TSMC：THE_BEST_IS_YET_TO_COME;_UPGRADE_TO_BUY_(ON_CL)-2012-11-12.ppt

,21%,100%,90%,80%,70%,60%,50%,40%,30%,20%,10%,november 10, 2012 asia pacific: technology: semiconductors equity research tsmc: the best is yet to come; upgrade to buy (on cl) tsmc is pulling ahead in this critical phase of semiconductor mfg,advanced semiconductor manufacturing is at an inflection point, with escalating r&d intensity and capex requirements for 18” fab. tsmc,summary of coverage company ticker rating,market price,12m tp,potential upside/ downside,samsung, and intel are the three remaining leaders in the industry, in our view, as scale becomes increasingly critical for sustainable growth.,tsmc tsmc (adr) umc,2330.tw tsm 2303.tw,buy* buy* neutral,nt$91 us$16.17 nt$10.65,nt$112 us$19 nt$12.7,23% 18% 19%,however, we believe that tsmc will surpass intel and samsung in capex and gain market share in 2013e-2015e, and will likely benefit from its simple and open business model, leading ecosystem r&d, efficient cost structure, and larger existing total addressable market. intel leads in technology, but struggles in smartphone and foundry,umc (adr) umc neutral us$1.82 us$2.2 note: price as of market close of nov 7, 2012. * denotes stock is on our conviction list. key risks: tsmc: intensifying competition and poor free cash flow. umc: better-/worse-than-expected 28nm yield. source: datastream, goldman sachs research estimates. tsmc will lead in capex in 2013e, paving the way for future growth comparison of capex share for tsmc, samsung lsi, and intel,our intel analyst expects the company to widen its technological lead through 3d transistors and gain share in x86 cpu for pcs, but believes arm cpu and tablet application processors (ap) will likely gain share from intels x86 in 2013e-2014e. intels merchant smartphone soc lacks a meaningful customer base as smartphone makers with their own soc and total solutions are rapidly taking share from merchant soc makers. 0%,2007,2008,2009,2010,2011,2012e,2013e,2014e,tsmc,samsung lsi,intel,samsung lsi may lose apple, but become a 2nd-source foundry we expect apple to start moving its ap wafers to tsmc from samsung lsi in 2014e on increasing conflicts of interests between apple and samsung. our samsung analyst thinks samsung lsi will try to offset this with its in- sourced chips and foundry business. however, samsung is a supplier, customer, and competitor to its large foundry customers such as qualcomm. we think this complexity, along with market concerns on ip and the 20nm roadmap, could prevent samsung from becoming a major foundry supplier. tsmc upgraded to buy (cl), add to gs sustain focus list we now look for eps cagr to accelerate to 14.4% in 2012e-2015e, 8%-43% above i/b/e/s consensus in 2013e-2015e. we believe increasing capex and competition will moderate tsmcs structural profitability, but roe should remain stable. we raise our target price to nt$112 (adr: us$19) from nt$80 (adr: us$13.50) based on accelerated growth. we add tsmc to our global focus list based on its leading croci and industry position and demonstration of engagement in mitigating esg risks facing the sector. we also upgrade umc to neutral from sell on cyclical recovery, and raise our p/b- based target price to nt$12.70 (adr: us$2.20).,source: company data, goldman sachs research estimates. related research how far and fast will china smartphone soc market grow?, sep 25, 2012 tsmc (2330.tw): first take: solid 3q results, in-line guidance, and optimistic outlook, oct 25, 2012 glossary arm cpus: chips that are based on arm architecture and are widely used in smartphones and tablet computers, and in pcs as well going forward) x86: microprocessor architecture for pcs first developed and manufactured by intel. smartphone soc: system on chip used in tablets and smartphones. process technology refers to the method used for making silicon chips and the size of the features in the process is often measured by nanometers.,donald lu, ph.d +86(10)6627-3123 beijing gao hua securities company limited lingling hu +86(10)6627-3520 beijing gao hua securities company limited the goldman sachs group, inc.,goldman sachs does and seeks to do business with companies covered in its research reports. as a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. for reg ac certification and other important disclosures, see the disclosure appendix, or go to /research/hedge.html. analysts employed by