TSMC is expected to overcome the chip downturn

According to reports, TSMC released its fourth quarter 2022 financial report yesterday. Despite a sharp slowdown in demand for smartphones, PCs and other consumer electronics, TSMC, the world's largest chip foundry, hit a record fourth-quarter profit. The financial report shows that TSMC’s fourth-quarter net profit increased by 78% year-on-year to NT$295.9 billion (approximately US$9.42 billion). Revenue increased by 42.7% year-on-year to NT$625.53 billion.

Throughout 2022, TSMC’s revenue hit a record of NT$2.263 trillion, a year-on-year increase of 42.6%. The profit increased by more than 70%, reaching NT$1.016 trillion, which translates into a daily income of NT$2.8 billion (approximately 622 million yuan), which is also a record high.

Currently, TSMC manufactures chips for nearly all major global chip developers, including Apple, Nvidia, Qualcomm, and MediaTek. Despite strong performance in 2022, most market observers expect TSMC's first-quarter 2023 revenue to decline sequentially due to a weak consumer electronics market outlook and seasonal low demand. This also means that TSMC will experience a quarterly revenue decline for the first time since the first quarter of 2020.

In the first quarter of 2020, the COVID-19 epidemic began to affect the world. Subsequently, industries ranging from automobiles to home appliances experienced unprecedented chip shortages. Analysts surveyed by data provider Refinitiv on average expect TSMC's first-quarter revenue in 2023 to fall by more than 14% quarter-on-quarter.

Gokul Hariharan, co-head of Asia Pacific technology, media and telecom research at J.P. Morgan, said in a recent client note: "We expect TSMC, and the entire chip market, to see a sharp decline in the first half of 2023. .

But at the same time, we also see strong long-term growth in the coming years, driven by high-performance computing. TSMC’s 3nm foundry business looks quite strong in 2024 and beyond. "JP Morgan predicts that due to the market slowdown, TSMC's revenue in 2023 may be the same as last year, and the worst-case scenario is a 6% decline.

According to research firm Counterpoint Research, the revenue of the entire semiconductor industry may drop by 5% to 7% in 2023. Mark Li, a semiconductor analyst at Sanford C.Bernstein, an investment research company, said that due to the reduction in chip orders for Android phones, iPhones, PCs and other products, the semiconductor market will see a significant decline in the first quarter of 2023, but this decline It's temporary.

When it comes to capital expenditures, TSMC Chief Financial Officer Huang Renzhao said that this year's capital expenditures will be approximately US$32-36 billion, which is about 10% lower than last year, and will continue to increase R&D investment. Huang Renzhao said that in order to continue to support customers' structural growth needs, capital expenditures this year are estimated to be approximately US$32-36 billion, of which 70% will be used for advanced processes, 20% for special processes, and 10% for advanced packaging and mask production; in addition, , will also continue to invest in R&D. It is estimated that R&D expenses will increase by 20% this year.

As suppliers were affected by labor shortages, material shortages and other factors caused by the epidemic, the delivery time of advanced process and mature process equipment was lengthened. In addition, based on the optimization of production capacity based on the mid-term outlook for operations, TSMC lowered capital expenditures twice last year, once by The original estimate of US$40-44 billion was revised down to nearly US$40 billion, and was revised down for the second time to US$36 billion. Last year's actual capital expenditure was approximately US$36.3 billion.

In response to the progress of the advanced process, TSMC President Wei Zhejia said at an online press conference yesterday that the progress of 2 nanometers is better than originally expected and maintains the goal of entering risk trial production in 2024 and mass production in 2025.

As for 3nm, which has just entered mass production, Wei Zhejia mentioned that 3nm applications come from smartphones and high-speed computing. Although global mobile phone shipments are currently facing a recession, semiconductor content continues to increase, TSMC will continue to provide more value, and automotive demand will continue to increase and tighten.

TSMC’s 3-nanometer family includes N3, N3E, N3P and N3X. TSMC pointed out that although inventory adjustments are still continuing, it is observed that both N3 and N3E have many customer participations, and the number of product design finalizations in the first and second years of mass production will be more than twice that of 5 nanometers.

TSMC pointed out that 3nm has been successfully mass-produced by the end of the fourth quarter of 2022 as scheduled, and has a good yield rate. Driven by high-speed computing and smartphone applications, it is expected to achieve stable mass production in 2023. In addition, customer demand for TSMC's N3 exceeds supply capacity. It is expected that N3 will reach full capacity in 2023 and contribute significant revenue starting from the third quarter of 2023. N3 will account for mid-single digits of TSMC's wafer revenue in 2023 Number (mid-single digit) percentage. Compared with the revenue contribution of N5 in the first year of mass production in 2020, the revenue contribution of N3 is expected to be higher in 2023.

