TSMC: the smart money Premium

Taiwanese group is shifting into more profitable niches
TSMC should escape any downturn in the smartphone chip cycle via demand for its specialised chips for data processing © Reuters

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Semiconductors make phones smart, the rest is just for looks. In a similar way, some of the chipmakers are more clever at managing the industry cycle than others. Taiwan Semiconductor Manufacturing Company is one of them. It reported quarter-to-quarter revenues of T$214bn ($7bn), less than analysts’ already muted expectations. But TSMC should escape any downturn in the smartphone chip cycle via demand for its specialised chips for data processing.

In the second quarter, three-fifths of revenues still came from smartphones. Citi analysts expect a mere 2 per cent pick-up in iPhone unit sales this year, compared with a fifth in 2015. TSMC is a key supplier for Apple’s iPhone core chips. Inventory overhangs at its Chinese smartphone customers and adverse currency movements hurt the result, too. TSMC lowered expectations for the third quarter. Near-term performance will depend on the timing of the latest iPhone’s arrival.

Other chip producers have done better. Samsung recorded record profits, partly because of more diversified operations. It benefited specifically from price squeeze in memory chips, which TSMC does not produce.

These adverse developments — and the resulting negative free cash flow in the quarter — have rightly not altered its plans for roughly $10bn of capital expenditures for the year. TSMC is narrowing the technology gap with competitors Intel and Samsung, aiming to produce the next smallest generation of processors before them. Demand is shifting from smartphones to applications for cars, other industrial uses and artificial intelligence. These more complex areas require more customisation making it harder to switch suppliers.

Early after-market trading for TSMC’s US-listed depository receipt suggested that the result did little damage. Assuming TSMC’s other chips do well, only delays in Apple’s product schedule could cloud the second half. Stay smart and hold on to TSMC.

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