TSMC

Pioneers in emerging products drive gross profit growth

Story Although TSMC faced low global demand for chips in early 2023, however, with its intensive research &
development, TSMC is projected to come back stronger and even exceed its competitors by producing several
emerging products like 3nm, 7nm for AI, and chips for the EV automotive for mostly US customers. Throughout
Sales 2022, TSMC has gone through pilot production for 3nm and become the first company whose going into mass
production of 30,000 wafers in 2023 for Apple, resulting in projected revenue of US$600M. Moreover, with the
raising of the AI industry, TSMC becomes the leading producer of AI chips for major customers like NVIDIA and
FVMR potential customers like Google, AMD, Yandex, etc. Align with EV popularity, TSMC has secured a partnership
with Honda for EV chip production in the US. These give TSMC a first-mover advantage to determine the price
and secure deals for high total units, hence could drive around 6% gross profit growth from 2022–2025 in the
smartphone, high computer performance, and automotive segments.
P5F Global expansion strategy potentially leads to higher costs & raw material supply chain risk
Background: Taiwan Semiconductor (TSMC), is a
Taiwan multinational semiconductor with over
With the rising of US-China geopolitical tension, TSMC’s plan to manage customer supply risk by building 36 years of existence. TSMC has global footprints
Team fabrications in the US would lead to higher costs & risks in supplying raw materials. The uncertainty from the in Asia, Europe, and America with up to 18
US regarding its CHIPS Act incentive put TSMC in higher CAPEX for fab construction and OPEX regarding the fabrication plants present in 3 countries (Taiwan,
higher wage for US Labours and fab’s energy. Due to the expansion, TSMC which is known to rely on sole- China, and the USA) producing 13MN wafers per
WCB sourced suppliers might face challenges in managing raw material procurement & supplies outside the Taiwan
manufacturing area. Risk in managing raw material supply chain projected to leave TSMC with increased price
year.
TSMC is one of the world’s leading chipmakers
in tariffs, hence affecting the increase of COGS. However, with TSMC’s higher selling price and large volume and produces advanced chips & processors for 535
ESG strategy, the increase in total costs is expected to not affect net profit significantly. clients including Apple, Sony, Nvidia, and
Raw material supply chain risk from the global expansion plan hinders production capacity Qualcomm. In 2022, it is known that 7-nanometer
chip manufacturing is the largest revenue driver for
Value With 64% of raw wafers suppliers located in Asia, the production of the chips in the US fab will face constraints
in production capacity unless TSMC enhances its supply chain and inventory. This is known also from the
this firm.
previous case where TSMC is unable to meet the 3nm supply demand by 45% compared to the expectation TSMC is known to have US$12T of market cap.
Nowadays, TSMC plan to work towards the chips
Risks from the major customers in the given time. However, TSMC is known for its commitment to strengthening
upstream suppliers and improving its inventory monitoring. As a result, TSMC’s productivity is expected to for electric vehicles and become the pioneer of 5-
decrease in the first half-year of production in US but go stronger and remain stable in the next few years. nanometer chips for smartphone commodities.

Sources: Company data 1

TSMC: Revenue structure
TSMC is known for its main two sources of revenue, which are 88% wafer fabrication and
12% other services (including but not limited to design services). TSCM collects its revenue (NTDm) (%)
Story mostly from 5 countries, which are 66% US, 11% China, 9% Taiwan, 6% EMEA, 5% Japan, and
100,000 60.0
others.
80,000 50.0
Sales TSMC’s core revenue contributor by segment is coming from smartphones which accounted
for 48% of its 2022 revenue. This segment becomes one of the aspects that derive the core 40.0
revenue of two TSMC’s most used chips resolutions, which are 27% from 7nm (nanometer ) 60,000
and 26% from 5nm products. With a production capacity of 60,000 wafers per month, TSMC 30.0
FVMR attracts 62% of revenue from North America by serving major customers like Apple, 40,000
20.0
Qualcomm, Nvidia, AMD, and IBM. 20,000 10.0
P5F Another source of revenue comes from the High-Performance Computing segment which is
accounted for 27%. This segment allows TSMC to have higher revenue for 7nm as it is used - -
in AI processors for Nvidia, making TSCM the leading chips producer for the AI industry that 20A 21A 22A 23E 24E 25E
could potentially obtain a few major customers like Google, AMD, etc. Last, TSMC’s other
Team sources of revenue are 8% obtained from IoT and 3% from automotive.
Revenue Net margin (RHS)

