To The Moon

TSMC's Q1 results were weak, and the company lowered its full-year revenue growth guidance (expected to decline by mid to low single digits, compared to the previous guidance of a slight increase). However, with the end of inventory depletion in consumer electronics and the probable rebound in server demand, we believe that the recovery of the global semiconductor industry in the second half of the year is more certain, although the overall recovery is weak.

After the trough in the first half of the year, TSMC's performance is expected to enter an upward cycle in the next 1.5~2 years, and its performance growth rate is expected to return to 20%+ in 2024, which, coupled with the current low valuation level, will continue to benefit from the double contribution of upward performance + valuation expansion as a typical cyclical stock.

Q1 results: Full-year revenue guidance lowered due to industry inventory de-stocking and weak demand.

(1) Q1 revenue was US$16.72 billion (+3.6% YoY, -18.7% YoY), close to the lower end of the company's previous guidance of US$16.7-17.5 billion, mainly reflecting weak market demand and continued inventory de-stocking in the global semiconductor industry.

(2) By process, advanced process revenue accounted for 51% (5nm: 31%, 7nm: 20%), 16nm: 13%, and above 16nm: 36%; by application, smartphone/HPC/IoT/automotive/other business accounted for 34%/44%/9%/7%/6% respectively.

(3) Gross margin was 56.3% (+0.7ppts YoY, -5.9ppts YoY), higher than the previous guidance of 53.5%-55.5%, with lower gross margin mainly driven by lower capacity utilization. Net profit of $6.80 billion (+2.0% YoY, -30.1% YoY). Based on the current rate of inventory depletion and downstream demand, the Company expects 2023Q2 revenue of US$15.2-16.0 billion, gross margin of 52%-54% and operating margin of 39.5%-41.5%. The company also expects full-year revenue growth to decline by mid-to-low single digits (after guiding for a slight increase), as the market has previously anticipated.

Second, the downstream demand: PC, smart phones continue to be weak, AI demand growth is obvious.

In the subsequent results conference, the company said that the current global PC and smartphone demand is still relatively weak, the relevant customers are still actively inventory adjustment, while automotive demand is stable, but there are signs of marginal weakness, while benefiting from the current round of GPT wave, AI-related demand is steadily increasing. Based on a comprehensive analysis of inventory levels, downstream demand and other factors, the Company expects a mid-single digit year-over-year revenue decline in the global semiconductor industry (excluding storage) and a high single digit year-over-year decline in the foundry industry in 2023.

This semiconductor cycle is significantly different from previous ones, mainly due to high inventory levels at the top and weak market demand during the recovery phase. However, considering that the global PC and smartphone inventories are nearing the end of inventory decommissioning and service provider demand is expected to recover in the second half of the year, we expect the global semiconductor industry to turn around with high certainty in the second half of the year, but the strength of the turnaround will be weaker than the historical cycle.

Capacity Analysis: N3 will be released in the second half of the year.

(1) At present, the company's N3 process (N3B) has already started mass production, and the company expects that N3E will be further released in the second half of the year, which we judge mainly reflects the demand for Apple's A17 chip.

(2) Affected by the short-term weak demand for consumer electronics and servers, the company's N5 and N7 process capacity utilization declined significantly in the first half of the year, and is expected to partially benefit from the introduction of new orders for NVIDIA H100, H800/A800 in the second quarter. At the same time, considering the further migration of advanced computing chips to higher-end processes such as 5nm/3nm, 7nm will shift more to RF and connectivity chips.

(3) Other aspects, the company expects the 2nm process to be in mass production in 2025 as planned, and said that it will expand the 28nm process in Nanjing, while the Japanese plant will proceed as scheduled and the possibility of building a plant in Europe will be evaluated. We believe that the company will continue to maintain its full-year capital expenditure guidance (US$32-36 billion) based on the optimistic view of future demand (especially for 3nm).

Risk factors: Risk of lower than expected AI industry development and technology iteration; risk of lower than expected downstream HPC, smartphone, IoT and automotive demand due to global macroeconomic fluctuations; risk of lower than expected 3nm and 2nm advanced process progress; risk of higher labor costs and loss of core technology personnel; risk of increased competition in the semiconductor industry; risk of lower than expected global epidemic control; risk of global distribution disruption due to geopolitical conflicts. The risk of global distribution disruption due to geopolitical conflicts, etc.

$Taiwan Semiconductor Manufacturing(TSM)$ 

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