power point company analysis

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Marcus Allan Ingram, PhD, CFA

Taiwan Semiconductor Manufacturing, Inc.

American Depositary Receipts (ADR) trade on the New York 

Stock Exchange – ticker symbol: TSM

Each ADR is equivalent to 5 shares of TSM common stock 

TSM’s home listing is on the Taiwan Stock Exchange since 1986

Officers and Directors own about 1% of shares

TSM 5 year return 113%, Nasdaq 75%, SP500 56%

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Company description

Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) is  the world's largest dedicated semiconductor foundry,  operating 12 fabs (semiconductor fabrication plants)

Customer without fabs (e.g., Microsoft, Qualcomm)  made up 85% of 2014 sales; customers who have their  own fabs (e.g., AMD, Analog Devices), 15%

TSM is a vertically integrated manufacturing; construction  and preparation of the silicon chip (front end‐of‐line),  adding processes via photolithography (back end‐of‐ line) and testing and packaging.

Schematic representation of the cross-section of a CMOS chip

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Strong growth with modest valuations 

Consistent profitability

Taiwan Semiconductor Manufacturing Co., Ltd. (NYS: TSM) Common size Income Statement

Fiscal year ended 12/31/2014 12/31/2013 12/31/2012 12/31/2011 12/31/2010

Total Revenue (100% TR) 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Direct Costs %TR 50.5 % 52.9 % 51.9 % 54.5 % 50.6 %

Gross Profit %TR 49.5 % 47.1 % 48.1 % 45.5 % 49.4 %

Selling General & Admin %TR 3.1 % 3.9 % 4.4 % 4.4 % 4.3 %

Research & Development %TR 7.5 % 8.0 % 8.0 % 7.9 % 7.1 %

Operating Income %TR 38.5 % 35.2 % 35.8 % 33.2 % 37.9 %

Interest Income %TR -0.1 % -0.4 % 0.1 % 0.2 % 0.3 % Foreign Exchange Gains %TR 0.3 % 0.0 % 0.1 % 0.0 % 0.0 % Other Non-Operating Income %TR 0.1 % 0.7 % -0.5 % 0.5 % 1.8 % Total Non-Operating Income %TR 0.6 % 0.3 % -0.3 % 0.6 % 2.1 %

Earnings Before Tax %TR 39.1 % 35.5 % 35.5 % 33.8 % 40.0 %

Taxation %TR 6.3 % 5.4 % 3.1 % 2.5 % 1.9 %

Net Income %TR 33.3 % 30.8 % 32.8 % 31.4 % 38.5 %

1Source: Mergent Online

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Peers/Competitors (data from Mergent Online)

Fiscal year ended 12/31/2015 12/31/2014 12/31/2015 12/31/2014 12/31/2015 12/31/2014

Total Revenue (100% TR) 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Direct Costs %TR 67.8 % 78.8 % 50.5 % 52.9 % 37.4 % 36.3 %

Gross Profit %TR 32.2 % 21.2 % 49.5 % 47.1 % 62.6 % 63.7 %

Selling General & Admin %TR 4.4 % 8.4 % 3.1 % 3.9 % 14.3 % 14.6 %

Research & Development %TR 9.5 % 7.0 % 7.5 % 8.0 % 21.9 % 20.6 %

Operating Income %TR 18.4 % 18.9 % 38.5 % 35.2 % 25.3 % 27.5 %

Interest Income %TR -2.1 % -2.0 % -0.1 % -0.4 % -0.2 % 0.1 % Foreign Exchange Gains %TR 0.3 % 0.0 % Other Non-Operating Income %TR -0.2 % -0.2 % 0.1 % 0.7 % 0.7 % 0.8 % Total Non-Operating Income %TR -2.3 % -2.2 % 0.6 % 0.3 % 0.5 % 0.9 %

Earnings Before Tax %TR 16.1 % 16.7 % 39.1 % 35.5 % 25.8 % 33.8 %

Taxation %TR 1.0 % 0.8 % 6.3 % 5.4 % 3.1 % 2.5 %

Net Income %TR* 17.9 % 18.6 % 33.3 % 30.8 % 32.8 % 31.4 %

*includes equity income in non-consolidated subsidiaries

Common size Income Statements

Taiwan Semiconductor Manufacturing Corp.

