Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR(TSM.US): Is the "magic needle" now unbeatable?

Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) released its fourth quarter financial report for 2024 (as of December 2024) before the US stock market on the afternoon of January 16, 2025 Beijing time, with the following key points: 1. Revenue: Both volume and price increased, reaching new highs. In the fourth quarter of 2024, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR achieved revenue of 26.88 billion US dollars, setting another record high, close to the upper limit of the revenue guidance range (26.1-26.9 billion US dollars). Revenue increased by 14.4% quarter-on-quarter this quarter, with volume contributing +2.4% and average selling price contributing +11.7%. The company achieved a simultaneous increase in volume and price this quarter driven by the launch of new Apple Inc. phones and demand for computing chips. 2. Gross profit and gross margin: Average selling price increase is the main driving force for gross margin. In the fourth quarter of 2024, the gross margin of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR was 59%, reaching the upper limit of the guidance range (57-59%). The increase in the proportion of 3nm and 5nm chips drove the average selling price of the company's products to continue to rise. The increase in average selling price covered the increase in costs, thereby driving the company's gross margin to continue to improve. 3. Wafer manufacturing: 60% of the proportion is 5nm and below. Smartphones and high-performance computing are the main sources of revenue growth for the company this quarter. With the launch of the new Apple Inc. iPhone 16 series this quarter using 3nm chips, the revenue proportion of 3nm chips this quarter increased to 26%. In addition to the demand for computing chips from NVIDIA Corporation Blackwell and other products, the revenue proportion of the company's 7nm and below chips has increased to 74%. With the support of American customers such as Apple Inc. and NVIDIA Corporation, the revenue proportion of the North American region in this quarter further increased to 75%. 4. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR performance guidance: For the first quarter of 2025, expected revenue is 25-25.8 billion US dollars (market expectation is 24.5 billion US dollars) and gross margin is 57-59% (market expectation is 56.8%). Revenue is expected to decrease by 4%-7% quarter-on-quarter, mainly due to seasonal decline in demand for Apple Inc. phones in the first quarter. The gross margin is expected to remain stable, supported mainly by strong demand for 3nm and 5nm chips. Overall view of Dolphin: Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's performance this quarter is generally good. The company's revenue and gross margin for this quarter have both reached the upper limit of the company's previous guidance, mainly benefited from the shipment of new Apple Inc. phones this quarter and the continuous demand for computing chips, driving the company's chips to achieve a simultaneous increase in volume and price this quarter. Looking at specific products, the proportion of processes below 7nm in the company's revenue this quarter has further increased to 74%, especially the demand for 3nm and 5nm chips. With Intel Corporation becoming a customer instead of a competitor and Samsung's lack of catching up, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR currently enjoys a dominant position in the market for 5nm and below chips. For the next quarter, the company has provided revenue guidance of 25-25.8 billion US dollars and gross margin guidance of 57-59%, which seems significantly better than market expectations. However, compared to our core sell-side and market buy-side expectations (a decline of 1-4% quarter-on-quarter), the actual revenue guidance indicates a decline of about 4-7%, which is not particularly good. One possible reason for the decline is the seasonal decline in demand for Apple Inc. products in the first quarter, which is traditionally a slow season for the company. In addition, production of Blackwell chips has not yet entered full-scale production. However, from the guidance provided, the decline in revenue is not significant, and the gross margin is expected to remain stable, indicating the company's confidence in the demand for computing chips. Dolphin believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's stock price may see a higher increase in after-hours trading in the US stock market, mainly due to the confidence conveyed in the conference call: 1) Key point: Expectations for 2025: Achieving 30% year-on-year growth in 2024, the company expects full-year revenue growth to reach around 25% in 2025 (better than the market's expectation of 20%+), providing a sense of stability to the market. In addition, the company's progress in 2nm is smooth, and it is expected to start mass production in the second half of 2025. 2) Increased capital expenditure: The company's capital expenditure for 2025 will further increase to 38-42 billion US dollars (better than the market's expectation of 38-40 billion US dollars). The company's total capital expenditure in 2024 was only 29.7 billion US dollars, and the significant increase in capital expenditure for 2025 indicates the company's positive expectations for advanced technology, as the company will further increase investment. 