ASML and Trump "feinted twice" in a row? TSMC "holds the fort", what else to fear!

Taiwan Semiconductor (TSMC) released its second-quarter financial report for 2024 (ending in June 2024) before the US stock market on the afternoon of July 18, 2024 Beijing time, with the following key points:

1. Revenue: Both volume and price increased, reaching a historical high. In the second quarter of 2024, TSMC's revenue reached $20.8 billion, hitting a record high, exceeding the upper limit of the performance guidance range ($19.6-20.4 billion). Revenue in this quarter increased by 10.3% compared to the previous quarter, with shipments contributing +3.1% and average selling price contributing +7%. The increase in 3nm shipments led to a simultaneous increase in volume and price this quarter.

2. Gross Profit and Gross Margin: Gradually recovering from the trough. TSMC's gross margin for the second quarter of 2024 was 53.2%, slightly better than the guidance range (51-53%). The increase in average selling price this quarter offset the cost increase, resulting in a slight rise in gross margin. The volume of 3nm production is expected to drive the gross margin out of the trough.

3. Wafer Structure: HPC initiates the 3nm node. With HPC (High-Performance Computing: including AI and data center-related chips) initiating the 3nm node, the proportion of revenue from 7nm and below increased to 67% this quarter. The company's 3nm process currently mainly caters to the demand for smartphones and high-performance computing. As electronic products enter the peak season in the second half of the year, the proportion of 3nm is expected to continue to rise. The revenue contribution from the US region remained stable at around 65% this quarter.

4. TSMC's Performance Guidance: $ Taiwan Semiconductor.US expects revenue of $22.4-23.2 billion and a gross margin of 53.5-55.5% for the third quarter of 2024 (market expectations $22.528 billion and 52.5% gross margin). Revenue is expected to increase by 7.7%-11.5% compared to the previous quarter, mainly driven by the demand for high-performance computing and Apple's new product stocking. The gross margin is expected to continue to rise due to the increase in 3nm shipments, leading to an increase in the average selling price.

Dolphin's overall view: The company's financial report this time looks very good.

Both revenue and gross margin for this quarter exceeded market expectations, mainly driven by the increase in 3nm production due to demand from AI and other sectors, further concentrating the company's overall performance on advanced processes.

In addition to the financial data, the company also provided guidance for the next quarter that exceeded expectations. The company expects revenue of $22.4-23.2 billion and a gross margin of 53.5-55.5% for the third quarter (market expectations $22.53 billion and 52.5% gross margin). The outstanding performance in gross margin is mainly due to the better-than-expected increase in 3nm shipments.

With the increasing demand for AI and the stocking of new Apple devices, the company's gross margin is expected to emerge from a temporary low.

The capital expenditure that the market is concerned about, the company has raised the previous lower limit as scheduled. The annual planned range of 28-32 billion has been raised to 30-32 billion. Although only the lower limit of the range has been raised, this move also indicates that the company's outlook is starting to improve, and the second half of the year will also enter the peak season for capital investment.

Overall, with the start of a new process node for high-performance computing in the second quarter, TSMC's 3nm is expected to achieve true mass production. With the release of 3nm capacity, it is expected to drive the company's performance recovery and the R&D work on 2nm. Entering the second half of the year, the peak season for electronic products, the company's performance will see a significant improvement. Therefore, the company's outlook is starting to improve, and the lower limit of the company's annual capital expenditure plan has been raised.

1) In the short term, although ASML's outlook was slightly flat yesterday, TSMC's financial report this time still brought confidence to the market. Both revenue and gross margin exceeded expectations, providing good guidance, and performance will see a significant improvement in the second half of the year.

2) In the medium to long term, TSMC will start preparing for a new round of process iteration, with the 3nm process starting to produce high-performance computing products, with the proportion expected to increase to over 20% in the second half of the year. Only when the process is in mass production can it contribute to the profit end for the company and achieve a virtuous cycle. After the large-scale production of 3nm, the company will also focus on entering the 2nm market.

Although the company's current valuation has risen to around 25 times, the strong demand for AI has indeed brought significant changes in performance. As long as demands like AI continue to bring performance improvements to the company, this wave will continue to support market confidence.

Here is Dolphin's specific analysis of TSMC:

I. Revenue: Volume and price rise together, reaching a historical high

TSMC achieved revenue of $20.82 billion in the second quarter of 2024, reaching a historical high, exceeding the upper limit of the performance guidance range ($19.6-20.4 billion). This quarter's revenue increased by 10.3% compared to the previous quarter, mainly due to the increase in demand for high-performance computing.

TSMC's quarterly revenue, due to the publication of monthly operating indicators, has been fully anticipated by the market. How did prices and shipment volumes change in this quarter's revenue?

