TSMC: The Strongest Player, but Still Subject to Business Cycles

On the afternoon of April 20, 2023, TSMC released its first quarter financial report (ending in March 2023) for the US stock market before the market opened. The highlights are as follows:

Revenue: Both volume and price have declined, unable to escape the industry cycle. In the first quarter of 2023, TSMC's revenue reached 16.72 billion U.S. dollars, at the lower limit of the performance guidance range (16.7-17.5 billion U.S. dollars). The quarterly revenue showed a decline, of which the dimension of shipment volume brought an impact of -12.8%, and the dimension of shipment unit price brought an impact of -3.8%. The price decline is mainly due to the impact of the industry cycle decline, while the decline in shipment volume is mainly due to customer order adjustments.

The biggest decline in TSMC's revenue this quarter comes from North America because US customers have adjusted their orders under inventory pressure, directly affecting TSMC's current performance;

Gross profit and gross profit margin: Hard to maintain high. TSMC's gross profit margin in the first quarter of 2023 was 56.3%, although it exceeded the upper limit of the guidance range (53.5-55.5%), it showed a decline of nearly 6% compared to the previous quarter. In the semiconductor prosperity cycle, TSMC's gross profit margin frequently rose and broke through 60%, which is not sustainable. Under the impact of price decline and cost increase, the company's gross profit margin also slid from a high level.
High-performance computing (HPC) becomes the first pillar, and 3nm is still difficult to produce. With the continuous weakness of smartphones, HPC's share has reached 44%, becoming the company's new core business. With the recovery of demand such as graphics cards and data centers, the proportion of HPC business is expected to continue to increase. In terms of process nodes, 3nm has not yet achieved mass production, which to some extent suppresses the company's product average price increase.
TSMC performance guidance: Expected revenue of 15.2-16 billion U.S. dollars for the second quarter of 2023 (market expectation of 16.1 billion U.S. dollars) and gross profit margin of 52-54% (market expectation of 52.57%). The revenue side is slightly lower than the market's expectations, with a continued decline of 4%-9% compared to the previous quarter, mainly because orders are still not recovering, and the price side is also under pressure. Although the gross profit margin meets the market expectation, it continues to decline compared to this quarter, mainly due to the decline in the company's product unit price and utilization rate of production capacity.

Dolphin's overall view:

TSMC's financial report for this quarter basically meets market expectations. Combined with monthly data disclosed, the decline in TSMC's revenue on a quarterly basis has been anticipated by the market. The focus of the financial report is on the company's gross profit margin and the progress of each business. Under the impact of price decline and cost rise, the gross profit margin showed a significant decline, but it was better than the market's expectations overall.

TSMC's guidance for the next quarter is 15.2-16 billion U.S. dollars in revenue (a quarterly decline of 4%-9%) and a gross profit margin of 52-54% (a quarterly decrease of 2.3-4.3%). From the income guidance, the volume and price of Taiwan Semiconductor in the next quarter may continue to decline. From the gross margin guidance, there is no sign of a significant rebound in customer orders in the company in the next quarter. Therefore, Dolphin Jun believes that Taiwan Semiconductor still have difficulty getting out of the industry downturn in the next quarter.

Combining this financial report and the guidance for next quarter, Dolphin Jun believes that Taiwan Semiconductor's current situation is "not good, not bad" as expected by the market. In the semiconductor downturn, Taiwan Semiconductor cannot escape the ups and downs of the cycle. The current decline in revenue and gross margin from the peak is only expected in the down cycle.

Overall, Taiwan Semiconductor's performance in the first half of the year is not showing any improvement. It is necessary to wait until the second half of the year to observe the recovery of downstream demand, the production of new machines for major customers, and the production of 3 nm. The adjustment of downstream customer orders is also not a bad thing, indicating that the pressure on the industry chain has been clearly transmitted to Taiwan Semiconductor. With the release of inventory pressure in the industry chain, the entire semiconductor industry chain is expected to usher in a comprehensive opportunity to hit bottom.

Below is a specific analysis of Taiwan Semiconductor by Changqiao Dolphin Jun:

I. Income end: Volume and price decline, difficult to avoid the cycle

Taiwan Semiconductor achieved revenue of USD16.72 billion in the first quarter of 2023, which is at the lower end of the performance guidance range (USD16.7-17.5 billion), and the quarterly revenue continued to decline. The changes in quarterly revenue are mainly due to the decline in the semiconductor prosperity, and the volume and price of the company's wafers have declined simultaneously.

Taiwan Semiconductor's quarterly revenue has been fully anticipated by the market due to the release of monthly operating indicators. And Taiwan Semiconductor's revenue has shown a rare double-digit decline in this quarter. How did the price and shipment volume perform?

