Taiwan Semiconductor Manufacturing

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

18 April 2017 Asia Pacific/Taiwan

Equity Research Semiconductor Devices

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT)

Rating OUTPERFORM Price (14-Apr-17, NT$) 189.00 Target price (NT$) 205.00 Upside/downside (%) 8.5 Mkt cap (NT$/US$ mn) 4,900,842 / 161,350 Enterprise value (NT$ mn) 4,501,732 Number of shares (mn) 25,930 Free float (%) 87.3 52-wk price range (NT$) 195-144 ADTO-6M (US$ mn) 177.3 Target price is for 12 months.

Research Analysts

Randy Abrams, CFA

886 2 2715 6366

[email protected]

Haas Liu

886 2 2715 6365

[email protected]

THEME

2016 annual 20-F report shows TSMC

managing its consolidating customers well

■ Longer-term trends intact. TSMC’s 20-F annual filing provides more details

beyond the normal quarterly reports, with insights into TSMC’s customer

concentration, market share, increasingly more advanced work force, and

operational control of materials and inventory costs. The longer-term

competitive position and profitability remains intact, with ROE at 25% above

its long-term average on strong margins and now rising cash returns.

■ Managing rising customer concentration well. TSMC’s top ten customers

increased ten points in the past few years to approach 70% of sales, though the

top two customers declined from 32% of sales in 2015 to 27% as TSMC offset

the lower Qualcomm business with other customers. Apple became the largest

customer contributing 17% of TSMC's sales in 2016, offsetting the decline in

Qualcomm now at 11% (vs 16% in 2015). We expect Apple to rise toward 20%

with TSMC’s gains on a10 in 2017, while Qualcomm could drop to ~8% of sales

this year before stabilising with a bit of 7nm at TSMC in 2018.

■ Good barriers and operational controls. The skill set of advanced foundry

manufacturing continues to increase. TSMC has maintained double-digit

growth in PhD and Masters, and staff with advanced degrees has grown

from 40% to 70% of the headcount in the past 15 years. Execution remains

solid, with TSMC increasing revenue per head at a steady 4% CAGR and

holding material costs stable despite +13% sales growth in 2016.

■ Stay positive looking past the slowdown. While guidance is well below

seasonal for 2Q17, recovery into 2H17 and still intact technology position and

margins should limit downside. We maintain our 2017/18 estimates and NT$205

TP at 14x 2018E. We maintain OUTPERFORM with catalyst from the 2H ramp

of iPhone 8 and good share position on 10/7nm in 2H17 into 2018 and long-term

growth potential from IoT, high performance computing and automotive.

Share price performance

The price relative chart measures performance against the

TAIWAN SE WEIGHTED INDEX which closed at 9,732.93

on 14/04/17. On 14/04/17 the spot exchange rate was

NT$30.37/US$1

Performance 1M 3M 12M Absolute (%) 1.3 4.1 17.0 Relative (%) 1.4 0.4 4.7

Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 843,497.4 947,938.3 981,763.1 1,082,084.0 EBITDA (NT$ mn) 544,097.9 600,889.9 653,677.8 716,758.5 EBIT (NT$ mn) 322,345.6 377,928.7 393,670.0 436,075.4 Net profit (NT$ mn) 287,469.2 334,245.1 347,452.4 381,160.8 EPS (CS adj.) (NT$) 11.09 12.89 13.40 14.70 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (NT$) n.a. n.a. 13.63 14.98 EPS growth (%) 9.0 16.3 4.0 9.7 P/E (x) 17.0 14.7 14.1 12.9 Dividend yield (%) 2.4 3.2 3.7 4.2 EV/EBITDA (x) 8.4 7.5 6.8 6.1 P/B (x) 4.01 3.53 3.20 2.87 ROE (%) 25.4 25.6 23.8 23.5 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

18 April 2017

Taiwan Semiconductor Manufacturing (2330.TW / 2330 TT) 2

Focus charts

Figure 1: TSMC’s top customers changing over the

years

Figure 2: TSMC’s share back 2002 high levels

Source: Company data Source: Company data

Figure 3: TSMC’s WIP inventory has increased Figure 4: Revenue and spending higher per head

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: TSMC trading near its high-end P/B Figure 6: Top customers have accelerated growth

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 7: TSMC top 3 customers are now 37% of sales and have doubled the company’s growth since 2010

Source: Company data, Credit Suisse estimates, TSMC 20F filing

2000 2005 2010 2015 2016

Altera Altera AMD AMD AMD

Via ATI Altera Broadcom Broadcom

NVIDIA Broadcom Broadcom Huawei Huawei

Qualcomm Marvell Marvell Marvell Intel

Motorola NVIDIA Mediatek Mediatek Marvell

Philips Qualcomm NVIDIA NVIDIA Mediatek

Alcatel Via Qualcomm Omnivision NVIDIA

ADI LSI Qualcomm Omnivision

Freescale STM Sony Qualcomm

Philips TI Spreadtrum Sony

TI Spreadtrum

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YoY +/- (%)Sales NT$mn

Top 3 mobile customers sales Rest of TSMC salesTop 3 YoY Growth Rest of TSMC YoY GrowthTSMC YoY

