"TSMC to Stand Out with Attractive Earnings Despite Weak Market Conditions"

[Asia Economy Reporter Minji Lee] Despite the negative outlook in the semiconductor sector, TSMC is expected to stand out with stable performance and valuation appeal.

On the 17th, TSMC's Q2 revenue reached 524.1 billion Taiwan dollars, marking a 9% increase compared to the previous quarter. The significant revenue growth was driven by a 13% increase in high-performance computing sales, a 14% rise in automotive-related sales, and a 3% growth in smartphone-related sales, resulting in substantial revenue increases across all front-end industries. The gross profit margin recorded 59.1%, significantly surpassing the market expectation of 57.2%. Most notably, the Taiwan dollar exchange rate against the US dollar rose by 5.3% quarter-over-quarter to 29.4, boosting revenue contribution.

The operating profit margin also reached 49.1%, exceeding the previous quarter's record high. Wafer shipments increased by 1% quarter-over-quarter to 3.8 million units, and the average selling price rose by 3% to $4,780. The revenue share from sub-7nm processes increased by 1 percentage point to 51% compared to the previous quarter. However, the inventory turnover period extended by one week to 95 days from 88 days in Q1.

Despite concerns over customer inventory adjustments, the Q3 guidance projects revenue of 599.9 billion Taiwan dollars, a gross profit margin between 57.5% and 59.5%, and an operating profit margin of 48%. These figures significantly exceed market expectations of $18.6 billion in revenue and a 56% GPM. Junho Moon, a researcher at Samsung Securities, stated, "Although consumer demand is slowing, the steady demand in data centers and automotive sectors is supporting the performance."

The gross profit margin is expected to slightly decrease compared to the previous quarter, attributed to inflationary impacts and rising cost pressures. Recently, as set demand has slowed, TSMC's customers have continued order cuts due to inventory burdens. The company forecasted during its earnings conference call that customer inventory normalization will continue through 2023. Additionally, some equipment supply delays may push part of this year's planned capital expenditures into next year.

However, the annual revenue guidance has been further revised upward, reflecting confidence that customer demand still exceeds supply capacity. Last quarter, the annual revenue growth forecast was raised from the mid-to-high 20% range to the high 20% range in US dollar terms, and it has now been further increased to the mid-30% range. Consequently, TSMC is predicted to rank first in operating profit among global semiconductor companies for the first time this year.

TSMC's valuation appeal is also expected to increase. Looking at TSMC's stock price trend, it currently stands at 492.50 Taiwan dollars, down 22% since the beginning of the year. Researcher Junho Moon noted, "The company's stock is trading at a 12-month forward PER of 14 times, which is 44% lower than at the end of last year and below the 5-year average of 20 times and the 10-year average of 17 times."

While the stability of earnings is notable, some advise a cautious approach. This is based on the view that negative outlooks on the semiconductor sector could trigger further stock price adjustments. Sangsoo Park, a researcher at Korea Investment & Securities, explained, "The strong set demand enjoyed during the COVID-19 consumer goods phase has turned weak. Although Q3 earnings are expected to meet guidance due to the new iPhone launch, profitability is likely to slightly decline compared to Q2 as price hike margins narrow, which may lead to additional stock price corrections."

Seungwoo Lee, head of the Research Center at Eugene Investment & Securities, analyzed, "It is positive that TSMC continues its remarkable earnings streak despite the global stress from inflation and interest rate hikes, but for the stock market to rise, controlling inflation is paramount."