Micron Technology Intel Corporation

Ratio analysis

  Market Cap 

($billions)

Net profit 

margin

Asset 

turnover 

Fixed 

Asset T/O

Debt/ 

Equity ROA ROE

Taiwan Semi 135 33.3% 0.55 0.95 25% 18.4% 27.4%

Intel 153 32.8% 0.57 1.71 37% 11.7% 19.3%

Micron Tech 12 14.0% 0.68 1.66 60% 12.2% 24.7%

Semi Mfg Intl 0.5 11.5% 0.38 0.71 44% 3.0% 4.0%

STMicroelectronics 5.0 1.5% 0.81 2.5 34% 1.3% 2.3%

Adv Micro Devices 3.2 ‐16.4% 1.16 16.3 0% ‐19% ‐19%

Source: Mergent Online

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Valuation measures

  1 year 5 year 1 year 5 year Beta P/E ratio P/Ebitda Yield

Taiwan Semi 6% 16% 11% 16% 0.98 12.2 6.9 2.8%

Intel ‐1% 4% ‐2% ‐1% 0.97 14.8 7.3 3.3%

Micron Tech ‐1% 16% ‐5% NMF 1.58 5.7 2.9 0

Semi Mfg Intl ‐5% 13% ‐28% NMF 1.30 26.6 4.9 0

STMicroelectronics ‐7% ‐8% ‐15% NMF 1.44 NMF NMF 5.7%

Adv Micro Devices ‐28% ‐8% NMF 1% 2.22 NMF NMF 0

Source: S&P Capital IQ Stock Reports

Sales growth Earnings growth

“We think TSM’s business will continue to grow given its solid track 

record and experienced management team. Its leading position in 

the pure foundry service industry with more than 50% market 

share will help TSM to tap into the mobile growth opportunity 

(smartphones, tablets, wearables, etc.) given a decline within the 

PC segment. TSM expects to start 10nm production in late 2016 

(7nm in 2017), which we think will support growth and strengthen 

its market position. TSM s strong earnings growth, stable cash 

generation and net‐cash position will ease its financial burden 

given ambitious capital spending.”

Tzyy Loon Ng in “S&P Stock Reports”, Jan 14, 2016our view.

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Qualcomm (QCOM) was TSMs largest customer until last year. But Qualcomm is ditching TSM and going to its largest competitor Samsung Electronics for 14nm this year and 10nm next. As a result, while Qualcomm contributed to over 20% of TSMC’s revenue in 2014, it is expected to chip in only 9% this year and 4% next.

However, J.P. Morgan thinks TSMC has not lost its technological edge and Qualcomm will be coming back to the Taiwan manufacturer for 7nm in 2018. Building a semiconductor process is so expensive – estimated to be over $10 billion in capital expenditure – that even large foundry makers like TSMC and Samsung tend to skip a generation.

We believe TSMC’s aggressive schedule on 10nm /7nm is a key motivator for QCOM to return to TSMC for 7nm after skipping 16nm/10nm nodes for leading edge silicon. As such, JP Morgan expects Qualcomm to lift TSMC’s revenue by 3-4% in 2018 and another 3-4% in 2019. The bank raised its price target by 9%; the price target implies 14.5 times 2016 earnings estimates.

By Shuli Ren, March 7, 2016

Estimate the cost of capital

  capital wt cost (1‐T) product

Debt 6.79 4.8% 4.00% 0.85 0.0016 Equity 135.0 95.2% 8.86% 0.0844

$141.79 0.0860

WACC = 8.6%

Cost of debt = YTM on BBB bonds = 4.0%

Cost of equity capital  8.86%

Taiwan Semiconductor

= 0.02 + (0.98*0.075)

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Simple DCF: Dividends + Terminal Value

Taiwan Semi 1/1/2016

16.0%

8.0%  

  2016 2017 2018 2019 2020

growth rate 16% 16% 16% 16%

Earnings per share 1.85 2.15 2.49 2.89 3.35

growth rate 8% 8% 8% 8%

Dividends per share 0.50 0.54 0.58 0.63 0.68

46.90

Div. plus T.Value 0.50 0.54 0.58 0.63 47.58

NPV 32.94

8.86%

implied return   14.25%  using SOLVER

26.05$       actual price per share on 3/18/2016

   required return on equity

All inputs from Value Line

est. annual growth in earnings 2015‐2020

est. annual growth in dividends 2015‐2020

estimate of equity value per share

Terminal value in 2020 assume P/E ratio = 14

Recent price=30.39, P/E=16.5 , YTD +50%

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Conclusions and Recommendation

TSM has outperformed the industry and the 

broad stock market this year. Price is up over 50%, 

and P/E multiple has expanded from 14.2 to 16.5 

since the beginning of the year.

TSM continues to have excellent prospects for 

future growth, but this is fully reflected in the price at 

$30 per share.

Recommendation: HOLD – market performer