TSMC top 3 customers 2010 2011 2012 2013 2014 2015E 2016E CAGR '10-16

TSMC sales 419,538 427,081 506,745 597,024 762,806 843,497 947,938 14.6%

YoY Growth 41.9% 1.8% 18.7% 17.8% 27.8% 10.6% 12.4%

Qualcomm 37,962 60,412 87,099 130,564 157,631 134,158 107,463 18.9%

Mediatek 14,119 12,611 23,749 31,734 51,966 56,334 84,767 34.8%

Apple 0 0 0 5,632 71,185 134,117 157,185 NA

Top 3 mobile customers sales 52,081 73,023 110,848 167,930 280,782 324,610 349,416 37.3%

YoY Growth 14.0% 40.2% 51.8% 51.5% 67.2% 15.6% 7.6%

Rest of TSMC sales 367,457 354,058 395,897 429,094 482,024 518,887 598,523 8.5%

YoY Growth 46.9% -3.6% 11.8% 8.4% 12.3% 7.6% 15.3%

% of TSMC's revenue from top 3 12.4% 17.1% 21.9% 28.1% 36.8% 38.5% 36.9%

% of TSMC's growth from top 3 5.2% 277.6% 47.5% 63.2% 68.1% 54.3% 23.8% 28.9%

18 April 2017


2016 annual 20-F report shows TSMC managing its consolidating customers well TSMC recently released its 20-F annual filing for 2016. The 175-page document provides

incremental disclosures beyond the normal quarterly releases on top customers, market

share, headcount efficiencies, product splits, inventory mix and supplier purchases. The

company has lowered disclosures in this document on some metrics over the years

including price trends and changes in structural profitability drivers but still has useful

insights on long-term trends for the business. We believe the filing demonstrates a

continued track record of solid and sound financials and good disclosure into its

operations. The following are key takeaways:

Top customer concentration increases

TSMC disclosed its top customers’ details showing the semiconductor industry

consolidation is also concentrating its customer base. The company’s sales from its top

ten customers has increased by 600 points from 2015 to reach 69% of sales.

Figure 8: Apple ramped further, Qualcomm has dropped by half as a % of TSMC

Source: Company data, Credit Suisse estimates.

The concentration of the two largest customers declined from 32% in 2015 to 28% in

2016, though it is still above its traditional 19-25% from its two largest customers. We

believe Apple became the largest TSMC customer in 2016, contributing 17% of sales

(vs 16% in 2015 though below our 20% estimate), while Qualcomm dropped from 16%

to 11%, in line with our estimate. While Apple’s contribution was less than expected, we

expect it to reach 20% in 2017 on the back of TSMC's full share at a10/a11 in 2017 and

iPhone 8 product cycle. We also believe the Qualcomm business will stabilise in 2018

on 7nm.

Figure 9: TSMC gaining share into Apple to offset losses at Qualcomm


TSMC increasing reliance on its top mobile

customers, HPC/IoT/Automotive to start ramping

TSMC’s sales growth has also been led by the market shift to mobility and also

consolidation of the baseband/application processor landscape. TSMC’s top 3 mobile

TSMC top customers 2009 2010 2011 2012 2013 2014 2015 2016 % of 2016

Qualcomm 11.2% 9.0% 14.1% 17.2% 21.9% 20.7% 15.9% 11.3% 11.3%

Apple 0.9% 9.3% 15.9% 16.6% 16.6%

NVIDIA 10.8% 9.8% 7.4% 8.6%

Top 10 Customers 53% 54% 56% 60% 62% 63% 63% 69% 69.0%

TSMC Market Share 2014 2015 2016 2017 2018 2017 Chg

TSMC Apple Share 46% 67% 69% 89% 98% 20%

TSMC Qualcomm Share 65% 65% 52% 43% 42% -9%

TSMC Fabless Share (Ex-QCOM) 47% 50% 56% 51% 54% -4%

TSMC IDM Outsourcing Share 51% 57% 56% 57% 56% 2%

TSMC Share 51% 55% 57% 57% 59% 0%

TSMC Apple Sales $2,482 $4,342 $5,001 $6,916 $8,213 $1,915

YoY 74.9% 15.2% 38.3% 18.8% 38.3%

TSMC Qualcomm Sales $5,185 $4,280 $3,385 $2,925 $3,031 -$460

YoY -17.4% -20.9% -13.6% 3.6% -13.6%

TSMC Fabless Sales (Ex-QCOM) $13,759 $13,195 $15,838 $16,281 $17,902 $442

YoY -4.1% 20.0% 2.8% 10.0% 2.8%

TSMC IDM Sales $3,748 $4,789 $5,196 $5,623 $5,759 $428

YoY 27.8% 8.5% 8.2% 2.4% 8.2%

TSMC Sales (US$mn) $25,173 $26,606 $29,420 $31,745 $34,906 $2,325

TSMC YoY (%) 5.7% 10.6% 7.9% 10.0% 7.9%

Apple became the largest TSMC customer

at 17% of sales, followed by Qualcomm's 11%

TSMC’s top ten have increased by ten points

to 69% of sales over the past five years

18 April 2017


customers (Qualcomm, Apple, and Mediatek) have grown at a 37% CAGR from 2010-

2016 and doubled TSMC’s growth rate from 7.4% for the rest of TSMC to 15% including

these high growth customers.

