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Semiconductor industry still on full gear

Taiwan Semiconductor Manufacturing Company, Limited recently released its Q2 2022 earnings which reported robust revenue growth of 36.6% YoY in USD terms and surpassed our previous projections of 23% growth. First, we looked at the semiconductor industry and how it performed in Q1 2021 based on the market growth and market share of the top 10 largest companies to determine how TSMC performed relative to the industry and derived our outlook supported by the revenue growth guidance of the top semiconductor companies.

Moreover, we reviewed the foundry market in Q1 2022 and analyzed the market growth and share of the top foundry companies including TSMC, Samsung (OTCPK:SSNLF), GlobalFoundries (GFS), UMC (UMC) and SMIC (OTCQX:SMICY). We analyzed the average ASP and shipment growth to determine the factors driving the performance of each company.

Lastly, we analyzed TSMC’s revenue growth in Q2 2022 and compared it with its past guidance as well as recent developments including its planned rollout for its 3nm technology in H2 2022 and updated guidance throughout 2022. Based on that, we updated our revenue projections for TSMC based on ASP and shipment growth.

With the upcoming earnings season for semiconductors companies, we first compiled data from Q1 of the top 10 semiconductor companies in terms of their market share, revenue growth and analyst consensus difference compared to actual revenues. In Q1 2022, the top semiconductor companies’ revenue grew by 22.9% YoY and 5.6% QoQ. Based on the chart above, Samsung maintained its place as the market leader in the semiconductor market with the highest sales of $88.5 bln (TTM) in Q1 2022 followed by Intel and TSMC. Only 4 companies within the top 10 semicon companies had gained market share which included Samsung, Qualcomm, Nvidia and MediaTek. While Nvidia had the fastest revenue QoQ growth rate (9.8%) followed by Samsung (9.1%), Samsung’s revenue increased the most by $7.4 bln, followed by Qualcomm and TSMC. On the other hand, only Intel had negative revenue growth among the top 10 semicon companies at -1.7%. This is as in Q1 2022, Intel’s CCG business, which is its largest segment (51% of revenue), declined by 13% YoY. Besides Intel, the other companies which lost market share were TSMC, SK Hynix, Micron, Broadcom and Texas Instruments as their revenue growth was below the average of 5.6%.

Among the top 10 semicon companies by market type, foundry (Samsung and TSMC) had the highest revenue growth of 6.9% followed by Memory (6.5%), Logic (6%) and DAO (5.9%). Among the foundries, Samsung had higher total revenue growth than TSMC but it also includes memory and DAO revenues. Moreover, the two pure-play memory companies Micron and SK Hynix had similar growth of 5.2% but were still below the total average of 5.6%. Among the Logic chipmakers, Qualcomm and MediaTek (smartphone AP market leaders) as well as Nvidia (Discrete GPU market leader) had higher than average growth but Intel (CPU market leader) was the only logic company that saw its revenue decline as it faces strong competition from AMD. These companies with higher growth (Qualcomm, MediaTek and Nvidia) are fabless chipmakers. According to IC Insights, the share of sales for fabless companies has been increasing with superior growth compared to IDMs. For DAO, only Samsung had above-average revenue growth while Broadcom and Texas Instruments grew below the market average. Though, this is because Samsung’s revenue consists of other products (foundry and memory).

Furthermore, we compared the top 10 semicon companies in terms of the difference between their actual revenue and analyst revenue consensus. Based on the table, all 10 companies surpassed analyst revenue consensus with an average difference of 3.5% in Q1 2022. TSMC had the largest analyst beat at 8.1% followed by Qualcomm, MediaTek and Texas Instruments. TSMC had a revenue growth of 22.6% in Q1 2022 (‘TTM’) which was in line with our previous projection for its full-year revenue growth of 23.1%.

Based on the table above, we compiled the revenue growth guidance of the top 10 largest semicon companies based on their earnings briefings in Q1 2022 for Q2 2022. We obtained an average revenue growth of 12.2% YoY (excluding Samsung and SK Hynix which did not provide guidance) compared to the Q1 growth of 22.9%. Moreover, from TSMC’s recently held Q2 2022 earnings briefing, management had increased its guidance to full-year growth of mid-30%. However, in contrast, Micron’s recently provided poor guidance of $7.2 bln for its Q4 FY2022 which is a decline of -13% YoY citing weakness in the DRAM and NAND market outlook.