TSMC emphasized that it expects customers to have strong demand for the company's 3-nanometer process technology in 2023, 2024, 2025 and beyond. It is confident that the 3-nanometer family will become another large-scale and long-term demand process technology of TSMC.

Previously, Japanese officials actively invited TSMC to expand a second factory in Japan and introduce EUV processes. TSMC President Wei Zhejia confirmed for the first time at a press conference yesterday that TSMC is considering building a second factory in Japan. In addition, he also said that he would evaluate the development of automotive equipment in Europe. fab possibilities.

TSMC has previously announced the investment and expansion of its Arizona wafer fab in the United States. It held a 3-nanometer mass production and factory expansion ceremony in Nanke, Taiwan last year, and announced that 2-nanometer will be mass-produced in Zhuke and Zhongke, Taiwan, in 2025. . Today’s Dharma conference will further update the overseas layout.

Wei Zhejia said that TSMC is building a wafer fab with special process technology in Japan. The wafer fab will use 12/16 nanometer and 22/28 nanometer process technology and plans to enter mass production at the end of 2024. We are also considering building a second fab in Japan, as long as customer demand and the level of government support make sense.

Wei Zhejia also said that in Europe we are in contact with customers and partners to evaluate the possibility of establishing a special process fab focusing on automotive technology based on customer needs and government support levels.

In addition, TSMC also said that in mainland China, it is expanding its 28nm process technology production capacity in Nanjing as planned and continues to abide by all rules and regulations to support local customers.

Yesterday, TSMC responded to analysts’ questions about whether it will be a V-shaped recovery or what kind of recovery trend it will be in the second half of the year. President Wei Zhejia said, “We are not sure whether it will be a strong V-shaped recovery, but we can be sure that it will not be U-shaped. The industry will recovery in the second half of the year."

Analysts are paying attention to TSMC's expected dramatic adjustment in semiconductor inventory in the first half of the year and subsequent recovery. In this regard, Wei Zhejia said that he is confident that demand will recover in the second half of 2023. After all, the inventory adjustment occurred last year, and the peak of industrial inventory was in the third quarter of last year. , the inventory has been reduced sharply recently and will continue to be adjusted in the first half of this year.

After the news of inventory adjustment appeared in the semiconductor industry last year, industry analysts and supply chains were discussing what kind of recovery the semiconductor industry would have in the second half of 2023, and various speculations were derived, such as V-shaped, U-shaped and even L-shaped. Now Wei Zhejia is in France Key opinions on industry trends were put forward at the meeting.

The world's largest contract chipmaker ended 2022 on a high note. But with a recession — or at least slower growth — lurking around the corner, 2023 could prove to be an even more challenging year.

TSMC is a leader in the chip industry, with customers including most of the largest chip designers including Apple Inc and Nvidia Corp. The signals it sends are concerning - at least for the first half of 2023.

Taiwan Semiconductor Manufacturing Co. said in its earnings briefing on Thursday that it expects revenue to fall sequentially this quarter due to losses from weak demand for consumer electronics. At the midpoint of its guidance, sales will be down 14% from the December quarter in the first quarter of 2023.

Profits could take a bigger hit. The company expects its gross margin to be around 55%, compared with 62% in the previous quarter. TSMC will continue to invest in its most advanced nodes, although capital expenditures may not rise from last year's levels. It expects spending this year to be between $32 billion and $36 billion, compared with $36.3 billion in 2022.

While TSMC has outperformed many companies in the chip industry, it's inevitable that economic slowdowns - like the one happening now - will hurt it as well. Chip companies are piling up inventories as demand for smartphones and PCs plummets. Demand from data centers has been relatively resilient, although the market there is starting to soften.

TSMC's revenue slowed last quarter, but it managed to raise prices to offset lower demand. A weak Taiwan dollar also helps: The chipmaker's factories are in Taiwan, but most of its customers are overseas. Its gross profit margin in the last quarter increased by nearly 2 percentage points from the previous quarter to 62%.

Counterpoint Technology Market Research predicts that the revenue of the foundry industry will decline by 5% to 7% year-on-year in 2023. But TSMC remains optimistic that it will rebound strongly in the second half of the year and outperform the industry. It forecast its full-year revenue would still exceed 2022 levels.

Its most advanced 3nm node has just begun mass production, and actual demand will also affect whether it can achieve this ambitious goal. Customers like Apple may want to put these new chips into their new smartphones and laptops — but ultimately, actual demand will depend on global economic conditions. Consumers may or may not be inclined to buy the latest gadgets this year due to the possibility of a recession.

TSMC's technology prowess and solid margins mean it's likely to outperform most rivals no matter what happens in 2023. Achieving its ambitious goals may be more challenging — unless the United States manages an elusive soft landing and Chinese households and businesses start spending in earnest again.