3) Addressing market rumors: There have been rumors in the market about customers of the company CoWoS cutting orders and slowing expansion. The company responded positively, stating that overall demand for CoWoS is still high, and customers transitioning from CoWoS-S to CoWoS-L does not mean cutting orders. From the company's growth expectations for 2025 and capital expenditure, in addition to dispelling market rumors, it reflects the company's confidence in the demand for AI computing and the mass production of 2nm technology.Confidence, this also has the potential to further widen the gap between the company and its competitors.Overall, as the guiding beacon of the semiconductor industry, although there were slight flaws in the first quarter guidance, the stable performance in the fourth quarter and the optimistic planning and guidance for the whole year are convincing enough for funds not to amplify short-term quarterly fluctuations, but to look at the optimistic judgments revealed in the annual plan. The underlying logic is that Intel Corporation and Samsung are losing momentum, while the company is in an absolute leading position in the current 5nm and below foundry market, winning high-quality customers and industry chain discourse power. In the AI race, no matter how GPUs and ASICs compete, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is an unavoidable "gold shovel". As long as the demand for computing chips continues, the performance growth of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is the most certain. Detailed analysis is as follows: 1. Revenue: Both volume and price are on the rise, reaching new highs repeatedly. In the fourth quarter of 2024, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR achieved revenue of $26.88 billion, a new high and close to the upper limit of the revenue guidance range ($26.1-26.9 billion). Revenue in this quarter increased by 14.4% compared to the previous quarter, mainly benefiting from the shipment of new Apple Inc. devices in North America and the demand for computing chips from downstream customers like NVIDIA Corporation. Dolphin Jun observes the main driving forces behind the revenue growth in the fourth quarter of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR from the volume and price perspectives: 1) Volume: In Q4 2024, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's wafer shipments were 3,418 thousand pieces, an increase of 2.4% compared to the previous quarter. The continued growth in shipments was mainly driven by Apple Inc.'s new device shipments and the demand for high-performance computing. With the growth in shipments, the company's capital expenditures also increased towards the end of the year. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's capital expenditure in this quarter was $11.23 billion, relatively high for a single quarter, but the total capital expenditure of $29.76 billion in 2024 was slightly lower than the company's previous expectation of "slightly over $30 billion." 2) Price: In Q4 2024, the average revenue per wafer for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR was $7,864 per piece, a 11.7% increase from the previous quarter. The increase in the average wafer price was mainly due to the higher proportion of 3nm and 5nm processes in this quarter. The revenue share of processes below 7nm has increased to 74%. Considering the guidance provided by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR for the next quarter, it is expected to achieve revenue of $25-25.8 billion in Q1 2025, a decrease of 4%-7% compared to the previous quarter. Due to the seasonal decline in Apple Inc. smartphone demand in the first quarter, the company's revenue is expected to decrease slightly but remains stable due to the demand for computing chips. 2. Gross profit and gross margin: Price increase is the main driver In the fourth quarter of 2024, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR achieved a gross profit of $15.86 billion, an increase of 16.7% compared to the previous quarter. The significant increase in gross profit was mainly driven by the growth in revenue and gross margin. The gross margin of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR in Q4 2024 was 59%, an increase of 1.2 percentage points compared to the previous quarter, slightly better than the market expectation (58.5%), mainly benefiting from the increase in overall product prices driven by the growth in shipments of 3nm and 5nm chips. The market is most concerned about the revenue and gross margin of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. Due to the publication of monthly operating data, the quarterly revenue is already largely anticipated by the market. However, the gross margin is one of the focuses in this quarter's report. Dolphin Jun will analyze the main drivers of the increase in gross margin in this quarter: "Gross profit = Revenue per wafer - Fixed costs - Variable costs" 1) Revenue per wafer (equivalent to 12-inch): In Q4 2024, Taiwnductor Manufacturing Co., Ltd. Sponsored ADR single crystal wafer revenue is approximately $7,864 per wafer, an increase of $824 per wafer compared to the previous period. With the shipment of Apple Inc.'s smartphones and computing chips, the combined market share of 3nm and 5nm in this quarter reached a record high of 60%, further driving up the average selling price of the company's products.2) Fixed costs (depreciation and amortization): In 2024 Q4, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's average fixed cost was approximately $1543 per chip, a decrease of $16 per chip compared to the previous quarter. Although the total depreciation and amortization continued to increase due to capital expenditure, the rapid increase in product shipments resulted in a decrease in unit fixed costs. 