Overall, we believe that while the semicon industry continued to have a solid quarter in Q1 2022 with all of the top 10 companies beating analyst consensus with particularly strong growth from Samsung, Nvidia, Qualcomm and MediaTek, we believe the revenue guidance for the industry points towards a potential slowdown in growth at an average of 12.2% YoY for the top 10 semicon companies which are lower compared to the Q1 TTM total revenue growth of 22.9%. According to SIA, global semiconductor sales growth had moderated to 18% YoY in May 2022 from 21.1% in the prior month.

That said, we also note that all of the top 10 semicon companies reported better than expected revenue growth compared to analyst consensus by 3.5% in Q1 2022. Therefore, we believe this could indicate the potential for the semicon companies to continue to surpass revenue expectations with the strong momentum continuing in Q2.

Based on our previous analyses of the top 10 semiconductor companies, we highlighted the supply constraints in the end markets that were experienced by companies including Micron and Intel and due to PC component shortages but expect the situation to improve throughout the year. However, in terms of demand, we previously analyzed Intel and AMD which expected the PC market to experience softness this year and that the market had passed peak pandemic demand by the IDC with a full-year market shipment forecast decline of 2.4%. Furthermore, in the smartphone market, supply constraints from Covid-related lockdowns and lower demand due to the Russia-Ukraine conflict and the market shipments were forecasted to decline by 1% in our analysis on Qualcomm.

In the memory market, Micron also cited the reduced expectations for PC and smartphone end markets and lower outlook for DRAM and NAND but data center to remain strong in H2 2022. Similarly, Samsung highlighted strong fundamental demand for servers and 5G with the expectation of pricing improving in the second half of the year. Whereas GPU maker Nvidia also expected to remain supply-constrained for the year but assured supply to improve substantially in the second half of the year. Despite the supply constraints and potentially lower demand of PC and smartphone end markets which we accounted for in our revenue projections of the semicon companies, we still projected average revenue growth of 20.5% in 2022 for the top semicon companies.

In Q1 2022, the foundry market (top 10 foundries) grew by 8.2% QoQ to $31.96 bln according to Trendforce. Among the top 5 foundries, TSMC gained the most market share as its share increased by 1.6% to 54.9%, solidifying its market leadership. Additionally, GlobalFoundries, SMIC and others also gained market share while Samsung and UMC lost market share.

Furthermore, we further examined the growth breakdown by wafer shipment and ASP in Q1 2022 for the pure play foundries to analyze the drivers of their revenue growth.

Based on the table, all companies had positive ASP growth in Q1 2022 following the reported wafer price hikes by TSMC, GlobalFoundries, UMC and SMIC. TSMC had the highest ASP growth of 10.1% which was above the average ASP growth (8.1%). As covered in our previous analysis on TSMC, we believe it has the pricing power due to its technological advantage with its superior process technology. Overall, for pricing, we compiled our ASP growth projections of the 4 foundries from our past analyses at a full-year average growth YoY of 15.6% which is in line with the average of 8.1% QoQ growth in Q1 2022. Moreover, in terms of shipment growth, SMIC had the highest shipment growth of 6.8% QoQ. Additionally, SMIC also had the highest revenue growth in Q1 2022 (16.6%) followed by TSMC.

From our previous analyses of the top 5 foundries, we summarized our revenue projections for the top 5 foundries based on our wafer shipment and ASP forecasts of the companies.

Overall, we projected the top 5 foundries’ revenues to grow by 27.8% in 2022 based on wafer capacity and ASP growth factors. We believe this supports the supply of foundries. Furthermore, we compared our revenue projection with the revenue guidance of the fabless chipmakers for Q2 2022 in the table below.

Based on the revenue guidance of the fabless chipmakers in Q2 2022, the average revenue growth is 18.1%. We believe this bodes well for the demand growth for the foundries as these companies are the customers of the foundries. Though, the revenue guidance of the chipmakers is lower compared to our supply projection above (27.8%) based on capacity and ASP growth. Thus, we believe the foundry market in 2022 to be limited by demand growth of 18.1% instead of supply growth.

TSMC’s total revenue grew by 36.6% YoY in Q2 2022 to $18.16 bln in line with management’s previous guidance of between $17.6 bln to $18.2 bln. Based on its revenue breakdown, its HPC segment, which is its largest segment (43% of revenue) had the second fastest growth rate of 53.7% YoY in H1 2022 behind Automotive (69.3%) but only accounts for 5% of its revenue. Followed by those segments, the next highest growth platforms were others (35.5%), IoT (27.7%), Smartphone (21.5%) and DCE (1.6%).

