TSMC--FAB world leader

 TSMC—WORLD LEADER IN FOUNDRIES—fy23

To repeat, my international strategy is to put together companies that are world leaders and acquire them at reasonable prices. These purchases will initially be founded from the International etf. Of course, every plan will be open to opportunism and flexibility.

The results were 6% better than my company-guided estimates, note quarterly reporting here. This means the management is conservative and has limited visibility or both. The results could also mean a much stronger finish, backed by strong guidance into 2024.

The numbers for TSMC continue to be quite outstanding in terms of roe and growth. The semiconductor industry is unusual in being a growth industry but with a significant degree of cyclicality. 2023 was a rare down year, after a very strong 2022. For long-term investors, this offers an opportunity to gauge the cycles.

One very attractive feature is that although the company is capital intensive it remains a high roe business. After a few strong years in capex it is now expected to flatten and reap the returns. The company carries large net cash balances so Roe is generated without the help of debt.

The risks for TSMC are as follows;

1.      Geo-political which is widely understood and what has opened the discount to valuation. Of course, a Chinese invasion would be disastrous.

2.      The company has commenced building FABs outside of its native Taiwan in Germany, Japan and the US. Whether these investments can generate returns near the Taiwan fabs is a viable criticism, although the company appears to be building the lesser complex nodes overseas and repeatedly comments about government subsidies that make these plants work.

3.      TSMC is the leader in innovation as nodes get smaller and the larger less complex nodes get commoditised. The industry structure is relatively stable except for the aggressive moves of Intel to challenge TSMC. At this stage, they have a long way to go. Samsung the second player also lags TSMC but as nodes get smaller careful consideration will have to be made of the progress of each company.

4.      Customer concentration is potentially an issue, AAPL, AMD , NVDA. Given the complexities for the industry to grow and the long-standing relationship that TSMC has with these players at this stage it looks manageable. To be clear, TSMC specifically says it has better processes to tie in customer innovations into it processes and specialisations to avoid commodity degradation.

Valuation

Coming out of the 2023 trough in earnings, eps growth is expected to pick up. Assume 15% eps for the next five years, including two strong upcoming years.

Net cash, ROE has averaged 36% over the last 10 years and eps growth 18% over the last 5 years.

PE has averaged 22X and one std dev 15X. The low Pe ratios due to the capital intensity and geo-political risk?

At $110 give 14% pa at the median and 5% at the low, which does not include the dividends. TSMC becomes a very strong buy around $90.

DISC HELD

Partnerships 









note risks

cyclical industry, client-specific factors, technology transition, competition eg SMIC, Hua Hong larger nodes, Pricing power, Geopolitical risk.


Please note the disclaimer.








Comments

Post a Comment

Popular posts from this blog

Performance Review FY2024--

  REVIEW OF PERFORMANCE fy2024 The numbers are in for 2024. The portfolio generated 20.8% (after costs and some cash taxes [1] ), the benchmark return was 13.4%. I am satisfied with the result, considering all things. What are all things? Was I in the fortunate receipt of much good luck (or bad luck), or did I utilise much higher risk in a rising market? Did style assist me? Does the result differ from what could be considered a random outcome (that is the hardest to assess)? I will attempt to address some of these in the following text. The following post will be divided into several sections addressing various segments. To reiterate my investment philosophy is to buy quality companies when they are reasonably priced. Of course, this sets a conscious boundary on likely results, up and down. I am consciously setting a limit on risk by skewing the portfolio almost totally to quality growth companies with a long history of profitable businesses. The belief is that over the long...
Read more

INVESTMENT CHECKLIST

  CHECKLIST FOR INVESTMENTS Overall I want this to be short enough so that I will use it and long enough to be useful. not War and Peace. In deference to Charlie Munger who continually suggested using a checklist, well I am getting on! Can be built up and on over time. Understandable business Do you understand the positioning of the business versus its competitors, customers and suppliers? What are the critical products, services and relationships? Is the size of the market(s) able to be estimated? Are there existential risks to the business, structural decline, or obsolescence? Operating History EPS growth, consistency/volatility is it forecastable? ROE/GM stability and level. Ability to manage margins. Total asset growth can the business profitably deploy assets. What has the reinvestment rate been? NPM level and stability. Does the business generate FCF, does CF reconcile to earnings? Given the above has the company favourable LT prospects? Management Condu...
Read more

Post Results--Examining the tail--PXA MIN CKF DMP SHL IEL DDR

  EXAMINING THE TAIL—PXA DMP RMD IEL DDR SHL MIN Almost all of my top 10 holdings are clear of significant issues with maybe valuation being the main point of conjecture. These investments represent a large proportion of the funds deployed. There is also a tail these are small or middling positions as launching pads to potential further investment but with current issues that may preclude investors from becoming overly excited about them. Therefore, they have potential attractive upsides. The underlying business should be sound and the issues short term. These holdings can be upscaled if the issues are indeed ST, however, not all will turn out favourably. How are these going? This is not an in-depth analysis but an overview of the short-term issues, are these issues becoming better or worse? Pexa (PXA) My thesis here rests with the Australian business being a natural monopoly, that appears intact. Secondly, Australian success can be repeated in the UK. Success in the UK rem...
Read more