non- us affiliates are not registered/qualified as research analysts with finra in the u.s. global investment research,3,5,7,15,17,22,27,2,november 10, 2012 contents executive summary semiconductor manufacturing is entering a critical phase tsmc is pulling ahead in a critical phase of semiconductor mfg tsmc (2330.tw): the best is yet to come; up to buy and add to cl we see upside to consensus estimates for tsmc; re-rating likely gs sustain: add tsmc to global focus list umc (2303.tw): upgrade to neutral on cyclical recovery other disclosure disclosure appendix prices in the report are as at the market close of november 7, 2012, unless otherwise indicated. exhibit 1: gs foundry comp sheet gs/gh foundry comp sheet,asia pacific: technology: semiconductors 31 32,stock,stock,11/7/12,12 month target,market cap,p/e (x),ev/ebitda (x),roe (%),p/b (x),fcf yield (%),company name tsmc (nt$) tsmc (us$) umc (nt$) umc (us$) smic (us$) smic (hk$),ticker 2330.tw tsm 2303.tw umc smi 0981.hk,rating buy* buy* neutral neutral nc nc,price 91.0 16.2 10.7 1.8 2.2 0.4,price 112.0 19.0 12.7 2.2 n.a. n.a.,(us$bn) 80.89 83.83 4.73 4.71 1.38 1.47,2012e 14.4 15.2 15.6 15.8 n.m. n.m.,2013e 13.0 13.6 11.4 11.4 n.m. n.m.,2014e 11.1 11.6 10.5 10.5 n.m. n.m.,2012e 7.5 7.8 3.4 3.4 4.6 4.8,2013e 6.6 6.8 3.0 3.0 4.6 4.8,2014e 5.3 5.5 2.5 2.5 3.0 3.2,2012e 24.3% 24.3% 4.1% 4.1% -3.1% -3.1%,2013e 23.7% 23.7% 5.6% 5.6% -4.2% -4.2%,2014e 24.1% 24.1% 5.9% 5.9% -4.8% -4.8%,2013e 2.89 2.99 0.64 0.64 0.49 0.52,2012e 1.4% 1.4% -13.3% -13.3% n.a. 0.0%,average median,15.0 15.0,12.2 12.2,10.8 10.8,5.2 4.6,4.7 4.6,3.6 3.0,8.5% 4.1%,8.4% 5.6%,8.4% 5.9%,1.3 0.6,-5.9% -5.9%,* denotes stock is on our regional conviction list. source: datastream, i/b/e/s, gao hua securities research estimates, goldman sachs research estimates. goldman sachs global investment research,structure,3,november 10, 2012 executive summary,asia pacific: technology: semiconductors,three remaining competitors in advanced semi manufacturing - tsmc, samsung we expect samsung could respond by in-sourcing we forecast accelerating eps growth at tsmc and are significantly above consensus,advanced semiconductor manufacturing is at an inflection point now that the process has delivered extremely small and efficient 20nm nodes and further efficiencies may be difficult to achieve. intel expects increased r&d intensity and capex requirements for 18” fabs, which cost us$10bn to build. market share and scale have become increasingly critical for sustainable growth in this industry. the recent agreement by tsmc, samsung, and intel to take a stake in asml, the largest supplier of lithography systems for the semiconductor industry suggests there will likely be three remaining leaders in the advanced semiconductor manufacturing industry and thus key competitors for market share, in our view. we believe tsmc will surpass intel and samsung in capex and gain market share in 2013e-2015e, driven by continued secular growth of smartphones and tablets, its apple ap (application processor) business, arm cpu (chips that are based on arm architecture and are widely used in smartphones and tablet computers, and in pcs as well going forward) and 3d packaging. our analysis of the three companies indicates that, contrary to market concerns, tsmc and its ecosystem (i.e., customers and suppliers) are investing more in semiconductor hardware r&d, targeting a larger existing total addressable market (tam), and has an efficient cost structure. as a result, we believe that tsmc is on its way to becoming the leader in advanced semiconductor manufacturing, and is one of the most important companies in the technology supply chain. our us semiconductor analyst expects intel to widen its technological lead over tsmc and samsung through 3d transistors and gain market share in x86 cpu but believes arm cpu and tablet ap will likely gain market share from x86 pc in 2013e-2014e partially due to the introduction of windows for arm and tablet cannibalization of pc demand. intel stated it intends to leverage its technological leadership to penetrate the smartphone market. however, we believe intel lacks a solid customer base for its merchant smartphone solution because most traditional merchant system on chip (soc) customers such as nokia, lg, sony, rim, htc, and motorola are losing market share to apple and samsung, which have their own soc. in addition, a large number of chinese makers would