Figure 10: TSMC top 3 customers are now 37% of sales and have doubled the company’s growth since 2010 NT$ mn, unless otherwise stated


With mobile now more mature and new product cycles (automotive, data center, IoT, VR)

growing but still modest, the company has toned down its growth to about 5-10% growth,

realistic and more in line with the broader customer base that did not see the high growth

transition from feature phone to smartphone/tablets the past few years.

TSMC has notably adapted well to changes in customers’ business activity, with its top

customers shifting meaningfully since the tech bubble in 2000. The customers disclosed

as top customers for TSMC at the time of its 2000 annual report were a base of

networking due to the strength of the telecom bubble which drove customers like Altera,

Motorola, Philips, Alcatel) and also the PC-related WinTel cycle which lifted NVIDIA and

Via into the top bucket. TSMC also relied more on IDM customers at that time as the

fabless model was not yet mature, with IDMs at that time representing about 35% of sales.

Figure 11: TSMC’s top customers in the annual filing changing over the years


The top customer base has changed significantly from 2000 to 2016, with only three of the

7 original lead customers still in the disclosed 11 customer names, with the shift apparent

in the move of TSMC’s customer mix toward mobility (Qualcomm, Huawei, Mediatek,

Omnivision, Intel’s Mobile Division and Sony CIS now are top customers) and also the rise

of China (Huawei and Spreadtrum). Fabless also dominates now, with IDMs now down to

15-20% of sales.

TSMC top 3 customers 2010 2011 2012 2013 2014 2015E 2016E CAGR '10-16

TSMC sales 419,538 427,081 506,745 597,024 762,806 843,497 947,938 14.6%

YoY Growth 41.9% 1.8% 18.7% 17.8% 27.8% 10.6% 12.4%

Qualcomm 37,962 60,412 87,099 130,564 157,631 134,158 107,463 18.9%

Mediatek 14,119 12,611 23,749 31,734 51,966 56,334 84,767 34.8%

Apple 0 0 0 5,632 71,185 134,117 157,185 NA

Top 3 mobile customers sales 52,081 73,023 110,848 167,930 280,782 324,610 349,416 37.3%

YoY Growth 14.0% 40.2% 51.8% 51.5% 67.2% 15.6% 7.6%

Rest of TSMC sales 367,457 354,058 395,897 429,094 482,024 518,887 598,523 8.5%

YoY Growth 46.9% -3.6% 11.8% 8.4% 12.3% 7.6% 15.3%

% of TSMC's revenue from top 3 12.4% 17.1% 21.9% 28.1% 36.8% 38.5% 36.9%

% of TSMC's growth from top 3 5.2% 277.6% 47.5% 63.2% 68.1% 54.3% 23.8% 28.9%

2000 2005 2010 2015 2016

Altera Altera AMD AMD AMD

Via ATI Altera Broadcom Broadcom

NVIDIA Broadcom Broadcom Huawei Huawei

Qualcomm Marvell Marvell Marvell Intel

Motorola NVIDIA Mediatek Mediatek Marvell

Philips Qualcomm NVIDIA NVIDIA Mediatek

Alcatel Via Qualcomm Omnivision NVIDIA

ADI LSI Qualcomm Omnivision

Freescale STM Sony Qualcomm

Philips TI Spreadtrum Sony

TI Spreadtrum

TI

TSMC’s gains into its top mobile customers have

allowed it to close to double its growth from 9% to 15% since 2010

TSMC’s top customers shifting toward mobile and China since 2000

18 April 2017


TSMC’s market share back to 16-year highs

TSMC estimates its market share in each of its annual reports, using IC Insights from 2000-

2007 and switching to its own estimates from 2008 to present. The company’s estimated

foundry share has stayed in the 45-55% range through the past 15 years, though it is on a

rising trend with its leadership in mobile computing, rising back to 15 year highs in 2016 at

56% share. That level of share was last seen in 2002 when TSMC gained market share

during the tech bubble hangover as competitors pared back deeper on investments.

Figure 12: TSMC’s share back 2002 high levels

Source: IC Insights 2000-2007, TSMC 2008-2015

Revenue still concentrated on the core business

TSMC core foundry business outpaces masks/other. TSMC’s core business has

increased from 90% in the prior decade to 96% of sales. The company has grown its wafer

fabrication at a 13% growth pace in 2016 and 12% CAGR the past decade, far eclipsing

the mask shop and other services declining 4% in 2016 and up 2% CAGR in the past

decade. TSMC tried to enter solar and LED but had limited traction although its back-end

InFO packaging could lift the other category in 2017-18.

Figure 13: TSMC non-wafer business has remained constant since 2006 NT$ mn, unless otherwise stated


TSMC’s inventory sees a sharp cycle time reduction

and drawdown ahead of the 1H17 lull

Work in process inventory declines in 2016. TSMC has a policy of not carrying

significant finished goods for its customers, holding that level around one week and also

exiting 4Q16 at seven days finished goods vs an eight-day average in the past decade.

