Photographer: Maurice Tsai/Bloomberg

TSMC Has Never Been So Dominant as Apple Orders Boost Profit

  • Company is outperforming global peers by most on record
  • TSMC accounts for 16% of Taiwan bourse’s market value

Taiwan Semiconductor Manufacturing Co. is on a roll.

The world’s largest contract chipmaker has surged 32 percent in 2016, climbing to its highest level versus MSCI Inc.’s global gauge of technology stocks on record. The $156 billion company now accounts for 16 percent of Taiwan’s entire equity market value, the biggest proportion according to data stretching back 13 years, and none of the 33 analysts who cover it recommend selling the shares.

While the company has benefited from a broader rally in technology companies this year that’s seen rivals including Intel Corp. reach multi-year highs, TSMC is luring investors with record profit as demand for Apple Inc.’s new iPhones fuels orders for its processor chips. With Samsung Electronics Co. faltering after the scrapping of its Note 7 device, Value Investment Principals Ltd. and Manulife Asset Management Co. say the stock has room to rise further.

“Samsung’s issues and the perceived benefit for Apple is surely creating some optimism,” said Sandy Mehta, chief executive officer of Value Investment. “TSMC is the best in class. Valuations are not very high for TSMC, and rising estimates have led to investor optimism. The shares could still have upside.”

TSMC trades at 13.9 times forward earnings, less than the MSCI global-technology gauge’s 16.3 times, while analysts project the company’s net income will increase 30 percent this quarter, according to data compiled by Bloomberg. Profit climbed 28 percent in the previous three months to NT$96.8 billion ($3.1 billion) from a year earlier. The stock dropped 0.3 percent on Tuesday.

The company’s high dividend yield and reasonable valuation provide good downside protections to the share price,” said Caroline Maurer, head of Greater China equities at BNP Paribas Investment Partners in Hong Kong, whose greater China fund returned 45 percent this year to beat 99 percent of its peers.

TSMC has been able to count on demand for Apple’s new iPhone 7 models to fuel sales of the A10 processor it makes, helping it weather a slowdown in the global smartphone market as it invests in more advanced production technology. The company will “soon” start mass production of chips using 10-nanometer processors, said Elizabeth Sun, a spokeswoman at TSMC. The smaller chip size allows handset makers more room for new hardware features.

Apple Reliance

Still, any doubt about the success of Apple’s products can shake investor faith in TSMC’s prospects. The Taiwan stock slid 2.6 percent last week after Apple failed to issue a robust holiday sales forecast in the wake of Samsung’s decision to stop manufacturing the Galaxy Note 7.

“A lot of demand is coming from one single device and any hiccup on iPhone sales this and next year could have a big impact on TSMC,” said Mark Li, a strategist at Sanford C. Bernstein & Co., who rates the stock market-perform. “Longer-term smartphone growth will deteriorate gradually, which is a headwind to the company.”

Analysts remain bullish, with their consensus target price implying a 9 percent return over the next 12 months. For Catherine Kung, any correction in share prices is a buying opportunity.

“Their technology is strong and it is a dominant player in advanced processes,” said Kung, a Taipei-based fund manager at Manulife Asset Management Co., whose Global Taiwan Equity Fund returned 18 percent this year, beating 94 percent of peers. “Analysts will keep revising up target prices over the next two to three years.”

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