For the full-year outlook based on its segments, we believe its growth could be continued to be fueled by HPC and automotive segments. According to the company’s annual report, its HPC segment consists of products including CPUs, GPUs, FPGAs, server processors, accelerators and high-speed networking chips for 5G, AI and data centers. In our analysis of Nvidia, we projected it’s the cloud infrastructure market to grow by 39% in 2022 driven by data volume growth at a forecasted CAGR of 23% through 2025 by the IDC. Furthermore, for its automotive segment which includes products such as sensors and PMIC, we expect its outlook to be buoyed by the growth of automotive technologies such as EVs. In our analysis of Tesla (TSLA), the market leader of EVs with a 21% market share, we projected its automotive sales growth of 47.6% in 2022 as it expands production in new facilities across the US, China and Germany.

In its latest earnings briefing, the company’s management highlighted its guidance for the rest of 2022 to be a strong year of growth at mid-30%. In H2 2022, the company’s management also highlighted that it is on track for volume production of its 3nm process (N3) for smartphone and HPC platforms followed by the improved N3E in 2023.

We expect our capacity to remain tight throughout 2022 and our full-year growth to be mid-30% in U.S. dollar terms. – CC Wei, CEO

Thus, we incorporated management’s guidance in our revised revenue projection of the company based on wafer shipment and ASP growth. We based its ASP growth of 26.35% obtained by prorating our calculated Q1 and Q2 ASP QoQ growth of 10.1% and 2.8% respectively. This gives us a projection of 36.4% for TSMC’s wafer revenue growth which is in line with management’s guidance of mid-30% in 2022.

Thus, we believe TSMC’s outlook for the rest of 2022 could be buoyed by its HPC and automotive segments fueled by data center growth for logic products and the rise of automotive technologies such as EVs. Moreover, we updated our revenue projection for the company from a previous revenue growth forecast of 24.2% in 2022 to 36.4% with a higher ASP growth projection of 26.25% in 2022 based on its prorated ASP growth of 10% in Q1 and 2.8% in Q2 2022 which we believe is appropriate with the tight capacity situation in the foundry market.

Risk: Higher cost pressures
In Q1 2022, the company’s gross margins had increased by 2.9 percentage points to 55.6%. However, based on its Q1 2022 earnings transcript, the company highlighted manufacturing cost challenges that could affect its profitability in the following quote below. Thus, we believe this could impact the company’s profitability margins.

Looking ahead on our profitability, we will face challenges from rising inflationary costs from raw materials, utilities and tools, increasing process complexity of leading nodes, new investments in mature nodes and overseas fab expansions. Despite the manufacturing cost challenges, and excluding the impact of foreign exchange rate, of which we have no control over, taking the other 5 factors into consideration, we continue to believe a long-term gross margin of 53% and higher is achievable. – Wendell Huang, CFO

We valued the company with a DCF valuation as we continue to expect the company to generate strong positive FCFs. We summarized our revenue projection of the company from our previous analysis with an updated forecast of its wafer revenue growth.

We based our terminal value on the average EV/EBITDA of the semiconductor foundries with an average of 8.18x.

Based on a discount rate of 9.6% (company’s WACC), our model shows its shares are undervalued by 87.86%.

To conclude, the revenue guidance of the top 10 companies (excluding Samsung and SK Hynix) points toward a slowdown in the industry with an average revenue growth of 12.2% YoY compared to 23% YoY in Q1 2022 TTM. However, we believe the strong revenue growth in Q1 2022 for the semicon industry with all of the top 10 companies beating analyst revenue consensus could indicate the possibility of the semicon companies surpassing expectations again in the next quarter. For the full-year outlook in 2022, we believe that despite the supply constraints and potentially weaker demand in PC and server end markets factors which were accounted for in our projections, we still expect the top semiconductor companies’ revenue to grow by 20.5% for the full year.

Moreover, specifically in the foundry market, we expect the market to be supported by the demand growth with an average revenue growth guidance of 18.1% among the top fabless chipmakers rather than the supply growth which we projected to grow by 27.8% based on shipment and ASP growth. Finally, we determine that TSMC’s growth in Q1 2022 had been driven by HPC and automotive segments and we updated our revenue projections incorporating the revenue guidance of TSMC of mid-30% growth in 2022. Compared to our last analysis, we obtained a higher price target from $142.14 previously with a higher revenue growth forecast of a 5-year forward of 21.4% compared to 16% despite a lower EV/EBITDA average of 8.18x from 11.7x previously. Overall, we rate TSMC as a Strong Buy with a target price of $157.01. Seeking Alpha

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