The majority of the company’s inventory is in work in process running through the fabs and

raw materials/spare parts. The company’s work in process dropped sharply in 2016

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TSMC share

TSMC's foundry share

2010 2011 2012 2013 2014 2015 2016 YoY % 10-YR CAGR

Wafer fabrication 375,061 384,633 462,971 560,685 723,748 802,938 909,179 13.2% 95.9% 12.2%

Mask and Other 44,657 42,448 43,278 36,339 39,059 40,559 38,759 -4.4% 4.1% 2.3%

Total 419,718 427,081 506,249 597,024 762,807 843,497 947,938 12.4% 100.0% 11.6%

Wafer % of sales 89.4% 90.1% 91.5% 93.9% 94.9% 95.2% 95.9%

TSMC estimates its foundry share back to 56%, the highest level

since 2002

Core wafer fabrication business continues to

dominate the sales outlook

WIP days stabilised at 27 days, below 32 day 10-

year average

18 April 2017


following the significant increase from 2013, dropping back down to 27 days and below the

32 days average the past decade.

We also believe, by the end of 2016, the company’s customers were paring back output as

TSMC is now going through two below seasonal quarters, with 1Q17 USD sales down high-

single digits and 2Q17 USD sales down a further mid-high single digits. TSMC’s lower

WIP/FG is also a function of the decelerating sales base into 1H17, though we believe WIP

inventory will be rising sharply in 2Q17 ahead of the peak season iPhone build.

Figure 14: Low finished goods points to limited amount of wafer bank TSMC carries for customers NT$ mn, unless otherwise stated


Materials costs remain under control, a good evidence of efficient cost management.

TSMC no longer discloses structural profitability drivers (GMs assuming a standard 85%

utilisation), although it has noted YoY improvement in the past few years. The company

has maintained efficient operations, keeping its raw materials at 10.6% of sales in 2016

and also concentrating wafer purchases at its top 4 suppliers at 95% of purchases, up

significantly from 82% in 2005. We expect the company to see some negative impact from

raw wafer price but raw wafer price/sales should sustain at reasonable 11-13% levels on

the back of its strong bargaining power.

Figure 15: Raw material costs as % of sales stable in 2016 NT$ mn, unless otherwise stated


Foundry resource intensity keeps barriers high

Professional ranks continue to grow. TSMC’s revenue generation power per head has

grown at a 4% CAGR since 2006, though it is lagging the 5% operating expense per head

increase since 2006 as it has also raised salaries since 2008 to offset employee bonus

expensing moving on the P&L. TSMC is shifting to add more professional R&D and

managerial functions as wafer manufacturing expands to include more design for

manufacturing, IP development and technical support to handle growing yield challenges

and less basic labor now that 12” fabs are increasingly automated. The professional ranks

have grown at a 9% CAGR versus only 6% CAGR for technicians. In 2016, the company

matched its long-term trend, growing its managerial and technical headcount by 5%

versus only 2% growth for assistants and technicians.

2011 2012 2013 2014 2015 2016 . .

(NT$mn) $'s Days $'s Days $'s Days $'s Days $'s Days $'s Days 10 Yr Avg Vs. Avg

Finished goods 3,348 6 6,245 8 7,245 8 9,972 8 7,975 6 8,522 7 8 -2

Work in process 17,941 30 25,713 33 26,034 31 51,028 41 53,632 44 33,331 27 32 -5

Raw materials 1,947 3 3,864 5 2,435 3 3,223 3 3,039 2 4,012 3 3 0

Supplies and spares 1,743 3 2,008 3 1,781 2 2,116 2 2,407 2 2,817 2 2 0

Total 24,979 41 37,831 48 37,495 44 66,338 54 67,052 55 48,682 40 46 -6

Raw Materials (NT$mn) 2010 2011 2012 2013 2014 2015 2016 YoY

Sales 419,538 427,081 506,745 597,024 762,806 843,497 947,938 12.4%

Raw Materials 54,540 53,812 68,917 74,628 100,690 88,567 100,481 13.5%

Raw Materials % of Sales 13.0% 12.6% 13.6% 12.5% 13.2% 10.5% 10.6%

Wafers 23,398 23,085 29,566 32,015 43,196 37,995 43,107 13.5%

% of Wafers: Shin Etsu, SUMCO, Siltronic, MEMC 96.8% 96.0% 94.2% 93.3% 94.3% 95.5% 94.7% -0.8%

Wafers from Shin Etsu, SUMCO, Siltronic, MEMC 22,649 22,162 27,851 29,870 40,734 36,286 40,822 12.5%

Professional labor force increasing

18 April 2017


Figure 16: TSMC operations becoming more resource intensive NT$ mn, unless otherwise stated


Figure 17: TSMC gaining higher revenue per head, but also spending more on

opex

Source: IC Insights 2000-2007, TSMC 2008-2015

Higher education requirements. TSMC’s hiring has stayed slanted toward recruiting

workers with advanced education, with 6% growth in staff with PhDs and 7% with Masters

degrees but Junior College and Below staff declined by 2% YoY in 2016. With the greater

challenges running operations, TSMC’s work force increasingly has advanced degrees.

TSMC has grown Ph.Ds, masters, and university staff at an 11-14% CAGR since 2006

versus 2% growth for Junior College below. As a percentage of mix, TSMC now has 70%

of staff having university or higher degree, up from 40% in 2001.

