TSMC - Beneficiary of rising chip demand

*TSMC - Beneficiary of rising chip demand* (buy opportunity)

Taiwan Semiconductor Manufacturing Company, Limited, TSMC is the world's largest dedicated independent (pure-play) semiconductor foundry.

*Summary:*
The investment case for TSMC is fairly straight forward: mobile computing and network/cloud infrastructure is driving the demand for complex semiconductor devices. TSMC is by far the dominant player in the industry and there are huge barriers to entry. The company allocated $10 billion to capex.


There are 3 group of companies in the semiconductor industry:
• Fabless / IC designers: Nvidia, Qualcomm
• Foundry (manufacture chips) : TSMC, Global Foundries, UMC, SMIC
• Testing and assembly: STATS Chippac, Amkor, ASE
• Integrated device manufacturer or IDM (they can do chip designing and manufacturing)

30 years ago, foundry is a high fragmented industry. In recent decade, there has been huge consolidation. Today TSMC is the largest foundry in the world with more than 50% of market share.

*Market share of foundry industry:*
TSMC 50.60%
Samsung 7.90%
Global Foundries 9.60%
UMC 8.10%
Others 23.80%

Semiconductor manufacturing has been a cut throat, low profit margin business, except TSMC. Due to its huge market share and advanced manufacturing technologies, they are able to charge premium.


*Financial of TSMC:*
• Net margin 30% to 35% consistently.
• Free cash flow positive.
• ROE more than 20% annually since 2004.
• Net income compounded 14% over past 3 years.
• Net cash position.

TSMC has relentlessly investing in R&D to keep up with Samsung & Intel. It is a high capex business. TSMC has spent over USD10 billion a year on capex. The other 2 companies that have spent more than TSMC are Samsung and Intel. The other foundries cannot afford to spend similar amount and hencw they had fallen behind in term of technology.

IDM like Samsung has designed and manufactured their own chips as well as manufactured chips for their customers. Hence Samsung ends up competiting with their own customers. And this is why Apple had decided to switch out of Samsung into TSMC for manufacturing of chips. Hence TSMC has been the only choice for high end chip manufacturing.


*Where are the opportunities:*
• Though smart phones has been in the market for so long, there are countries where smart phone penetration rate is still low. According to forecast from the International Data Corporation (IDC) Worldwide Quarterly Mobile Phone Tracker, worldwide smartphone shipments are expected to maintain positive growth through 2021.
• Blockchain - short term bubble, long term potential.
• Cloud computing - IDC predicts growth around 19% annually.
• Big data - IDC pdedicts 11.7% growth annually.
• Artificial intelligence / Robotics - Long term potential

All of the above means the *whole world needs more high end chips* and TSMC is in a great position to take advantage of that.

TSMC is trading at reasonable forward PE of 16x.


*Other news:*
• Qualcomm has been rumoured to be shifting its high end processors to TSMC.
• For many years, Nvidia has relied on Taiwan Semiconductor Manufacturing Company to manufacture the graphics chips it designs. Nvidia CEO commented on TSMC: "I want the best, and TSMC provides us with the absolute best that we can get, and we push along with them as hard as we can."