3) Variable costs (other manufacturing expenses): In 2024 Q4, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's average variable cost was approximately $1682 per chip, an increase of $272 per chip compared to the previous quarter. With the increasing proportion of 3nm and 5nm products, unit variable costs showed a trend of increase. Combining the above breakdown, in 2024 Q4, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's gross profit per chip was $4640, an increase of $568 compared to the previous quarter. Although the unit cost of the company's products increased, the increase in selling price completely covered the cost side, ultimately resulting in a continued increase in the company's unit gross margin. In this quarter, the unit price of the company's products increased by $824, while the unit cost increased by $256. The revenue performance of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR was already anticipated by the market, with gross margin being the main focus. With the growth in demand for 3nm and 5nm products driving the increase in average product prices, the company's gross margin also showed a significant improvement. Looking at the guidance for the next quarter of 57-59%, although there will be a seasonal decline in demand from Apple Inc., the demand for computing chips from companies like NVIDIA Corporation will help maintain the company's gross margin. Dolphin expects that the proportion of products below 7nm in the next quarter will continue to be maintained at over 70%. 3) Wafer end structure: 60% share of 5nm and below 3.1 Wafer revenue share (by application type) Smartphones and HPC are the largest sources of revenue for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, accounting for a combined 88% of the company's downstream revenue. Looking at downstream applications, with the increase in shipments of new Apple Inc. phones this quarter, the smartphone business accounted for 35%. The company's high-performance computing segment remains the largest this quarter, accounting for 53%. The revenue this quarter also came mainly from the growth in these two segments, with the smartphone business growing by 17.7% and high-performance computing by 18.9% compared to the previous quarter. Dolphin believes that the guidance given by the company for a decline in revenue for the next quarter is mainly due to the impact on the smartphone business, with seasonal fluctuations in demand from Apple Inc. The demand for high-performance computing remains robust, mainly driven by the demand for NVIDIA Corporation Blackwell products and certain chip products from Intel Corporation. 3.2 Wafer revenue share (by process nodes) This quarter, revenue from processes below 7nm continued to increase to 74%, with revenue from advanced processes being the core source for the company. Specifically, this quarter, the revenue share from 3nm increased to 26%, while the revenue share from 5nm rose to 34%. With the iPhone 16 series using 3nm chips in this quarter, the share of 3nm further increased. Additionally, driven by demand for computing chips, the proportion of 5nm and below reached a record high this quarter, totaling 60%. Looking at the revenue guidance for the next quarter, the decline in revenue for the first quarter is mainly due to seasonal fluctuations in demand from Apple Inc. However, the demand for NVIDIA Corporation Blackwell products, flagship products from Qualcomm and MediaTek (for N3E), and certain chip products from Intel Corporation will help fill the company's production capacity for advanced processes. Although revenue will decrease, the utilization rate for advanced processes will remain relatively high. 3.3 Wafer revenue share (by region) In terms of revenue from different regions, North America remains the largest source of revenue for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, with a revenue share increasing to 75%. This is due to the presence of major clients such as Apple Inc., NVIDIA Corporation, AMD, and Qualcomm in North America, creating a strong commercial relationship between Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and the United States. Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 9% and 9% respectively this quarter. With the increase in shipments of new Apple Inc. phones and the demand for computing chips from NVIDIA Corporation, the revenue share from North America once again increased. Considering the situation of various companies and the industry chain, Dolphin believes that the current semiconductor market demand continues to show structural characteristics. Traditional processes are affected by cycles and show no clear signs of recovery. In addition to the cyclical impact of the launch of new Apple Inc. phones, the demand for semiconductors is mainly in the area of computing chips requiring high-end process chips. As for the debate between GPU and ASIC, both camps are significant in Taiwan Semiconductor Manufacturing.Co., Ltd. Sponsored ADR is the core customer of AI computing power chips. Therefore, the manufacturing process of AI computing power chips is difficult to bypass Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, and the company remains the most certain in the computing power industry chain. According to the company's expectations, the revenue growth of the company is expected to reach around 25% by 2025, with the majority of the growth coming from the demand increase in the computing power field.This article is reprinted from the "Dolphin Investment Research" official account, edited by GMTEight: Jiang Yuanhua.