To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$ 

TSMC hosted its 2023 AGM on 6 June, and I’m here to share with you my key takeaways from the AGM!

FY2023 full year sales to decline mid-single digit

TSMC expects its revenue to decline by a mid-single-digit percentage in 2023 due to a slower recovery in demand. Management said that the inventory destocking process among its fabless customers is continuing, but the pace of inventory reduction appears to be slower than expected. This is due to the elevated inventory levels that were built up during the previous upcycle, as well as the soft end-demand markets for PCs, smartphones, TVs, consumer electronics, automobiles, and industrial products.

Considering the headwinds in demand across multiple end markets, including PC, smartphone, non-AI server, consumer electronics, automotive, and industrial sectors, the recovery pace of demand 2H 2023 will also likely to continue remaining relatively weaker than expected.

New products in 2H23 to boost rebound, but not much.

TSMC expects revenue to grow sequentially in the second half of 2023, led by new product ramps and the completion of inventory destocking at its customers. However, the pace of growth is unlikely to be steep.

The new product ramps include the iPhone A17 processors, which will be manufactured using TSMC's N3 process technology, and the newly announced Mac products. Moreover, the completion of inventory destocking at TSMC’s customer end will also mean that customers will have less excess inventory on hand, which will lead to increased demand for TSMC's chips.

AI-led upside confirmed!

TSMC management confirmed there is demand upside driven by rising generative AI demand. However, TSMC said that its overall exposure to generative AI is still quite small, (estimated to be ~5% of its revenue for 2023). Nonetheless, if AI inference proliferates to edge devices, such as PCs and smartphones, this will stimulate more meaningful wafer demand upside due to larger unit volume.

TSMC believes advanced packaging has become a key enabler for AI chips, and demand continues to outpace supply, especially for its CoWoS (chip-on-wafer-on-substrate) packaging technology. Presently, TSMC is receiving numerous new orders related to AI that necessitate the use of their advanced packaging solutions. The demand for these packaging options exceeds the available supply, and TSMC will have to undertake the expansion of their CoWoS capacities in order to meet the growing demand.

Capex to remain at lower end of guidance range

TSMC has adjusted its expansion plans and slowed down the pace of investment due to the ongoing pressure on utilization rates. This includes the postponement of the Kaohsiung fab project and other adjustments. TSMC's revised capex guidance for fiscal year 2023 is $32 billion, which is at the lower end of the previous guidance range of $32 billion to $36 billion. This revision is likely attributed to a slower demand recovery for the N5 and N7 process nodes, as well as some capacity conversion from N5 to N3 at Fab 18.

Optimistic on FY24 rebound

Looking ahead to 2024, TSMC is confident about revenue growth in 2024, driven by a continued ramp of its N3 process technology, recovery in demand for the N7 family of products (including smartphone SOC and Qualcomm's RF transceiver to be moved from Samsung Foundry), and potential restocking demand for older process nodes. Management expresses confidence in achieving revenue growth in 2024 and believes that the long-term revenue CAGR of 15-20% is still attainable.

N3: strong tape-out; N2: on track for volume production!

TSMC has observed stronger customer tape-outs for their N3 process node, indicating a higher number of customer designs in the first two years compared to their previous N5 process node. They anticipate that N3 will become a long-lasting process node following N5. TSMC expects a smooth ramp-up for N3 in 2023 with meaningful revenue contribution from N3, primarily driven by the anticipated iPhone ramp-up featuring the new A17 processors from Apple.

Furthermore, TSMC provided an update on the development of their N2 process node, which utilizes the Nanosheet Gate-All-Around (GAA) transistor structure. They confirmed that the N2 development is progressing as planned, with the intention of entering risk production in 2024 and achieving volume production in 2025. TSMC emphasizes that N2 will be the most advanced technology (in terms of power, performance, and area) when it is launched, which will help TSMC establish a leading position in the industry.

Margin dilution from overseas expansion manageable

TSMC is committed to expanding its capacity in various overseas regions, including Japan (Kumamoto) for 22/28nm and 12/16nm processes, the United States (Arizona) for N4 and N3 processes, and potentially Germany for mature specialty processes. However, TSMC said that the impact of margin dilution resulting from overseas expansion will be manageable due to various factors such as improved wafer pricing, as well as potential government subsidies that can help bridge the cost difference associated with manufacturing in different regions.

Looking ahead, TSMC plans to concentrate most of its leading-edge capacity expansion in Taiwan over the next few years. This includes establishing N3 production in Tainan and N2 production in Taichung and Hsinchu. By focusing a large portion of their cutting-edge manufacturing facilities in Taiwan, TSMC aims to maintain their technological edge and leverage the advantages offered by their home country.

Conclusion: Irreplaceable position in the semi market!

TSMC has established itself as a pivotal force driving the new wave of computing revolution in the semiconductor industry. With numerous architectures, chip platforms, and design teams vying to push the boundaries of computing and AI innovation, TSMC occupies a central role as the key enabler of this transformation.

In terms of near-term demand trends, TSMC has experienced a mixture of positive and negative factors. On the upside, there has been increased demand for the N5 family of products, including Bitmain's crypto-miner ASIC, NVDA's gaming GPUs, and more recently, NVDA's AI GPUs. However, there has been a downside in demand from Apple for their iPhone, Mac, and iPad processors manufactured using the N5 process.

Despite the anticipated downturn in 2023, investors should focus on TSMC’s robust long-term growth in the coming years, fuelled by the expansion of high-performance computing (HPC). TSMC will also likely experience a vigorous recovery in revenue momentum in 2024, driven by the ramp-up of the N3 process, continued market share gains in QCOM, and improved utilizations in the N6 and N7 processes.

TSMC share price has rallied quite a lot after Nvidia’s recent massive earning surprise. Do note that TSMC's exposure to the AI market remains relatively small, as confirmed by management during the AGM. Furthermore, demand in non-AI areas has not shown significant improvement, which is evident from the downward revision of the FY23 guidance. Consequently, TSMC's share price may experience a period of consolidation in the near to medium term as there might be limited potential for earnings upgrades.

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