H15.

Revenue Projections and Impact

• TSMC's 2014 revenue is expected to be USD671 billion.
• Apple's contribution to TSMC's 2014 revenue is projected at 8.1% (USD1.8 billion), with potential upside to 12.2% (USD2.7 billion) if Apple adopts 20nm APs for iPad Mini 3 and iPhone 6C.
• Apple's 20nm wafer orders are estimated at 32,000 wafers/month.
• Qualcomm and MediaTek are also expected to increase their reliance on TSMC for 28nm HKMG and 28nm Poly processes, but limited to low-end devices.

Challenges and Risks

• High-end smartphone demand is slowing, leading to lower utilization of 28nm HKMG capacity.
• Intel's Bay Trail is expected to cannibalize ARM-based APs, including those from TSMC, especially in the tablet market.
• Market share shifts in 28nm node due to second-source and new competitors.
• Inventory concerns and downside risks in earnings forecasts.

Conclusion

TSMC remains a dominant player in the foundry market but faces increased competition from GF and Intel, especially in the 28nm node. The company is adjusting its capacity expansion and customer strategy in response to slower high-end smartphone growth, inventory pressures, and cost considerations. While Apple's shift to TSMC for APs offers revenue opportunities, the uncertainty in demand and market trends pose significant challenges to TSMC's growth prospects.