Dolphin Jun observes the main driving forces behind the growth of Taiwan Semiconductor's Q1 revenue from the dimensions of volume and price:

1) Volume dimension: In Q1 2023, Taiwan Semiconductor's wafer shipments were 3,227 thousand pieces, a quarterly decrease of 12.8%. The quarter-on-quarter decline in Taiwan Semiconductor's shipments is mainly due to the adjustment of customer orders caused by the poor downstream. Combining with the capital expenditure situation, Taiwan Semiconductor's capital expenditure this quarter is USD9.94 billion, a slight decrease from the previous quarter. The company's capital expenditure plan for 2023 was relatively conservative (USD32-36 billion), and the current pace of capital investment is still being maintained.

2) Price dimension: In Q1 2023, Taiwan Semiconductor's wafer revenue per single wafer (equivalent to 12-inch wafer) was USD5,181, a quarterly decrease of 3.8%. The wafer price delivered by Taiwan Semiconductor has ended the consecutive seven quarters of growth, and this quarter's decline is mainly due to the company's drag from the industry downturn. The downturn in the semiconductor industry chain has been transmitted to Taiwan Semiconductor, putting pressure on the company's product price increase.

In the earnings report review of "TSMC's downfall, even Buffett's buying couldn't stop it" by Dolphin in the previous quarter, it was mentioned that "the downward cycle of semiconductors has spread to TSMC". The double decline in revenue and gross profit margin in this quarter also confirms that the company cannot escape this round of semiconductor downward cycle.

Combining TSMC's guidance for the next quarter, "Data is expected to reach US$15.2-16 billion in 2023Q2 (a quarter-on-quarter decrease of 4%-9%), with a gross margin of 52-54% (a quarter-on-quarter decrease of 2.3-4.3 percentage points)." The company's next quarter performance is still not showing significant improvement, and prices and gross profit margins will continue to decline. The recovery of TSMC's performance may have to wait until the second half of the year.

Second, gross profit and gross profit margin: there is no warmth in the heights.

TSMC achieved a gross profit of US$9.42 billion in the first quarter of 2023, a quarter-on-quarter decrease of 24%. The main reason why the decline in gross profit exceeded the decline in revenue was that the gross profit margin also experienced a "collapse".

In 2023Q1, TSMC's gross profit margin was 56.3%, a quarter-on-quarter decrease of 5.9 percentage points. Although the gross profit margin was better than the market's expected 54.5%, it has experienced a significant decline compared to the previous level of over 60%.

In 2023Q1, TSMC's gross profit fell by 24% month-on-month, with the impact of revenue dimension contributing by -16.1% and gross profit margin dimension by -9.4%.

The two data points that the market is most concerned about for TSMC are revenue and gross profit margin. Due to the disclosure of monthly operating data, quarterly revenue has basically been anticipated by the market. Gross profit margin is one of the focus of market attention in this quarter's report. Dolphin will analyze the main driving forces behind the improvement of gross profit margin this quarter:

"Gross Profit = Single Wafer Revenue - Fixed Cost - Variable Cost"

Single wafer revenue (equivalent to 12 inches): In 2023Q1, TSMC's single wafer revenue was about US$5,181 per piece, a quarter-on-quarter decrease of US$202 per piece, mainly due to the impact of the semiconductor industry's downturn on the company's product shipment prices.
Fixed costs (depreciation and amortization): TSMC's average fixed costs in 2023Q1 were about $1,124 per wafer, a quarter-on-quarter increase of $198 per wafer. This was due to a significant decline in shipment volumes this quarter, resulting in an increase in the unit cost of depreciation and amortization to a single wafer.
Variable costs (other manufacturing costs): TSMC's average variable costs in 2023Q1 were about US$1,139 per wafer, a quarter-on-quarter increase of US$31 per wafer. The increase in variable cost per wafer was mainly due to the increase in manufacturing costs and the overall decline in shipment volume. After breaking down the data, TSMC's single-chip gross profit was $2919/pc in 2023Q1, down $431 from the previous quarter. The sharp decline in single-chip gross profit was influenced by a drop in unit prices by $202 and an increase in unit costs by $229.

The declining revenue of TSMC had already been anticipated in the market, but the gross margin was the main focus. The drop in prices and shipments affected the company's gross profit margin at the price and cost ends, respectively. The extent of the specific impact, according to Dolphin, is about 50%. Considering the company's guidance for next quarter, 52-54%, TSMC will still be affected by the double decline of price and shipment, and the gross profit margin is unlikely to rebound in the short term.

Third, the wafer structure end: HPC becomes a new core business

3.1 Wafer revenue ratio (by application)

Smartphones and HPC are TSMC's biggest sources of revenue, accounting for a total of 78%, making them the company's biggest downstream sources.

Looking at the downstream application segments, the share of smartphone businesses has fallen to 34%, while the share of HPC and automotive is trending upward. The main reason is that the smartphone market has matured and is currently entering a downturn.