Dolphin observes the main driving forces behind TSMC's revenue growth in the second quarter of 2024 from the dimensions of volume and price:

1) Volume: In the second quarter of 2024, TSMC's wafer shipments were 3,125 thousand pieces, an increase of 3.1% compared to the previous quarter. The continued growth in shipment volume is mainly driven by the demand for high-performance computing. Although the shipment volume is increasing, the company is not actively expanding production. TSMC's capital expenditure for this quarter was $6.36 billion, and the company's capital expenditure remains relatively low.

2) Price Dimension: In 2024Q2, TSMC's wafer revenue (equivalent to 12-inch wafers) was $6662 per wafer, a 7% increase from the previous quarter. The increase in TSMC's wafer shipment average selling price was mainly due to the increased proportion of 3nm in this quarter. The revenue share of processes below 7nm further increased to 67% this quarter.

Combining TSMC's guidance for the next quarter, the company expects to achieve revenue of $22.4-23.2 billion in the third quarter (a 7.7%-11.5% increase from the previous quarter) with a gross margin of 53.5-55.5% (market expectation is 52.5%). The third-quarter revenue is expected to continue to reach new highs, mainly driven by the growth in demand for high-performance computing and Apple's new product stocking.

II. Gross Profit and Gross Margin: Gradually Emerging from the Low Point

TSMC achieved a gross profit of $11.07 billion in the second quarter of 2024, a 10.6% increase from the previous quarter. The sequential increase in gross profit was mainly influenced by revenue growth. TSMC's gross margin in 2024Q2 was 53.2%, a 0.1 percentage point increase from the previous quarter, surpassing market expectations (52.6%).

The two key data points that the market is most concerned about regarding TSMC are revenue and gross margin. Since monthly operating data is disclosed, quarterly revenue is already largely anticipated by the market. Gross margin, on the other hand, is one of the focal points of this quarterly report. Here are the main drivers analyzed by Dolphin Jun for the increase in gross margin this quarter:

"Gross Profit = Wafer Revenue - Fixed Costs - Variable Costs"

1) Wafer Revenue per Wafer (equivalent to 12-inch): In 2024Q2, TSMC's wafer revenue was approximately $6662 per wafer, an increase of $435 per wafer from the previous quarter. With the increase in shipments in the high-performance computing sector, the proportion of 3nm significantly increased this quarter, driving the increase in average selling price;

2) Fixed Costs (Depreciation and Amortization): In 2024Q2, TSMC's average fixed cost was around $1634 per wafer, a decrease of $37 per wafer from the previous quarter. Although the total depreciation and amortization increased, the increase in production volume led to a decrease in unit fixed costs;

3) Variable Costs (Other Manufacturing Expenses): In 2024Q2, TSMC's average variable cost was approximately $1486 per wafer, an increase of $234 per wafer from the previous quarter. The increase in the proportion of 3nm wafers raised the company's manufacturing costs;

Taking all factors into account, in 2024Q2, TSMC's gross profit per wafer was $3543, an increase of $238 per wafer from the previous quarter. The gross profit per wafer increased this quarter, with the unit price increasing by $435, covering the increased cost itemsPerformance of TSMC's Revenue has been anticipated by the market, while gross margin is the main focus. With the mass production of 3nm continuing to drive the increase in the average selling price of the company's products, it has a positive impact on the company's gross margin. Looking at the company's guidance for the next quarter of 53.5-55.5%, TSMC's gross margin is starting to emerge from a temporary low. Currently, the proportion of 3nm is around 15%, and Dolphin believes that with the promotion of AI, Apple's new devices, and other factors, the proportion of 3nm in the company's next quarter is expected to continue to increase.

III. Wafer Structure End: HPC Initiates the 3nm Node

3.1 Wafer Revenue Proportion (by Application Type)

Smartphones and HPC are TSMC's largest sources of revenue, with a combined proportion of 85%, making them the largest source of downstream revenue for the company.

Looking at the downstream segmented applications, the proportion of smartphone business in this quarter once again declined to one-third, mainly due to the fact that although the demand in the smartphone market has improved, it has not shown clear sustainability. The share of the company's high-performance computing has reached a new high of 52%. From the downstream perspective, the company's business still exhibits structural characteristics, with revenue growth mainly driven by demand for AI and other technologies.

Dolphin believes that as high-performance computing begins to enter the 3nm node, related revenue is expected to continue to increase. The second half of the year will also see the release of Apple's new devices, leading to a seasonal rebound in smartphone revenue. Overall, the company's revenue in the second half of the year will be significantly better than the first half.

3.2 Wafer Revenue Proportion (by Process Node)

The proportion of revenue from nodes below 7nm continued to increase to 67% this quarter, with revenue from advanced process nodes already being the company's main source. Specifically, the revenue proportion of 3nm in this quarter rebounded to 15%, while the proportion of 5nm revenue remained at around 35%.