Revenue breakdown, by segments 2022

WCB
High Performance
Smartphone 48% IoT 8% Automotive 3%
Computing 27%
ESG
Value
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv 2
MRK.N: Revenue structure
Merck is known to primarily serves the pharmaceuticals products market. Merck has been

Story producing drugs that are used for the treatment of various types of diseases such as cancer,
heart-related, infectious, diabetes, vaccines, and many more. Merck sells its products globally but
collects its revenue mostly from 3 major regions, which are 46% US, 23% Europe – Middle East -
Africa, 20% Asia, and others.
Sales Merck’s core revenue contributor by segment is coming from Oncology products which
accounted for 44% of its 2022 revenue. This is because Mercks is well known for its cancer
medicine named KEYTRUDA which accounted for 42% of its oncology product’s revenue. Since
FVMR 2014, Mercks begin to receive its major source of revenue in the Oncology segment after gaining
approval for the KEYTRUDA medicine and is expected to gain a potential rise in revenue after
gaining a few approvals from different institutions and countries in the upcoming years.
P5F Another source of revenue comes from the Vaccines segment which is accounted for 21%. This
segment includes the making of COVID-19 vaccines, chickenpox vaccines, and the latest well-
known HPV vaccine (Gardasil) which accounted for the second top source of revenue after the
Team KEYTRUDA product. The other segments include animal health products, diabetes medicine, etc.

Revenue breakdown, by segments 2022

WCB
Oncology 42% Vaccines 21% Animal Health & Other 13% Diabetes 6%
ESG
Value
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv 3
PetroChina: Revenue structure
PetroChina engages primarily in the petroleum-related products, services, and activities.
PetroChina operates through several business segments in generating the revenue, which are
Story from the oil & gas marketing, refining & chemicals, exploration & production, and natural gas &
pipeline. Petrochina’s revenue by market area is segmented into two categories which are 59%
derives from the China market and 41% from other countries (the Middle East, Central Asia,
Sales APAC, America, and Africa).
PetroChina’s core revenue contributor by segment is coming from the oil & gas marketing which
accounted for 52% of its 2022 revenue. This is because Petrochina has a large mid-downstream
FVMR market that owns 8 ten-million-ton level refining bases and operates in more than 20,000 service
gas stations that cover 31 provinces in China and undertook the supply of around 40% of China’s
oil products.

P5F Another source of revenue comes from the refining & chemicals segment which is accounted for
22%. It is projected that there will be an increase in this revenue segment as PetroChina has
begin its expansion program by launching a subsidiary refinery in Southern China accounted for
Team $4.52 billion and refineries product will be granted around 10 million tonnes of new export
quotas in the upcoming period starting from the half year of 2023.
Revenue breakdown, by segments 2022
WCB
Oil & Gas Marketing 52% Refining & Chemicals 22% Exploration & Production 16% Natural Gas & Pipeline 9%
ESG
Value
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv 4
TSMC: A. Stotz Four Element

Overal: TSMC appears unattractive

Story
Story Rank relative to peers*
Worst Neutral Best relative to 1,060 non-financial companies
in Taiwan considering strong fundamental
aspects moderately attractive in terms of
Sales momentum but it offers unattractive
valuation and high risk.

