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TSM AT A GLANCE

P/E ► 24.3 AVG EV/EBITDA ► 11.8 AVG ROA ► 12.3% HIGH ROE ► 14.5% AVG Debt to Equity ► 0.163 LOW Current Ratio ► 4.44 AVG Interest Coverage Ratio ► 287 HIGH

 

 

 

 

 

 

Taiwan Semiconductor Manufacturing Company (Traditional Chinese: 台灣積體電路製造股份有限公司, abbrev. TSMC; NYSE: TSM (ADR) LSE: TMSD TSEC:2330) is the world's largest dedicated independent semiconductor foundry. The company manufactures chips on behalf of other companies - usually either "fabless" semiconductor companies which just design microprocessors, or integrated device manufacturers (IDMs) such as Intel (INTC) or Texas Instruments (TXN), who provide full products to end-users and often have their own manufacturing capability. Semiconductors, such as integrated circuits (ICs) and transistors, are the individual "on-off" switches that make up an electronic device. Working in tandem, semiconductors constitute an mp3 player, computer processor, or wireless network adapter.

Fabless high-tech companies such as ATI (now AMD), Broadcom, NVIDIA, and OmniVision Technologies design the ICs manufactured by TSM. Foundries like TSM occupy a specific part of the semiconductor supply chain, and the high labor and capital equipment costs in the production of semiconductors creates a niche for these companies. TSM serves both fabless and vertically integrated semiconductor manufacturers, and it has 77% share of the North American market.^[1] Unlike some rivals, it is focused on miniaturizing its technology in the long-term while promoting larger wafers to its customers to earn short-term profits. However, TSM's short-term position is threatened by weak demand for consumer goods that use semiconductors in a credit crunch or slowdown in consumer spending. As a result, the company has begun shaving down capital investment for the near term to avoid having idle plants.^[2]

Business Overview

TSM is a manufacturer of semiconductor chips. Its factories are primarily concentrated in Taiwan, with some capacity in China and the United States as well.^[3] In addition to pure manufacturing, TSM has also expanded into other value-added services, such as aiding in the design of ICs, and other downstream activities, such as testing of chips and assembly of semiconductors into its end-use state. These activities are typically still upstream of those of their clients and thus clients are not competitors.

TSM has used its first mover advantage in the foundry niche to control approximately 44% market share as of 2007, according to Gartner.^[4] Instrumental in maintaining this share was the production switch to 12 inch wafers (from 8 inch) over the years 2003-2005.^[5] Larger wafers let more semiconductors to be made per pass through the manufacturing equipment. The market moved with TSMC's shift to 12 inch and it has a commanding lead in revenues over nearest competitor UMC due to TSMC's technological superiority.

Financial Analysis

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The company's revenues increased 19.1% in 2006, mainly due to increased demand from the U.S. (seen below). However, growth slowed to 1.6% in 2007 due to a glut of semiconductors in customers' inventory in Q1 of 2007.^[10] Margins also decreased, first due to soft revenue growth, but also partially due to depreciation from prior capital expenditures and raw material costs.^[11]

The split between cooperation with fabless semiconductor companies and IDMs has not changed significantly over 2005-2007. However, when demand softened from Fabless companies in 2007, it was largely offset by an increase in business from IDMs. The increasing cooperation with IDMs stems from the investments TSM has made in its cutting edge small-scale processes, winning it agreements with IDMs who are trying to reduce their manufacturing exposure, such as Texas Instruments (TXN).

The vast majority of TSM's customers come from North America. The revenue mix from different regions has not changed significantly over 2005-2007, and has grown proportionally with overall revenue growth.

Trends/Forces

First mover advantage in technology is the basis of past success and future strategy

While competition against other foundries is tight, TSM's scale gives it resources to deploy new technology and encourage adoption amongst its customers. It has a lead over competitors in the less than .13 micron scale manufacturing processes.^[14] As of 2008, its leading-edge process, at 65nm, earned 6% of revenues^[15], whereas nearest competitor and market #2 UMC earned less than 5% of revenues from its 65nm processes.^[16] Its technology lead gives it a quality advantage, which leads to pricing premiums over competitors such as UMC.^[17] This pricing premium contributes to its industry leading gross margin, at about 40%, double that of competitor UMC.^[18]

TSM has advantages in scale and capacity

TSM's many fabs and past capital investment make it capable of creating more wafers than the competition. Hypothetically speaking, TSM's competitors would not be capable of manufacturing additional semiconductors if a large order was placed or a contract was won, simply because there is not enough excess capacity. Throughout the industry, the big 4 competitors typically achieve approximately 80-90% utilization of capacity^[19], but TSM's 10-20% spare capacity is dramatically larger in absolute size. In addition, its scale gives it the capability to negotiate supply deals, particularly since it has spread out its suppliers of silicon wafers over 5 companies, which supply approximately 90% of the company's wafers.^[20]

Foundries like TSM must land and maintain large manufacturing contracts

Semiconductor manufacturing contracts are typically negotiated with a quarter or more of lead time, and tend to be large, since companies do not want to switch foundries or deal with multiple suppliers if it can be avoided. As a result, TSM's top 10 customers accounted for 51% of sales in 2007, and the largest customer accounted for 11%.^[21] In 2003, a contract loss to IBM for Nvidia's graphics chip dealt a financial and ego blow to TSMC, losing the lucrative high-end business, although the company retained the business for older chips.^[22] Such contract losses can significantly hurt growth, but conversely, a contract win typically promises repeat business.

