Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) FY4Q24 Performance Meeting Summary: Mild growth expected in PCs and smartphones this year.

In recent days, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) held a performance meeting for FY4Q24. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR pointed out at the meeting that this year is expected to see moderate growth in PCs and smartphones. At the same time, it is important to note that much of the demand is being driven by AI, which is also the reason why the company expects a future 5-year CAGR of 20%. Smartphones are incorporating more AI functions, the semiconductor content is increasing, the replacement cycle is expected to shorten, and more advanced processes are needed in order to fit more functions into such a small area. Regarding the AI outlook for 2025/26, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR stated that the company expects a mid 40% 5-year CAGR, which can be used as a basis for forecasting. Of course, there may be individual years with higher or lower growth rates. Discussing 2026 at this point is a bit premature. In terms of progress on the Arizona Phase 2, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR revealed that one factory has already entered mass production, the second factory has completed its construction, is currently installing equipment, and the third factory is expected to start soon. In terms of pricing, the company's global layout provides incremental value to customers, so pricing will also be higher. Q&A: Q: Will the US factories produce more advanced processes? A: The company hopes to strengthen the technology of the US factories as well, but the technical challenges are quite significant. During the climbing phase, factories must be close to the research and development department, so Taiwan will be the manufacturing base for cutting-edge processes, regardless of whether Taiwan's relevant departments open up technology exports. Q: What changes are there in the company's manufacturing strategy in Taiwan and other locations outside of Taiwan? A: The company's overseas expansion is based on customer needs and also requires support from local governments. The company ensures open communication with both the current government and the next government, and cannot provide further details beyond that. Additionally, the trends of US IDM customers and the company's strategy are not directly related, but the related business of these IDM customers is important to the company. Q: Is it possible for the gross profit margin to exceed 60% in this current upcycle? What is the dilution situation of the gross profit margin for the US factories now? A: There are up to 6 factors affecting the gross profit margin. For example, if the utilization rate is good in this upcycle, there is a chance of exceeding 60%. The costs of the US factories are relatively high, including several factors: (1) the scale is still relatively small; (2) the supply chain costs are high; (3) the ecosystem is still in the early stages. In the next 5 years, overseas wafer factories will dilute the gross profit margin by 2%-3% each year. Q: Does this mean that the early gross profit margin of overseas factories will be around 10%? A: Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will not establish a factory based on this gross profit margin. Q: What are the prospects for PCs and smartphones this year? A: PCs and smartphones are expected to see moderate growth this year. It is important to note that much of the demand is being driven by AI, which is also the reason why the company expects a future 5-year CAGR of 20%. Smartphones are incorporating more AI functions, the semiconductor content is increasing, the replacement cycle is expected to shorten, and more advanced processes are needed in order to fit more functions into such a small area. Q: Can it be assumed that these AI terminals will use 2nm technology next year or in the second half of the year? A: Advanced processes will be used. Q: When can we expect to see revenue related to HBM in the financial statements? A: It may take another half year to see mass production, but this will contribute significantly to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's revenue. Q: How will the US restrictions on mainland Chinese AI chip companies this week affect the company? Will it also affect chip companies for mining? A: The company is applying for licenses for related customers, such as automotive customers, who are not in the AI data center industry chain. The company is confident in helping them obtain licenses, as well as for mining companies. Q: What are the prospects for CPO? A: First, the company will not comment on specific products of specific customers. The company is conducting research on silicon light and CPO, and is making good progress. However, in terms of mass production, it is unlikely to happen this year and will take 1 to 1.5 years to reach that stage. Nevertheless, the initial results are positive and customers are satisfied. Q: Progress on the Arizona Phase 2? Pricing policy in Arizona? A: (1) One factory has entered mass production, the second factory has completed its construction, is installing equipment, and the third factory is expected to start soon. (2) The company's global layout provides incremental value to customers, so pricing will be higher. Q: Broadcom Inc. mentioned ASIC's SAM, how does this compare with the company's expectations? A: The company will not comment on specific numbers, but whether it's ASIC or GPU, cooperation with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is necessary. For ASIC, customers have expressed significant demand. Q: Why hasn't the company adjusted its long-term gross profit margin? Where are the bottlenecks? A: Six factors affect the gross profit margin, each with different weights. There are two things to continue to monitor in the future: (1) dilution from the expansion of overseas factories; (2) macroeconomic uncertainties. Overall, the company is in a capital-intensive industry and needs a high gross profit margin to sustain investment. A gross profit margin of 53% or higher is an achievable goal. Q: When can we expect to see demand for non-AI applications of cowos? A: This year, AI still...It is the main demand, and even in short supply. Other terminals will depend on the customer's decision, but the company expects that this part of the demand is coming soon. Although specific events cannot be disclosed, it can be revealed that the demand is coming from server CPUs.Q: What methods are there to improve the operational efficiency of overseas factories? A: The company will continue to seek ways to bring the cost structure of US factories in line with that of Taiwan factories. Q: In a dilution of 2%-3%, are variable costs or fixed costs the determining factor? A: Specific data cannot be disclosed, but both are higher than those of Taiwan factories. Q: Market forecast for the whole year? A: Memory may grow this year, HBM may grow faster, but this is not within the company's business scope. Regarding Foundry 2.0, growth of 10% is expected. Q: Can Foundry 2.0 be considered as the market for all semiconductors other than memory? A: Yes. Q: Progress on SOIC and cowos? Can you comment on some of the current market noise? A: The company is working very hard to meet customer demands and there has been no reduction in orders. Again, it is emphasized that the company is diligently increasing production capacity. Q: What is currently the biggest constraint for AI chips, cowos or HBM? A: The company will not evaluate other aspects. Currently, the company's supply is very tight but this is not a bottleneck, and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will do its best to meet customer demands. Q: When will SOIC be implemented? What specific end-uses? A: SOIC will be used in AI applications for PCs and other terminals, but it is not yet being implemented. Q: Outlook for AI in 2025 and 2026? A: The company expects a CAGR of about 40% over the next 5 years to use as a basis for forecasting. Of course, there may be individual years with higher or lower growth rates. It's a bit early to discuss 2026. Q: Outlook for edge AI? A: The company sees customers adding more NPUs and moving their technology to the next process. In addition, replacement cycles are accelerating, and silicon content is increasing by more than 5%. Q: Revenue contributions and profit margins from advanced packaging last year? A: Overall, advanced packaging accounts for 8%, expected to be 10% this year. The gross margin has improved but is still lower than the company average. Q: Does the company consider IDM customers to be a long-term drive for performance growth? A: They are good customers, but the company also does not want to signal their dependence on the company. Both parties are partners and hope to establish a long-term cooperation relationship.