Figure 18: TSMC workforce mix shifting toward staff with advanced degrees NT$ mn, unless otherwise stated


HCT - Function 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YoY 10 Yr CAGR

Mgr/Professional 10,535 11,334 11,448 12,653 15,871 17,266 19,709 21,283 22,937 24,314 25,628 5% 9%

Asst./Technicians 11,711 11,686 11,395 11,813 17,361 18,191 19,558 19,200 20,654 20,958 21,340 2% 6%

Total 22,246 23,020 22,843 24,466 33,232 35,457 39,267 40,483 43,591 45,272 46,968 4% 8%

Rev per HCT (US$) $437,288 $426,909 $464,402 $367,756 $400,895 $410,160 $436,851 $496,766 $577,475 $587,690 $626,683 7% 4%

Opex per HCT (US$) $39,327 $40,527 $52,014 $46,466 $45,751 $50,502 $54,276 $59,524 $61,938 $61,323 $64,063 4% 5%

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Bonus expensing on P&L

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10 Yr CAGR 2016 YoY

Ph. Ds 578 668 708 856 1,097 1,241 1,414 1,619 1,744 1,992 2,114 14% 6%

Masters 6,207 6,837 6,990 8,025 10,535 11,701 13,508 15,141 16,303 17,747 18,928 12% 7%

University 4,360 4,581 4,614 5,064 8,607 9,183 10,170 10,445 11,246 11,861 12,540 11% 6%

Jr. College 4,583 4,351 4,157 4,037 4,752 4,893 5,026 4,817 5,187 5,523 5,448 2% -1%

Other 6,518 6,584 6,373 6,483 8,242 8,439 9,149 8,461 9,111 8,149 7,938 2% -3%

Total 22,246 23,020 22,843 24,466 33,232 35,457 39,267 40,483 43,591 45,272 46,968 8% 4%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10 Yr. Chg

Ph. Ds 2.6% 2.9% 3.1% 3.5% 3.3% 3.5% 3.6% 4.0% 4.0% 4.4% 4.5% 6%

Masters 27.9% 29.7% 30.6% 32.8% 31.7% 33.0% 34.4% 37.4% 37.4% 39.2% 40.3% 4%

University 19.6% 19.9% 20.2% 20.7% 25.9% 25.9% 25.9% 25.8% 25.8% 26.2% 26.7% 3%

Jr. College 20.6% 18.9% 18.2% 16.5% 14.3% 13.8% 12.8% 11.9% 11.9% 12.2% 11.6% -6%

Other 29.3% 28.6% 27.9% 26.5% 24.8% 23.8% 23.3% 20.9% 20.9% 18.0% 16.9% -5%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

18 April 2017


Employee bonus compensation staying below peak levels. Bonus expense has

dropped across all Taiwan corporates since Taiwan GAAP started requiring full expensing

of employee bonus in 2008. TSMC has dropped employee bonus expense from about 20-

25% of pretax earnings to 12% of pretax earnings. The average bonus per employee has

fallen from US$36,417 in 2008 to US$29,641 in 2016. Operating expense per head has

increased from US$40K to US$64k, implying higher salaries are offsetting some of the

reduction in bonuses. TSMC has moved to a higher fixed salary to help employees deal

with the drop in extra variable compensation.

Figure 19: TSMC’s bonus expense has stayed 12% of pre-tax income since bonus expensing began on the

P&L in 2009 NT$ mn, unless otherwise stated


Taiwan operational commitment intact. TSMC has maintained Taiwan headcount at

91% of the work force, unchanged from the 91% in 2001. TSMC has moved to a mega-fab

concept with its 12” Fabs 12, 14 and 15 which have maintained big engineering bases in

Hsinchu, Tainan and Hsinchu, improving scale economies and concentrating engineering

and management resources in one location. Of note in 2016, TSMC added over 800 more

employees in Taoyuan where its Longtan facility will do InFO packaging for Apple bringing

the total to 1,842. The company has maintained a relatively small headcount across

Europe, Japan and Korea, though it is adding headcount in China to bring it to 6% of its

staff—a level set to rise further when its Nanjing 12” fab is online in 2018.

Figure 20: TSMC maintaining its commitment to Taiwan NT$ mn, unless otherwise stated


Sales write-offs growing—a rising trend to monitor. TSMC sales returns have moved

back up to 3.0% of sales in 2016, back from a few low years around 1% of sales and a

watch-point for coming years for any further increases. The company did take a much

larger NT$37 bn provision, a 84 bp incremental negative impact to GMs in 2016 over 2015.

The 3.9% provision in 2016 is higher than its average since 2002 at 1.9% but at least not

as high as the levels seen in 2009 at 4.7%.

