Summary
* What is new - TSMC announced its 4Q21 result and 1Q22/2022 guidance today, which beat consensus estimates.
* Structural positives - management highlighted structural semiconductor dollar content growth for advanced/mature nodes and system houses' above-average sales growth rate in 2022. We attribute these to 1) TSMC's enhanced pricing power for advanced nodes based on increasing technology dominance, 2) growing artificial intelligence (AI) applications for datacenters and edge computing such as autonomous driving and micro servers, which require more advanced nodes with higher ASP, 3) the uptake of more analog ICs for mature nodes in edge AI applications and 5G smartphones, 4) Apple's share gain in PC (ARM-based CPU) from x86 CPU-based PC, and 5) system house customers' adoption of their internal ICs to replace fabless/IDMs' solutions. Notably, we expect Apple to adopt its ARM-based M series CPU to replace Intel's x86 CPU in datacenters in 2024 or 2025 based on TSMC's 3nm or 2nm (please see our note - "the investment implications of Semicon Taiwan 2021" published on 2021/01/02). In addition, we expect Intel to outsource its PC CPU/GPU/FPGA to TSMC for 3nm in 2H22 and server CPU to TSMC in 2023 or 2024 given rising competition from AMD and other system houses.
* A solid growth outlook and re-rating story in the long term - we expect its earnings CAGR to reach 20-25% in 2022/26 driven by 1) ASP increases, 2) margin expansion, 3) customers' share gain from logic/analog IDMs, 4) its share expansion from tier-two foundries based on greater dominance in advanced nodes and mature nodes for speciality technologies, and 5) robust demand for high-performance computing (HPC) and automotive applications. We expect the stock to generate 20-25% return each year over the next 5 years.
4Q21 result
* GM rose 1.4 ppts QoQ to 52.7% (down 1.3 ppts YoY) in 4Q21 vs. the guidance of 51-53%
* OPM rose 0.5ppt QoQ (down 1.8 ppts YoY) to 41.7% in 4Q21, higher than the guidance of 39-41%
* EPS 6.41 in 4Q21, +6.4% QoQ and +16.4% YoY
Sales breakdown in 4Q21
* 5nm 23%
* 7nm 27%
* 16nm and below 50%
2021 sales breakdown
* 5nm 19% in 2021 vs. 8% in 2020
* 7nm 31% in 2021 vs. 33% in 2020
* 16nm and below 50% in 2021 vs. 59% in 2020
Sales breakdown in 4Q21
* Smartphone - 44% of sales, +7% QoQ
* High-performance computing (HPC) - 37% of sales, +3% QoQ
* Internet of things (IoT) - 9% of sales, +3% QoQ
* Automotive - 4% of sales, +10% QoQ
* Digital consumer electronic (DCE) - 3% of sales, +2% QoQ
* Others - 3% of sales, +22% QoQ
Sales breakdown in 2021
* Smartphone - 44% of sales, +8% YoY
* HPC - 37% of sales, +34% YoY
* IoT - 8% of sales, +21% YoY
* Automotive - 4% of sales, +51% YoY
* DCE - 4% of sales, +2% YoY
* Others - 3% of sales, +9% YoY
1Q22 guidance
* Sales US$16.6 -US$17.2bn; 7.4% QoQ growth for the mid-point based on the currency assumption of 1 US$ vs. 27.6 NT$
* GM to reach 53-55%
* OPM to reach 42-44%
* Tax rate of 10-11%
* HPC and automotive segments to grow in 1Q22
* Smartphones to see some mild decline in 1Q22 due to inventory correction
Capex
* US$40-44bn in 2022
* 70-80% for advanced technology
* 10% for advanced packaging
* 10-20% for speciality technology
2022 outlook
* Mgmt expected semiconductor industry sales to grow 9% YoY in 2022 (excluding memory)
* Foundry industry sales to grow nearly 20% YoY in 2022
* Mgmt expected system houses’ orders to grow strongly and IDMs’ increasing outsourcing to TSMC in 2022; as such, mgmt believed the foundry industry sales growth could grow above the semiconductor sector sales growth in 2022
* Mgmt expected TSMC’s sales to grow mid to high 20% YoY in 2022, driven by unit growth, market share gain and dollar content increase
* TSMC’s sales growth by applications in 2022
1. HPC and automotive to grow above the corporate average sales growth rate
