What to look for in TSMC's financial report this week? HSBC: Narrative shifts to 2 nanometers

Taiwan Semiconductor is set to release its third-quarter financial report this Thursday. HSBC recently released a research report stating that Taiwan Semiconductor's performance will continue to be at the high end of its performance guidance. The report believes that the company's accelerated mass production of 2-nanometer technology and pricing improvements will drive profit margin expansion over the next two years, leading to profit growth.

HSBC: Mass Production of 2nm Next Year to Boost Profit Expansion

HSBC stated that Taiwan Semiconductor's third-quarter revenue and gross margin reached the high end of the company's guidance range. In this period, the total monthly sales from July to September amounted to NT$760 billion (a 13% increase from the previous period), exceeding the third-quarter revenue guidance range of NT$728 billion to NT$754 billion.

At the same time, HSBC expects Taiwan Semiconductor's third-quarter revenue to be in line with both the bank's and the market's expectations, at NT$743 billion and NT$749 billion respectively. HSBC predicts that Taiwan Semiconductor's gross margin for 3Q24 will be 55.5% (market consensus at 54.7%), reaching the high end of the guidance range of 53.5% to 55.5%.

Furthermore, Taiwan Semiconductor previously estimated its capital expenditure for 2024 to be between $30 billion and $32 billion. HSBC believes that the company's capital expenditure for 2024 will be close to the high end, reaching $32 billion, higher than the market consensus of $30.5 billion. The bank expects Taiwan Semiconductor's capital expenditure growth to continue in 2025, raising its capital expenditure forecast from $36.5 billion to $39 billion, a 22% year-on-year increase (market consensus at $35 billion, a 16% year-on-year increase).

HSBC stated that this is because Taiwan Semiconductor will continue to invest in expanding CoWoS (chip packaging technology) capacity, which is still limited in the face of artificial intelligence demand, while 2-nanometer technology is also accelerating mass production. The company's management mentioned in the last earnings conference call that the development progress of 2-nanometer is ahead of schedule and is expected to begin mass production in 2025.

HSBC predicts that 2-nanometer will start contributing revenue in the second half of 2025. The bank believes that compared to 3-nanometer, 2-nanometer performs better in terms of customer engagement. Therefore, the utilization rate of 2-nanometer may be higher than that of 3-nanometer. The report believes that the pricing of 2-nanometer will be 33% higher than 3-nanometer, coupled with higher utilization rates, which should help drive profit margin expansion in 2025 and 2026, leading to profit growth.

In 2026 (the first full year after the launch of 2-nanometer), HSBC expects 2-nanometer business to contribute NT$507 billion in revenue, 28% higher than the market consensus. In comparison, Taiwan Semiconductor's 3-nanometer contributed NT$160 billion in its first full year (2023).

Therefore, HSBC reiterated its "buy" rating with a target price raised to NT$1535, up from NT$1410. HSBC also raised its earnings per share estimates for the fiscal years 2024 and 2025 by 4% and 9% respectively to reflect the better revenue and profit margin in 3Q24, as well as the contribution from 2-nanometer starting from the second half of 2025. The report believes that Taiwan Semiconductor will maintain its leading position in the advanced node foundry field and become a major beneficiary of artificial intelligence/high-performance computing growth.

Nomura: TSMC remains one of the core holdings in the AI cycle

Nomura Securities' research report states that TSMC is one of the core semiconductor holdings in the "ongoing" AI cycle. The institution believes that although the non-AI related businesses, which account for over 80% of TSMC's revenue, face downside risks, the supply chain has taken cautious construction measures, and a significant cyclical rebound is expected by 2025.

Nomura predicts that the volume increase of Nvidia's Blackwell chip and mobile chip will support TSMC's capacity utilization rates for 5nm, 4nm, and 3nm, thereby driving a sequential revenue growth of over 10% in the fourth quarter of 2024 and a year-on-year revenue growth of 28% (in USD) for the full year.

Furthermore, considering the 5%-10% pricing increase for 5nm, 4nm, and 3nm and CoWoS starting from the first quarter of 2025, expanded AI CoWoS production, and potential incremental outsourcing from Intel, Nomura forecasts a 24% year-on-year revenue growth (in USD) in 2025. The report anticipates that the better pricing dynamics and efficiency improvements brought by the capacity transition from 5nm to 3nm in 2024 will offset the drag from overseas factory production, supporting a gross margin of over 55% and deeming it as the new norm. Overall, Nomura has raised its earnings per share and target price for 2024-2026 to 1355 NTD.

Moreover, Nomura believes that although Intel may outsource 20% of the Panther Lake chip production to TSMC, the additional revenue brought to TSMC is not significant. It is expected that this foundry revenue will account for 10% of TSMC's revenue from 2025 to 2026.

Regarding CoWoS, Nomura currently projects that TSMC's CoWoS capacity will reach 90-100 thousand wafers per month by the end of 2026. The institution forecasts that TSMC will convey a viewpoint that the supply and demand for CoWoS will not be balanced until the end of 2026. However, Nomura still believes that true demand understanding will only be possible after the delivery of Nvidia's GB200 (expected around the second quarter of 2025).