Bonus 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Cash Bonus (NT$m) 3,432 4,573 3,940 7,495 21,817 17,980 22,230 25,270 17,646 20,557 22,418

Stock Bonus (NT$m) 22,185 22,185 22,185 7,495 0 0 0 0 0 0 0

Total Bonus (NT$m) $25,617 $26,758 $26,125 $14,990 $21,817 $17,980 $22,230 $25,270 $35,127 $41,114 $44,836

Employees 22,246 23,020 22,843 24,466 33,232 35,457 39,267 40,483 43,591 45,272 46,968

NT$ Bonus / HCT 1,151,533 1,162,372 1,143,672 612,687 656,494 507,093 566,124 624,213 805,831 908,155 954,607

Exchange Rate 32.6 32.8 31.4 32.9 31.5 29.4 29.5 29.7 30.3 31.7 32.2

Pre-tax income (NT$mn) $133,362 $121,642 $111,472 $95,463 $170,270 $145,148 $181,676 $215,487 $302,098 $331,324 $385,959

Bonus / Pretax income 19% 22% 23% 16% 13% 12% 12% 12% 12% 12% 12%

US$ Average Bonus $35,292 $35,406 $36,417 $18,640 $20,847 $17,268 $19,164 $21,026 $26,593 $28,645 $29,641

Region HCT 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2016 YoY 10 Yr CAGR

Hsinchu Taiwan 14,772 14,892 14,635 16,010 20,703 20,107 21,534 21,096 22,329 23,583 22,960 -3% 5%

Taoyuan 996 1,842 85% NM

Other Taiwan 5,035 5,360 5,500 5,920 9,187 11,784 13,900 15,493 17,057 16,418 17,718 8% 13%

China 1,180 1,457 1,397 1,270 1,903 2,134 2,353 2,407 2,669 2,707 2,868 6% 9%

US 1,204 1,255 1,252 1,198 1,355 1,343 1,395 1,397 1,450 1,479 1,487 1% 2%

Europe 26 27 28 36 48 53 50 53 50 53 55 4% 8%

Japan 28 27 29 29 32 32 32 33 32 32 33 3% 2%

Korea 1 2 2 3 4 4 3 4 4 4 5 25% 17%

Total 22,246 23,020 22,843 24,466 33,232 35,457 39,267 40,483 43,591 45,272 46,968 4% 8%

% in Taiwan 89% 88% 88% 90% 90% 90% 90% 90% 90% 91% 91%

Sales US$mn 9,728 9,827 10,608 8,998 13,323 14,543 17,154 20,111 25,173 26,606 29,434 11% 12%

Sales / HCT (US$) 437,288 426,909 464,402 367,756 400,895 410,160 436,851 496,766 577,475 587,690 626,683 7% 4%

Bonus expense down significantly from the

peak

Taiwan remains 91% of its headcount resources

– more resources in Taoyuan for InFO / back-

end packaging

18 April 2017


Figure 21: Sales return provisions grow in 2015 NT$ mn, unless otherwise stated


TSMC remains a steady customer for Vanguard

TSMC continues to provide consistent support to Vanguard. TSMC’s wafer purchases

from Vanguard declined 6% YoY to NT$6.7 bn in 2016, but were offset by +18% YoY

growth for Vanguard from other customers, allowing Vanguard to still grow 11%. TSMC

outsources consumer digital ICs, power management and LCD driver ICs to its partner,

though down YoY is still within its long-term range. TSMC was 26% of Vanguard’s sales in

2016 and has maintained a consistent 25-35% share of Vanguard’s sales each year the

past decade except the 2008 financial crisis when it dipped to 20%. We expect TSMC to

maintain its co-operation with products remaining in Vanguard’s fabs, particularly with

industry 8” utilisation near 90%.

Figure 22: TSMC’s has remained 25-35% of Vanguard’s sales consistently ex-2008 NT$ mn, unless otherwise stated


ROEs above its long-term average and target 20%

ROEs staying above the long-term average. TSMC’s ROE stabilised at 25% in 2016,

above its ten-year average 23.4%. ROEs reached a peak in 2010 due to the benefit of a

favourable TWD rate, costs taken out during the financial crisis and low depreciation from

the 300mm efficiency gains and financial crisis of the prior years. The company has

continued to operate at relatively high utilisation through the cycle, maintain very low

break-even utilisation (40-45%), and maintain good capital efficiencies and now rising

cash returns to keep above its 20% ROE target.

Figure 23: 2015 ROE above the 10-year average


Reacceleration in 2H17 followed by a soft near-term

outlook

TSMC’s 20-F annual filing provided insights into TSMC’s ability to manage an increasingly

consolidated customer base by growing with the industry leaders, drive an increasingly

more advanced work force and keep well managed materials and inventory costs. The

company has maintained ROEs above its target range and should maintain that level as

long as it maintains its technology position and lead share at the top customers on high

volume designs.

Sales returns / allowances 2008 2009 2010 2011 2012 2013 2014 2015 2016 02-16 Avg

Sales 333,158 295,742 419,538 427,081 506,745 597,024 762,806 843,497 947,938 444,176

Write-offs for sales returns 6,844 11,260 13,266 5,890 6,211 5,043 7,679 18,133 28,569 8,730

Write-off % 2.1% 3.8% 3.2% 1.4% 1.2% 0.8% 1.0% 2.1% 3.0% 2.0%

Provision for write-offs 8,826 13,913 12,093 3,410 7,187 6,633 10,506 17,723 36,519 9,758

Provision impact 2.6% 4.7% 2.9% 0.8% 1.4% 1.1% 1.4% 2.1% 3.9% 2.2%

Vanguard Revenue (NT$mn) 2008 2009 2010 2011 2012 2013 2014 2015 2016 YoY Chg

TSMC Purchases from Vanguard 3,260 3,330 4,959 5,598 4,476 6,994 7,425 7,149 6,732 -6%