In contrast, HPC and automotive show significant growth potential. HPC mainly includes the demand for graphics cards and data centers, while automotive mainly includes the demand for intelligent driving. Dolphin believes that from a medium and long-term perspective, the impact of the smartphone business on TSMC will continue to weaken, while the impact of HPC and automotive will continue to increase.

3.2 Wafer revenue ratio (by process node)

In this quarter, the proportion of 5nm and 7nm revenue still exceeded half, and TSMC's income from advanced processes is still the company's largest source of revenue. Specifically, the proportion of 5nm and 7nm revenue has slightly declined this quarter, mainly because downstream chip manufacturers adjusted their orders under inventory pressure. This financial report also indicates that the industry-wide inventory pressure has been passed down to the company.

Regarding the new process nodes, although the company has announced that 3nm can be mass-produced, it has not yet been achieved on a large scale without the adoption of major customers.

Dolphin believes that from the company's guidance for next quarter, there is still no sign of large-scale production of 3nm in 2023Q2. The mass production of 3nm may still have to wait until the second half of the year. If 3nm achieves mass production, it is expected to support the average selling price of the company's products.

3.3 Proportion of Wafer Revenue (by Region)

In terms of revenue by region, North America is still TSMC's largest source of revenue. This is because North America is home to major customers such as $ Apple.US $, $ Qualcomm.US $, $ NVIDIA.US $, $$AMD(AMD.US) $, etc., which creates a strong commercial bond between TSMC and the United States. However, from this financial report, there is clearly a decline in North America's revenue share. This is mainly due to some American customers adjusting their orders this quarter, which is also the main reason for the company's decline in revenue.

Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 15% and 8% respectively this quarter. The revenue share of China in this quarter has shown a significant increase, from 12% in the previous quarter to 15% this quarter. Some Chinese customers made up for the production capacity gap that was caused by the adjustment of some American customers' orders in North America.

Dolphin believes that the decline in the proportion of North American customers is only a short-term behavior. U.S. chip companies need TSMC's production capacity, and TSMC also needs orders from large American customers. From TSMC's establishment of factories in the United States, it can be seen that their cooperation will become even more in-depth in the future. After crossing the half-cycle of the semiconductor cycle and inventory digestion, the revenue share of North America will continue to rise.

Dolphin's Research on TSMC and the Wafer Manufacturing Industry

TSMC

January 12, 2023 conference call: "Inventory adjustment will continue for six months, and growth will have to wait until the second half of the year (TSMC 22Q4 conference call)"

January 12, 2023 financial report review: "TSMC's thunder, even Buffett's increased position cannot bring it down"

October 13, 2022 TSMC conference call: "Despite an impressive financial report, TSMC cannot avoid industry decline (third quarter conference call)"

October 13, 2022 financial report review: "TSMC: How long can the lone warrior last in the dark night?"

July 14, 2022 TSMC conference call: "How can TSMC sustain growth in the downward semiconductor cycle? (TSMC conference call)" On July 14, 2022, the financial report comments on "TSMC: The 'Alternative' Backbone in the Wave of Order Cuts" were released.

On April 14, 2022, a TSMC conference call was held on “2nm on Schedule (TSMC Conference Call)."

On April 14, 2022, the financial report comments on TSMC were released on "TSMC: Strong 'Belief,' Irrelevant to Cycle."

On April 8, 2022, the in-depth report on TSMC's individual stocks was published on "TSMC Part 2: Prices are Reduced, but the Belief Remains Strong."

On March 16, 2022, the in-depth report on TSMC's individual stocks was published on "After the Market Crash, Let's Talk about the Bone Ash Level OEM King TSMC."

On January 13, 2022, a TSMC conference call was held on "What did TSMC Management Discuss After Providing Strong Quarterly Guidance?."

On January 13, 2022, the financial report comments on TSMC were released on "TSMC is Too Capable. It Takes a Detour from the 'Cycle'."

On October 14, 2021, the financial report comments on TSMC were released on "TSMC: The Leader is Still at the Top."

Semiconductor/Wafer Manufacturing Industry

On December 29, 2022, the industry overview on semiconductors was released on "Semiconductor Avalanche? Genuine Elasticity Only After the Fiercest Drop."

On June 24, 2022, the industry overview on semiconductors was released on "Are Semiconductor Order Cuts Indicating Big Changes in the Industry?."

On September 3, 2021, the industry overview on wafer manufacturing was released on "Performance Up, Stock Prices Down: Should SMIC et al. Be 'Killed' or 'Wrongly Killed'?." On July 16, 2021, Semiconductor Manufacturing International Corporation was covered in depth in "SMIC (Part 2): The Undervalued "Chip" of China" (https://longbridgeapp.com/news/40257302).

On July 9, 2021, Semiconductor Manufacturing International Corporation was covered in depth in "SMIC (Part 1): The Techniques of the Leading "Chip" (https://longbridgeapp.com/news/39746631).

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