Fundamentals W B
Valuation W B Fundamentals: One of the top companies
FVMR in Taiwan as it has strong profitability and
(%) Dec-18 Dec-19 Dec-20 Dec-21 PTM** (x) Dec-18 Dec-19 Dec-20 Dec-21 PTM** margin. The company also known to
Operating profit margin 35.7 33.2 40.5 40.5 49.3 Price-to-sales 6.2 6.6 11.4 9.8 5.9 effectively use the assets & equity to
P5F
Recurring net margin 34.0 32.1 38.5 37.5 45.0 Price-to-earnings 18.2 20.7 29.5 26.0 13.1
generate profits.
Asset turnover 50.5 49.1 53.3 48.9 52.1 Price-to-book 3.8 4.4 8.2 7.1 4.5
Return on assets 17.2 15.8 20.5 18.3 23.5 PE-to-EPS growth (PEG) 12.9 nm 0.6 1.7 0.2 Valuation: Unattractive as it appears
Recurring return on equity 21.9 20.8 29.7 29.6 39.9 EV/EBIT 15.7 18.7 27.1 23.2 11.4 overvalued relative to other companies in
Team the Taiwan market. Although the high
multiple might driven by the good EPS
Momentum W B Risk W B
growth and high ROE, however it will be
WCB Dec- Dec- Dec- Dec- PTM* Dec- Dec- Dec- PTM*
risky to buy & sell the stock with the
current rank on the valuation.
(%) 18 19 20 21 * (x) 18 Dec-19 20 21 *
Revenue growth 5.5 3.7 25.2 18.5 42.6 Current ratio 2.8 1.4 1.8 2.2 2.2 Momentum: Moderately attractive as both
ESG Recurring EPS growth
Operating profit margin chg.
1.4 (1.9) 50.1 15.3 71.5 Net debt-to-equity (%) (31.8) (24.7) (23.2) (19.8) (23.1) fundamental momentum and price
momentum have been relatively high.
(307) (252) 731 (1) 882 Times-interest-earned 120.6 109.1 260.4 118.6 77.4
(bps)
5yr 3yr 1yr 6mth 3mth Risk: Highly unattractive as it comes with
Value Price change
6mth
8.0
3mth
6.5
1mth
(5.9)
3wk
(1.0)
1wk
(0.6) Beta 1.3 1.2 1.5 1.7 1.8 high Beta ratio that implies high volatility
stock price and debt with quicker times for
TSMC to cover its mandatory debt even
Risks though TSMC has high current ratio to
meet its short-term financial obligations.
Note: Benchmarking against 1,060 non-financial companies in Taiwan.
Sources: A. Stotz Investment Research, Refinitiv. Notes: *Bars are decile rankings of the most recent period. **Past 12 months of published data. na = not available, nm = not meaningful.
5
Valuation is based on historical prices.
TSMC: A. Stotz Four Element

TSMC’s profitable growth has constantly in

Story
Story the top among 650 large info tech
companies worldwide. This mainly derives
from its capacity to generate profit out of its
Sales ability to be one of the first-ranked
companies in controlling expenses.
Excellent Great growth However, it is known that TSMC has been
Fundamentals Profitable Growth
FVMR profitability '18 '19 '20 '21 PTM
performed really well in terms of growth in
the past three months.
1 1 1 1 1
TSMC’s profitability is constantly at the top
P5F for the past 4 years. Meanwhile, the growth
has been fluctuating to the lowest number
of #7 but managed to be in the top position
Profitability Growth
Team '18 '19 '20 '21 PTM '18 '19 '20 '21 PTM
throughout the 4 years in the past three
months.
1 1 1 1 1 6 6 3 7 2
TSMC’s asset efficiency is in a risky
WCB condition with the worst rank is #9 but
managed to be 1 rank above in the past
three months. In balancing the asset
ESG Asset efficiency Expense control Revenue growth Expense direction
inefficiency, TSMC is known to control its
expenses well, making them in the top rank.
'18 '19 '20 '21 PTM '18 '19 '20 '21 PTM '18 '19 '20 '21 PTM '18 '19 '20 '21 PTM Sales growth is known to be volatile in a
Value 9 9 8 9 8 1 1 1 1 1 7 6 2 5 1 8 8 1 9 1 moderate rank, however, it shows that in the
past three months, TSMC is able to be in
Benchmarked against 650 large Info Tech companies worldwide. the first rank. Expense direction has been
Risks volatile in line with revenue growth, but
TSMC comes back strong in the first-
ranked
Sources: A. Stotz Investment Research, Refinitiv. Notes: *Bars are decile rankings of the most recent period. **Past 12 months of published data. na = not available, nm = not meaningful.
6
Valuation is based on historical prices.
TSMC: A. Stotz Four Element

Story
Story
Sales
Fundamentals
FVMR
P5F
Team
WCB
ESG
Value
Risks
Sources: A. Stotz Investment Research, Refinitiv. Notes: *Bars are decile rankings of the most recent period. **Past 12 months of published data. na = not available, nm = not meaningful.
7
Valuation is based on historical prices.
TSMC: A. Stotz Four Element

Story
Story
Sales
Fundamentals
FVMR
P5F
Team
WCB
ESG
Value
Risks
Sources: A. Stotz Investment Research, Refinitiv. Notes: *Bars are decile rankings of the most recent period. **Past 12 months of published data. na = not available, nm = not meaningful.
8
Valuation is based on historical prices.
TSMC: A. Stotz Four Element

Story
Story
Sales
Fundamentals
FVMR
P5F
Team
WCB
ESG
Value
Risks
Sources: A. Stotz Investment Research, Refinitiv. Notes: *Bars are decile rankings of the most recent period. **Past 12 months of published data. na = not available, nm = not meaningful.
9
Valuation is based on historical prices.