need total solution. we estimate apple will move 30% and 50% of its ap wafers from samsung lsi to tsmc at 20nm in 2014e and 2015e, respectively, due to increasing conflicts of interest between apple and samsung. our korea semiconductors analyst expects samsung will try to offset this loss by focusing on its in-sourced chips and foundry business. he is positive on samsungs in-sourcing efforts, but believes that samsung will only become a 2nd-source foundry. samsung is a supplier, customer, and competitor to its large foundry customers such as qualcomm. we think this complexity, along with market concerns on ip protection and capacity allocation, could prevent major customers from using samsung as their primary foundry supplier. in addition, our channel checks indicate that samsung has not yet committed to 20nm t-like process. at 28nm, our channel checks further indicate that globalfoundries has recently secured more foundry business than samsung lsi from a common customer. upgrade tsmc to buy from neutral and add it to the conviction list and the gs sustain focus list. we forecast tsmc eps cagr to accelerate to 14.4% in 2012e-2015e from 8.2% in 2005-2011, 8%-43% above i/b/e/s consensus (in 2013e-2015e). increasing capex and competition will likely moderately pressure tsmcs structural profitability, but its roe,should remain stable due to operating leverage and increasing debt levels at only 1.3% interest rate. we believe that tsmc will maintain 20% roe for its apple business given that it will have to offer its products to all its customers at the same price. goldman sachs global investment research,4,november 10, 2012 raising target price on higher multiples to reflect cyclical recovery and accelerating revenue and earnings growth; add to gs sustain focus list on superior croci,asia pacific: technology: semiconductors we raise our 12-month target price to nt$112 (adr: us$19) from nt$80 (adr: us$13.5) based on 16x ntm p/e. our previous target price was based on 12x 2013e p/e, 10% above tsmcs last trough multiple, as we had expected tsmc shares to contract into the moderate inventory correction in 4q12e-1q13. following tsmcs guidance that revenue would decline qoq in 4q12, we believe that the impact of the correction has been fully priced in. our current target price multiple of 16x is slightly above tsmcs last peak p/e of,15x given our expectations for accelerated revenue and eps and its historical pattern of peak p/e and growth. key risks: intensifying competition and poor free cash flow in 2012e- 2015e. in this report, we analyze tsmc within our gs sustain framework. while asia has limited representation on our global focus list due to limited disclosure of engagement with esg, tsmc scores above the global sector average and in the 100th percentile of our taiwanese coverage. we therefore add the shares to our global focus list as a result of its leading croci and industry position and demonstration of engagement in mitigating esg risks facing the sector. we upgrade umc to neutral from sell on cyclical recovery, and raise our 12-month target price to nt$12.70 (adr: us$2.20) based on 0.75x 2013e p/b (up from 0.7x ntm p/b). key risks: better-/worse-than-expected 28nm yield. goldman sachs global investment research,us$mn,5,november 10, 2012,asia pacific: technology: semiconductors,semiconductor manufacturing is entering a critical phase 20nm is an inflection point for moores law the semiconductor industry has been following moores law which is based on the history of computing hardware, and suggests that the number of transistors on integrated circuits doubles every two years. to improve performance, power consumption, and costs by 25%- 30%, transistor size has been reduced to one-half their original size every two years. however, as the transistor sizes approach physical limits, moores law may be challenged by mass production of 20nm nodes at tsmc in 2014. compared with 28nm, 20nm offers either 15%-20% faster speed (performance) or 20%-25% power savings, but does not offer cost reduction, according to tsmc and umc. the industry is ushering in new technology such as 3d transistors (fin-fet or tri-gate), 18” wafer, and 3d packaging to assist in maintaining the trajectory implied by moores law. escalating capex requirement and r&d intensity to drive industry consolidation these new technologies will likely further escalate the rapid increase in r&d intensity and