Vanguard's other customers 12,860 9,258 11,075 9,592 12,699 14,141 16,506 16,171 19,096 18%

Vanguard Reported Revenue 16,120 12,588 16,034 15,190 17,175 21,135 23,931 23,320 25,829 11%

Vanguard % from TSMC 20% 26% 31% 37% 26% 33% 31% 31% 26%

Shareholders Equity 2011 2012 2013 2014 2015 2016 10-YR Avg

TW GAAP Net Income 134,453 159,236 183,850 254,184 302,833 334,338 177,880

TW GAAP Equity 632,044 711,052 833,846 1,022,234 1,194,008 1,359,051 759,448

TW GAAP ROE 21.3% 22.4% 22.0% 24.9% 25.4% 24.6% 23.4%

Partner Vanguard still getting consistent

support from TSMC

ROE above its historical average in

2015 at 25%

18 April 2017


While guidance is soft and well below seasonal for 2Q17, recovery into 2H17 and still

intact technology position and margins should limit downside. We maintain our

2017/2018E EPS at NT$13.40/NT$14.70. Our +3.5% YoY sales growth in 2017 factors in

a full year 100% of Apple’s processor designs and potentially higher 2H17 volumes for

Apple's iPhone 8 cycle though partially offset by 4% impact from NTD appreciation against

USD. The company’s growth outlook should stay healthy with sustainable high share in

mobile and a bit of incremental contribution from IoT, automotive and high performance

ramping up late in the year, though more meaningful in 2018-19.

Figure 24: CS and street estimates for TSMC for 1Q17-3Q17 and 2017/2018 NT$ mn, unless otherwise stated

Source: Company data, Credit Suisse estimates, Bloomberg consensus estimates

We maintain our target price at NT$205 (14x 2018E EPS and 3.4x 2017E P/B) with re-

rating catalysts including leverage to iPhone 8, rising cash yield, and lower perceptions on

competition as TSMC moves quickly through 10/7nm to maintain high leading edge share.

TSMC's outlook stays intact for long-term investors, with profitability stepping higher,

advanced technology share gains continuing, and capex holding stable to support rising

FCF/dividend yields (board should approve a higher dividend 14 Feb). Sales are poised to

rebound from 2H17 on iPhone 8 launch, with share gains on 7nm in 2018 and EUV in

2019. Near-term sentiment though may dip post results as formal street was still up 1%

QoQ for 2Q17 sales and could trigger some negative estimate revisions in the coming

days. A pullback would set up a good entry.

Figure 25: TSMC now trading at 14x 2017 EPS Figure 26: TSMC trading near its high-end P/B

Source: TEJ, Company data, Credit Suisse estimates Source: TEJ, Company data, Credit Suisse estimates

TSMC's global holders supporting re-rating along with overseas peers

TSMC's ownership has shifted completely to global funds support, with 79% now owned

by foreign investors. The stock's valuation is now 14x 2017E earnings, in line with post-

crisis high of 14x but shy of its valuation in 2006-2007 and the 1990s. The company can

still re-rate further as it closes the gap to overseas semiconductor stocks re-rating faster,

possible as perceptions of competition with Intel and Samsung continue to subside as it

accelerates its roadmap through 10/7nm and also with the company's cash yield moving

higher as it harvests more cash flows to increase its dividend.

1Q17 2Q17 3Q17 2016 2017 2018

(NT$ mn) Actual Street CS Street Guidance CS Street Adtual CS Street CS Street

Sales 233,914 237,378 214,771 222,044 NT$213-216bn 258,788 268,303 947,938 981,763 969,449 1,082,084 1,097,579

Chg (%) -10.8 -9.5 -8.2 -6.5 -7.7% to -8.9% QoQ 20.5 20.8 12.4 3.6 2.3 10.2 13.2

GM (%) 51.9 52.1 51.5 50.8 50.5-52.5% 50.5 50.1 50.1 50.9 50.7 51.0 50.4

OpM (%) 40.8 41.4 39.6 40.6 39-41% 39.9 39.9 39.9 40.1 41.2 40.3 40.1

Net Inc. 87,621 88,532 66,866 71,528 FX: NT$30.5:1 93,631 96,279 334,338 347,444 352,433 381,161 387,694

EPS (NT$) 3.38 3.41 2.58 2.71 3.61 3.70 12.89 13.40 13.59 14.70 14.95

ADR EPS 0.53 0.57 0.42 0.45 0.58 0.62 2.01 2.06 2.28 2.37 2.51

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TSMC is well-owned by foreign investors, but still

at a discount to some global semis

18 April 2017


Compared with the average P/E multiple for its key chip customers (Qualcomm, Mediatek,

Broadcom, Xilinx, Marvell, and NVIDIA) averaging at 18x, TSMC is trading at a discount at

only 14x – a gap that has widened compared with 2H14 and 1H15.

TSMC is also at a smaller premium than its overseas peers, with its current multiple 9%

higher than its post-crisis average but consistent with overseas customers NVIDIA, Xilinx,

Marvell and TI trading at 30-40% premiums to their long-term average. While TSMC does

have the high capital intensity from owning fabs, its 38-40% operating margins are also

allowing strong FCF generation (5% FCF yield in 2017).

