Does Taiwan Semiconductor Manufacturing worth to invest?

Current price: NT$367   Target Price: NT$426.34    Recommendation: Buy

Taiwan Semiconductor Manufacturing Co., Ltd. engages in the manufacture and sale of integrated circuits and wafer semiconductor devices. Its chips are used in personal computers and peripheral products; information applications; wired and wireless communications systems products; automotive and industrial equipment including consumer electronics such as digital video compact disc player, digital television, game consoles, and digital cameras.

Revenue Analysis:

For the year ended 31 December 2019, TSMC showed a 3.73% revenue increase, in contrast to the global semiconductor industry’s 12% year-over-year decline. In between, 49% of total revenue are contributed from smartphone camera sales, and 59% were from United States market.

Semiconductor Market Share Analysis:

In Q2 2019, major semiconductors producers are mainly: TSMC (51.5%), Samsung Electronics (18.8%), GlobalFoundries (7.4%), UMC (7.3%). In between, TSMC takes first place in the revenue taking.

Future Prospection

Future plans boost the future revenue in TSMC

 The Japanese government is considering having TSMC ally with a local maker or research institution and provide funding support to TSMC on local project. This lower the cost of production in TSMC, creating more profit for TSMC. Besides, TSMC will begin construction on a $12 billion chip plant in Arizona to compensate the loss of sales from Huawei. Since the rules would require foreign firms to apply for a license before selling to Huawei, causing the shift of production from TSMC to SMIC. Hence, the sales in the US will be boosted accordingly.

Surge in online activity increases demand for semiconductors

TSMC posted monthly revenue that suggested June-quarter sales surpassed analysts’ estimates, underscoring that technological lead during pandemic is helping the chipmaker weather the pandemic. TSMC is considered relatively more resistant to a downturn due to a commanding position in the production of high-end chips needed for everything from datacenters and gaming to video streaming. Even during the pandemic, the semiconductor industry is rising.

Risk:

Negative impacts from deteriorating U.S.-Chinese relations

Under the rules from the U.S. Department of Commerce, TSMC will have to apply for waivers from Washington for future orders from Huawei. This causes TSMC to cut off Huawei, which contributing roughly 14% of the chipmaker’s revenue. This probably reduce the revenue of TSMC if no increase in sale to other clients.

Over-reliance on US market

In Q4 2019, it is mentioned that 59% of revenue were from United States market. Reduction in demand from Huawei, which is one of the largest manufacturers of smartphones in the world. The sales derived from China market will be reduced accordingly. Tilting the sales to the US market more.

Recommendation:
Using the conservative forward P/E multiple of 25 and Thomson Reuters 2021 consensus earning per share NT$17.054, this gives us a price of NT$426.35, which indicates around 16% undervaluation of this stock.

We used 25 P/E multiples since 1. Semiconductor industry has an average PE of 24.88. TSMC deserves a premium multiple of roughly 25 due to expected future plan of spending $12 billion building a chip plant in Arizona, which combat the loss of sales in China and rising semiconductor demand for cloud processing and video conferencing amid social-distancing requirements during COVID-19.