I bought Taiwan Semiconductor Manufacturing Company Limited (TSMC) recently at USD42 per share. It is listed on New York Stock Exchange. Its market cap is USD200 bil while historical PER is approximately 18 times.

TSMC is principally involved in chips fabrication (a so called chip foundry). The famous Integrated Circuit (IC) companies that we know nowadays such as AMD, HiSilicon (Huawei), Qualcomm, Broadcom, Nvidia are actually fabless chip companies. They are involved in design and marketing of the chips but they don't have their own manufacturing facilities. They outsource the manufacturing to chip foundries. TSMC is the biggest among them all (48% market share), followed by Samsung (19%), Global Foundries (8%), UMC (7%), SMIC (5%), etc.

(Intel is the very rare case of chip company which still has its own chip foundry, but it is behind TSMC in terms of technological leadership and is struggling with its latest most advanced node).

There used to be many chip foundries. However, as technology advances and Transistors get smaller and smaller, it becomes increasingly expensive to manufacture chips (requires huge capex and investment in R&D). Companies dropped out of the race one by one. The latest to quit is Global Foundries which announced in August 2018 that it will no longer pursue the 7nm manufacturing process so as to preserve resources for the more profitable, less advanced 14nm segment.

Pursuant thereto, the world is now left with only two chip foundries for advanced nodes (7nm and below) : TSMC and Samsung. Between the two, TSMC is the stronger party. It has the following advantages :-

(a) bigger market share (48% vs. Samsung's 19%);

(b) independence. Samsung has its own chips business. If you are a chip company (let's say, Apple), Samsung will be able to know how your chips work if you outsource the fabrication to them. TSMC does not have this problem. It is an independent foundry with totally no interest in any IC brand; and

https://www.youtube.com/watch?v=wT-cwb_JkTA&app=desktop

Why am I so bullish about TSMC ? Because it is expected to do well in the immediate term (as soon as coming quarter) as well as the medium and longer term.

Short Term Positives

TSMC's latest most advanced technology : 7nm manufacturing process is very well received by the market. Many chip companies rush to place orders with them. Having the latest fabrication process is no longer a luxury for chip companies, it is a necessity for market leadership.

A case in point is AMD (Advanced Micro Devices). For many years, AMD has been lagging behind Intel. However, since outsourcing manufacturing to TSMC in 2018 using the 7nm process, AMD's chips has overtaken Intel in terms of pricing and performance. Its share price has risen by more than 200% since 2018. Intel, on the other hand, is facing stagnation.

Please refer to charts below.

It is no more an expectation, the strong demand for 7nm chips is being reflected in TSMC's latest sales figures. Please refer to article below.

TSMC is expected to enjoy substantial revenue growth starting August with the momentum to continue through the last quarter of 2019, according to market watchers, who expect the pure-play foundry to post record-high sales for the fourth quarter.

TSMC has disclosed July revenues slipped 1.3% sequentially to NT$84.76 billion (US$2.7 billion).

TSMC's monthly revenues are set to top NT$100 billion in August and September, said the watchers, adding that revenues for the fourth quarter are expected to grow more robustly. Strong demand for 7nm chips will be driving the revenue growth.

 

 

Pursuant to the above, we can expect TSMC earnings to grow by leaps and bounds in coming quarters.

 

 

Medium to Longer Terms

 

 

While busy churning out 7nm products, TSMC is already working on its 5nm and 3nm manufacturing processes. It targets to roll out 5nm by first half of 2020 (next year !!!) and 3nm by 2022. With all these exciting developments in the pipeline, it is no exaggeration to say that TSMC is likely to maintain leadership positions for many years to come.

 

 

Please refer article below to feel the momentum and buliishness.

 

 

 

With regards to its 5nm production ramp-up, TSMC said previously it has become "a little bit more aggressive." The foundry is on track to move the node to volume production in the first half of 2020. TSMC regards its 5nm process as a long-lived node, same as its 7nm, 16nm and 28nm processes.

CONCLUDING REMARKS

All this while, I seldom invest in technology companies. It is notoriously difficult to predict how they will perform in the short term due to cyclical nature of the industry, and it is difficult to predict their perfomance in the medium to longer term due to the ever changing technological landscape. It is also difficult to pinpoint the winners. For example : I used to think that Nvidia is a promising company because it is a potential proxy to AI play. However, recently, AMD came up with a gaming chip that perform better than Nvidia. So Nvidia share price has collapsed by closed to 50%. You simply don't know where the bullets are going to come from.

However, TSMC doesn't have this problem. By virtue of its status as an independent chip foundry, it has exposure to EVERY sector and players.  It doesn't matter whether AMD, Nvidia, Qualcomm, Broadcom or Apple is the winner, they all source their chips from TSMC (with Samsung the pretender lurking far behind).  

On top of that, there are signs that demand for 5G is picking up faster than many people have expected (no small part due to TSMC's advanced manufacturing tehcnology). The proliferation of this new technology will generate demand for high end chips for various types of applications, from smart phones to cloud computing to AI to high performance computing to autonomous driving, etc. As mentioned in my earlier article dated 20 August 2019, I believe we are on the verge of a supercycle for semiconductors that can last for many, many years. 

https://klse.i3investor.com/blogs/icon8888/220402.jsp

With such favorable short, medium and long term prospects, I decided to bet my money on TSMC.

I am not greedy. Targeting a 50% return within 3 years.