Dolphin believes that the increase in 3nm production this quarter is mainly due to the large customers in high-performance computing, pushing the company's new products to the 3nm node. Looking at 5nm, the company's capacity remains relatively full.

Based on the guidance provided by the company for the next quarter, the performance of the company in 2024Q3 will benefit from the growth in demand in the high-performance computing sector and the stocking up for Apple's new devices. With the push from both, the proportion of 3nm nodes in the company is expected to continue to increase. Looking at the historical changes in the company's process nodes, the proportion of 3nm is expected to increase to over 20%. With the start of 3nm production, it is expected to drive the company's profitability to rise.

3.3 Proportion of Wafer Revenue (by Region)

In terms of revenue from various regions, North America remains the largest source of revenue for TSMC, accounting for 65% of the total. This is due to major clients such as Apple, Qualcomm, NVIDIA, AMD, etc., creating a strong commercial relationship between TSMC and the United States. Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 16% and 9% respectively this quarter. Revenue from China saw a significant increase this quarter, with some companies increasing their wafer orders from TSMC.

Considering the situation of various companies and the industry chain, Dolphin believes that the current semiconductor market demand still exhibits structural characteristics. Among the company's clients, the main boost comes from high-performance computing clients such as NVIDIA, AMD. The second half of the year will also enter the peak season for electronic products such as smartphones, and related revenue is expected to rebound. However, the sustainability of demand still needs to be closely monitored.

Dolphin's Research on TSMC and the Wafer Manufacturing Industry

TSMC

April 18, 2024 Conference Call " TSMC: Capital Expenditure Unchanged, Maintaining Original Plan (FY23Q4 Conference Call Summary)"

April 18, 2024 Financial Report Review " TSMC: iPhone Slump, NVIDIA Comes to the Rescue"

January 18, 2024 Conference Call " AI, the Strongest Driving Force for Future Growth (TSMC 23Q4 Conference Call)"

January 18, 2024 Financial Report Review " TSMC: Charging Ahead with 3nm, Intel Sends a "Spring Breeze""

October 20, 2023 Conference Call " Scaling Up to 3nm, Planning to Enter 2nm (TSMC 23Q3 Conference Call)"

October 20, 2023 Financial Report Review " TSMC: Surviving the "Performance Bottom", 3nm Battle Begins"

July 20, 2023 Conference Call " TSMC: AI Boosting Wildly, 3nm Will Finally Land (2Q23 Conference Call)"Financial report review on July 20, 2023: "TSMC: NVIDIA to the rescue, AI supports the 'cyclical' bottom"

Conference call on April 20, 2023: "Clear bottom in the second quarter, 3nm mass production imminent (TSMC 23Q1 conference call)"

Financial report review on April 20, 2023: "TSMC: The strongest king, also struggling with cyclical fluctuations"

Conference call on January 12, 2023: "Inventory adjustment will continue for half a year, growth expected in the second half of the year (TSMC 22Q4 conference call)"

Financial report review on January 12, 2023: "The thunder of TSMC, even Buffett's increased holdings cannot suppress"

TSMC conference call on October 13, 2022: "Despite impressive financial reports, TSMC cannot avoid industry decline (Third quarter conference call)"

Financial report review on October 13, 2022: "TSMC: How long can the 'lone hero' in the dark night last?"

TSMC conference call on July 14, 2022: "How will TSMC sustain growth in a semiconductor downturn? (TSMC conference call)"

Financial report review on July 14, 2022: "TSMC: The 'alternative' backbone in the wave of order cuts"

TSMC conference call on April 14, 2022: "On track for 2nm (TSMC conference call)"

Financial report review on April 14, 2022: "TSMC: Strong 'faith', unaffected by cycles"

In-depth analysis of TSMC stock on April 8, 2022: "TSMC (Part 2): Price discounts, unwavering faith"March 16, 2022, TSMC stock in-depth analysis "After the market crash, let's talk about the ashes of the foundry king TSMC"

January 13, 2022, TSMC conference call "After providing strong quarterly guidance, what did the TSMC management talk about?"

January 13, 2022, TSMC financial report review "TSMC is too powerful, 'cycles' take the detour"

October 14, 2021, TSMC financial report review "TSMC: Leading the pack, still in the limelight"

Semiconductor/Wafer Manufacturing Industry

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June 24, 2022, Semiconductor industry overview "Cancellations, cancellations, cancellations, is the semiconductor industry really about to 'change'?"

September 3, 2021, Wafer manufacturing industry overview "Performance up vs. stock price down: Are SMIC and others 'deserved' or 'mistakenly killed'?"

July 16, 2021, SMIC stock in-depth analysis "SMIC (Part 2): The underestimated Chinese 'core'"

July 9, 2021, SMIC stock in-depth analysis "SMIC (Part 1): Discussing the 'core' strategy of the industry leader"

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