Market Overreacted! JP Morgan: Intel Corporation's outsourcing competition is actually a positive for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR.

Recently, rumors about the revival of Intel Corporation's contract manufacturing plants have had a negative impact on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), with investors concerned about increased competition in the contract manufacturing sector. However, JPMorgan believes that Intel Corporation's contract manufacturing "competition illusion" is actually more favorable for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. The bank has a "neutral" rating on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, with a target price of 1,275 New Taiwan dollars. In the past two weeks, Intel Corporation has made significant progress. Reports indicate that the U.S. government intends to invest in the company, SoftBank has also invested $2 billion, and there are rumors that key customers may participate in the rescue operation of Intel Corporation's chip factory. U.S. Secretary of Commerce Howard Lutnick also stated that the U.S. cannot rely solely on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR to meet all its advanced chip supply needs, and hopes to bring more production capacity back to the U.S. in the future. While the market initially viewed these events as negative for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, JPMorgan has a different perspective. JPMorgan believes that the illusion of "choice" is more favorable for increasing the price-to-earnings ratio multiple of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR than absolute dominance. In the second half of 2020, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's price-to-earnings ratio reached 25 to 30 times, when people expected Intel Corporation to outsource a large portion of its business to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. Apart from the initial excitement, the idea that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR might become the dominant player in the contract manufacturing field did not significantly increase the company's price-to-earnings ratio. JPMorgan believes that a potential monopoly position will only increase regulatory pressure and highlight political risks, usually leading to a downward adjustment in the price-to-earnings ratio. Having a weaker competitor in the leading contract manufacturing field, creating the illusion of choice for customers, may be a more ideal situation for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, as it could alleviate the ongoing regulatory pressure and pressure to bring business back to the U.S. JPMorgan also states that customer participation in Intel Corporation's contract manufacturing revival plan should not be seen as entirely negative. The market may view the participation of major Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR customers such as Apple Inc. or NVIDIA Corporation in Intel Corporation's potential contract manufacturing rescue plan as a significant negative event, as it could cause substantial damage to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's market share. However, JPMorgan believes that no matter how many customers support it, resolving conflicts of interest between products and contract manufacturing is unlikely. Therefore, JPMorgan believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will continue to maintain more than 90% of the market share in cutting-edge nodes in the foreseeable future. In the current international political environment, the costs of a 100% market share may outweigh the benefits Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR could gain. JPMorgan emphasizes that Intel Corporation's contract manufacturing business faces more than just financial issues, with fundamental challenges in other areas. JPMorgan believes that contract manufacturing requires a very different corporate culture, service mentality, focus on cost efficiency, and customer-centric innovation, which are difficult to achieve in the short term for Intel Corporation, which has long focused on products. Furthermore, there are reports that the U.S. government may convert part of the funding from the semiconductor act into equity participation in companies, which means that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR may need to sell a small portion of its equity to the U.S. government. Given the scale of the current funding under the semiconductor act, JPMorgan believes that this selling proportion may be very small (not exceeding 1% of the equity) and is unlikely to significantly change the strategic direction of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. JPMorgan also believes that despite pressure from the U.S. government, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is unlikely to participate in the operation of Intel Corporation's factories or share intellectual property or technology with Intel Corporation's contract manufacturing. Overall, JPMorgan believes that political factors related to the semiconductor act will cause short-term fluctuations, but the fundamentals of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR remain strong, with potential for upside.