capital requirements (exhibits 2-3). tsmcs r&d expense and r&d as a percent of revenue have increased to us$1.39bn and 8.1% in 2012e from us$608mn and 5.6% in 2007, respectively. an 18” fab can help to reduce cost per transistor, but an 18” fab would cost us$10bn to build and generate up to us$4bn-us$5bn revenue per year, according to intel. tsmc currently generates us$8 revenue (content) per smartphone from soc, connectivity, power management, and sensors. assuming us$6 of this content requires leading edge technology, an 18” fab would potentially supply 670mn-830mn smartphones per year. global smartphone and total handset demand are only 649mn and 1.8bn in 2012e, respectively, based on gs global tech teams forecasts. we estimate only two 18” fabs would be needed to meet global smartphone demand in 2018e. therefore, under this scenario, market share and scale are important for investment returns in this critical phase of semiconductor manufacturing.,exhibit 2: r&d intensity continues to increase r&d expenditure for different nodes,exhibit 3: capex requirement increases for larger wafer size required investment for one leading edge fab,2003-07,2008-2011,2012 onwards,process r&d cost* $1,300 mn 450mm,$310-$400 mn,$600-$900 mn,200mm,300mm,90-65 nm,45-32 nm,22-12 nm, us$1 bn, us$ 5bn, us$ 10bn,*industry average for logic process r&d source: amd financial analyst presentation,source: globalfoundries goldman sachs global investment research,source: intel,6,november 10, 2012,asia pacific: technology: semiconductors,tsmc, samsung, and intel are the remaining leaders and will compete for market share asml is the global leader in lithography, the most critical technology and the bottleneck of the semiconductor technology. asml has recently invited intel, tsmc, and samsung to purchase a stake in the company and contribute to its r&d in order to accelerate the migration to euv (extreme ultraviolet) and 18” technology. the agreement suggests that there are difficulties in maintaining the tenets of moores law and that intel, tsmc, and samsung will be the remaining major suppliers in advanced semiconductor manufacturing for 18” fab and euv after 2017, in our view. goldman sachs global investment research,us$mn,7,november 10, 2012,asia pacific: technology: semiconductors,tsmc is pulling ahead in a critical phase of semiconductor mfg historically, tsmc, intel, and samsung have focused on logic, cpu, and memory, respectively, but we believe they will compete more directly in these markets in the long term. while intel and samsung are leaders in semiconductor technology and smartphones, our analysis indicates that tsmc should benefit from its simple and open business model, the evolution of smartphone makers, superior tam and ecosystem r&d, and an efficient cost structure. we expect tsmc to surpass both intel and samsung lsi in capex and gain market share in semiconductor manufacturing as we enter this critical phase, in 2013e- 2015e. tsmc to surpass intel and samsung lsi in capex in 2013e-2015e we estimate tsmcs capex will increase from us$8.3bn in 2012e to us$9.5bn, us$12bn, and us$12bn in 2013e, 2014e, and 2015e, respectively, driven by smartphones and tablets, apple ap, arm cpu, and 3d packaging. in 2013e-2015e, tsmc should surpass intel and samsung lsi in capex (exhibit 4) as it develops 3d transistors ahead of its own original roadmap. we note that the combined capex of tsmc and samsung lsi has grown steadily vs. intel since 2008, partially due to the cannibalization of pc by smartphones and tablets, in our view.,exhibit 4: tsmcs capex will surpass that of intel and samsung in 2013e-2014e comparison of capex between tsmc, samsung lsi, and intel 14,000,exhibit 5: tsmc should lead in capex in 2013e, paving the way for future growth comparison of capex share between tsmc, samsung lsi, and intel 100%,90% 12,000 80%,10,000 8,000 6,000 4,000,70% 60% 50% 40% 30%,20% 2,000 10%,0,0%,2007,2008,2009,2010,2011,2012e,2013e,2014e,2007,2008,2009,2010,2011,2012e,2013e,2014e,tsmc,samsung lsi,intel,tsmc,samsung lsi,intel,source: company data, goldman sachs research estimates, gao hua securities research estimates,source: company data, goldman sachs research estimates, gao hua securities research estimates,the evolution of smartphone makers favors tsmc and samsung lsi smartphone shipments will be 2x larger than pc shipments in 2012e according to our gs global tech teams estimates. smartphones a