Softness U.S. demand is causing a slow-down in investment

TSM already began 2008 with significantly lower capital expenditure projections compared with prior years ($1.8B USD vs $2.5B)^[23] These cuts were made due to weak expectations for future demand, which would require less equipment in the future.^[24] Such concern and dramatic capital expenditure reductions from management indicates that they expect a general slow-down in demand in the semiconductor foundries market. This is in line with general concerns over U.S. demand, caused by decreases in U.S. Housing Market that precipitated the 2007 Credit Crunch. Overall demand weakness is expected to feed through to manufacturing, particularly of non-essential goods that may require semiconductors.

Competition

• United Microelectronics (UMC) - The industry's number #2 company by revenues, UMC and TSM are the industry's traditional duopoly. Looking forward, UMC is attempting to chart a different course than TSM, not supporting a 450mm (18 inch) wafer launch, electing to stick with 300mm (12 inch) wafers for the time being.^[25]
• Semiconductor Manufacturing International (SMI) - SMI is a relative upstart in the industry, but gained share rapidly due to cost efficiencies after basing its fabrication plants in China.
• Chartered Semiconductor Manufacturing (CHRT) - CHRT is Singapore's chief semiconductor company, and offers a similar full-service approach to TSM through cooperation with its sister company, STATS ChipPAC.

There are also several other smaller manufacturers with foundry capabilities, but TSM has the largest share in the market, with over 2 times the revenue of nearest competitor UMC.

In 2008, TSM is pushing new technologies in tandem with IDMs Intel (INTC) and Samsung,^[26], while competitor UMC disagrees with TSM expectations for how equipment manufacturers will adapt to changes in the market, such as pushing for larger 450mm wafers.

Market Share

The total revenues for the global semiconductor foundry market are estimated at $22.2B by Gartner Dataquest^[27] and $24.5B by IC Insights for the year 2007.^[28] The "Top 4" - TSM, UMC, SMI, and CHRT - are estimated to have 72.5%^[29] and 68%^[30] combined share of the total market by the two data services, respectively.

Below are Gartner's estimates of market share by revenues for the year 2007 with the top 10 semiconductor foundries. By these estimates, TSM has 44% market share in 2007 by revenues.

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References

1. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Markets and Customers " pg. 15
2. ↑ Taipei Times "TSMC posts record quarterly profits" February 1, 2008
3. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Our Facilities" pg. 13
4. ↑ Electronic Engineering Times "Big changes seen in foundry rankings" Attached Image. April 28, 2008
5. ↑ FabTech blog "TSMC makes big push in 300mm capacity, UMC not responding" August 1, 2005
6. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Selected Financial and Operating Data" pg. 2
7. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Markets and Customers" pg. 15
8. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Markets and Customers " pg. 15
9. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Selected Financial and Operating Data" pg. 2
10. ↑ SeekingAlpha Taiwan Semiconductor Manufacturing Company Earnings Call Transcript. Q4 FY 2007. January 31, 2008
11. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Raw Materials" pg. 19
12. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Markets and Customers " pg. 15
13. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Markets and Customers " pg. 15
14. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Manufacturing Capacity and Technology" pg. 13
15. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Technology Migration" pg. 22
16. ↑ SeekingAlpha United Microelectronics Earnings Call Transcript. Q4 FY 2007. January 30, 2008
17. ↑ Morningstar Analysis "Taiwan Semiconductor Manufacturing" April 28, 2008]
18. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Selected Financial and Operating Data" pg. 2
19. ↑ ThinkEquity Foundry Industry Report, February 20, 2008
20. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Raw Materials" pg. 20
21. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Markets and Customers" pg. 15
22. ↑ The Inquirer. "Nvidia puts TSMC in place as air turns Big Blue" March 26, 2003
23. ↑ Taiwan Semiconductor Manufacturing Company FY 2007 20-F "Capacity Expansion and Technology Upgrade Plans" pg. 15
24. ↑ Taipei Times "TSMC posts record quarterly profits" February 1, 2008
25. ↑ Electronic Engineering Times "UMC tips roadmap, questions 450-mm" June 10, 2008
26. ↑ Electronic Engineering Times Asia "UMC tips roadmap, veers away from 450mm" June 16, 2008
27. ↑ Electronic Engineering Times "Big changes seen in foundry rankings" April 28, 2008
28. ↑ Purchasing Magazine "Big Four Foundries Dominate Chipmaking" June 12, 2008
29. ↑ Electronic Engineering Times "Big changes seen in foundry rankings" Attached Image. April 28, 2008
30. ↑ Purchasing Magazine "Big Four Foundries Dominate Chipmaking" June 12, 2008
31. ↑ Electronic Engineering Times "Big changes seen in foundry rankings" Attached Image. April 28, 2008
32. ↑ Electronic Engineering Times "Big changes seen in foundry rankings" Attached Image. April 28, 2008