2. IoT sales growth rate to be similar to the guidance of mid to high 20% YoY growth
3. 5G to grow closely to the corporate average sales growth
* Broad-based growth in HPC, automotive, IoT and 5G
* Capacity to remain tight in 2022
* Depreciation to grow low to mid-teen % YoY in 2022
LT growth outlook and profitability
* Content enrichment in HPC
* 15-20% sales CAGR in US dollar term over the next few years
* HPC to be the strongest growth driver; the largest contributor for long-term growth, driven mainly by CPU, GPU, and AI accelerator
* LT GM target of 53% and higher; this could be driven by cost reduction
* 25%+ ROE in the long term
N5/N4P/N4X status
* N5 - the third year of ramp-up in 2022
* N4P - mass production in 2H21; 11% performance gain, 22% power efficiency improvement, and 6% density gain over N5
* N4X - for HPC; risk production in 1H23
* Demand for N5 family to grow over the next few years; a long lasting node
N3/N3E status
* N3 development on track; N3 production in 2H22 and sales contribution in 1H23; more N3 tape-out in the first year than N5 for the corresponding period
* N3E will be one year after N3 for mass production
* Most of 3nm tape-out is N3 rather than N3E currently
* It is too early to predict when N3 GM could reach the corporate average GM given mass production in 2H22 and higher complexity of N3 vs. the previous nodes
Mature node capacity strategy
* TSMC will continue working with customers for speciality technology in mature nodes
* Mgmt expected structural dollar content growth for mature nodes in the long term
* 28nm will be a sweet spot among the mature nodes
* Growth areas - 28nm imbedded memory applications and multiple speciality technologies such as CIS and others
* 28nm capacity expansion in Japan, China, and Taiwan; it will be based on customers’ demand
* CIS and non-volatile memory to be the key growth drivers for 2022
Prepayment strategy and subsidy
* For long-term profitability and structural demand outlook, mgmt believed it could be important to get customers’ commitment for future capacity expansion
* Higher customers’ prepayment amount in 2022
* Subsidy will be subject to different cases in individual locations
Inventory risks
* Mgmt expected the inventory level in the semiconductor industry to remain high in 1Q22; high inventory level to persist a longer period of time
* Mgmt has factored in crypto mining ASIC of high order volatility for its 2022 outlook
Capital intensity
* The capex-to-sales ratio to remain high in 2022 due to high capex for strong growth outlook
* Mgmt guided for a capex-to-sales of mid-30% in the long term once sales growth rate is lower than the current level
Competitive landscape
* Mgmt well noticed that its IDM customer has been entering the foundry sector
* Mgmt has factored in IDM customer’s move into TSMC’s sales growth target and capacity expansion plan in 2022
Structural growth drivers
* The mega trend of 5G and HPC
* Structural long-term content increase - automotive, datacenter, and etc.; across all advanced and mature technologies
The semiconductor cycle
* Mgmt believed that TSMC’s leading position in advanced nodes and operational efficiency will be in a better position amid semiconductor up/down-cycles
Recruitment
* Global operation will be easier for TSMC to recruit global talent
Capacity expansion
* 2022 capacity expansion is on track
* Mgmt is working on the capacity expansion plan to secure equipment for 2023
Lead-time for capex to translate into sales
* Longer lead-time for capex to transfer into sales due to longer equipment lead-time
The strategy of overseas operation
* A special case of a fab setup for a joint venture with Sony in Japan
* Overall, mgmt will maintain a standalone operation for overseas operation in the long term
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