Figure 27: TSMC trades at a discount vs. customers

Figure 28: TSMC's P/E at a more modest premium to

its history than the overseas chip companies

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Financial Models

Figure 29: TSMC’s income statement summary

Source: Company data, Credit Suisse estimates

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TSMC BRCM, Marvell, QCOM, NVDA, XLNX, Mediatek average P/E

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NVDA MRVL XLNX TXN INTC TSMC BRCM QCOM MTK

Current P/E Avg. P/E post-crisisAvg. P/E P/E premium vs. post-crisis

P/E (x) P/E premium (%) vs. post-crisis average

NT$ mn 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2014 2015 2016 2017E

Net sales 203,495 221,810 260,406 262,227 233,914 214,771 258,788 274,291 762,806 843,497 947,938 981,763

Sequential change (%) 0.0 9.0 17.4 0.7 -10.8 -8.2 20.5 6.0

YoY change (%) -8.3 8.0 22.5 28.8 14.9 -3.2 -0.6 4.6 27.8 10.6 12.4 3.6

Cost of goods sold 112,125 107,469 128,367 125,117 112,424 104,174 128,147 136,893 385,101 433,118 473,077 481,637

Gross profits 91,370 114,341 132,039 137,110 121,490 110,597 130,641 137,398 377,706 410,380 474,861 500,126

Gross margin (%) 44.9 51.5 50.7 52.3 51.9 51.5 50.5 50.1 49.5 48.7 50.1 50.9

Sales and marketing 1,415 1,437 1,531 1,517 1,442 1,413 1,455 1,462 5,087 5,665 5,901 5,772

% of sales 0.7 0.6 0.6 0.6 0.6 0.7 0.6 0.5 0.7 0.7 0.6 0.6

General and administrative 3,836 4,673 5,533 5,724 5,283 5,178 5,281 5,308 19,933 16,788 19,766 21,050

% of sales 1.9 2.1 2.1 2.2 2.3 2.4 2.0 1.9 2.6 2.0 2.1 2.1

Research and development 15,619 16,904 18,724 19,961 19,413 19,025 20,547 20,649 56,824 65,545 71,208 79,634

% of sales 7.7 7.6 7.2 7.6 8.3 8.9 7.9 7.5 7.4 7.8 7.5 8.1

Total operating expense 20,903 23,020 25,777 27,203 26,138 25,615 27,283 27,420 81,816 88,016 96,903 106,456

Income from operations 70,467 91,321 106,262 109,907 95,352 84,982 103,358 109,979 295,890 322,364 377,958 393,670

% of sales 34.6 41.2 40.8 41.9 40.8 39.6 39.9 40.1 38.8 38.2 39.9 40.1

Depreciation 54,951 54,402 55,312 55,420 59,154 64,557 66,091 67,152 197,645 219,303 220,085 256,954

EBITDA 125,418 146,596 162,531 166,345 154,506 150,557 170,466 178,149 495,505 544,098 600,890 653,678

% of sales 61.6 66.1 62.4 63.4 66.1 70.1 65.9 64.9 65.0 64.5 63.4 66.6

Non operating income 948 1,056 1,106 1,259 1,803 857 846 633 2,252 4,206 4,369 4,139

Investment gains (loss) 841 1,030 881 881 667 1,000 1,000 1,000 3,955 4,754 3,633 3,667

Pretax income 72,256 93,406 108,250 112,047 97,822 86,839 105,204 111,611 302,098 331,324 385,959 401,476

% of sales 35.5 42.1 41.6 42.7 41.8 40.4 40.7 40.7 39.6 39.3 40.7 40.9

Income taxes exp. /(gains) 7,463 20,878 11,461 11,819 10,201 19,973 11,572 12,277 38,317 43,873 51,621 54,024

Tax rate (%) 10.3 22.4 10.6 10.5 10.4 23.0 11.0 11.0 12.7 13.2 13.4 13.5

Net income 64,793 72,528 96,789 100,228 87,621 66,866 93,631 99,334 263,781 287,452 334,338 347,444

% of sales 31.8 32.7 37.2 38.2 37.5 31.1 36.2 36.2 34.6 34.1 35.3 35.4

Pro Forma EPS (NT$) 2.50 2.80 3.73 3.87 3.38 2.58 3.61 3.83 10.17 11.09 12.89 13.40

EPS per ADR (US$) 0.38 0.43 0.59 0.61 0.53 0.42 0.58 0.62 1.70 1.75 2.01 2.06

Adjusted share count 25,930 25,930 25,930 25,930 25,930 25,929 25,929 25,929 25,930 25,930 25,930 25,930

18 April 2017


Figure 30: TSMC’s balance sheet summary


Figure 31: TSMC profitability ratios


NT$ mn 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2014 2015 2016E 2017E

Cash and marketable securities 648,397 667,865 516,955 632,109 659,323 654,821 569,387 671,906 436,924 586,163 632,109 671,906

Inventories 57,242 60,706 53,882 48,682 50,389 46,299 56,954 60,841 66,338 67,052 48,682 60,841

Account receivables 96,957 111,724 129,289 129,305 109,028 105,914 127,621 135,267 115,048 85,565 129,305 135,267

Other current assets 9,894 12,230 9,466 7,633 6,922 7,810 9,410 9,974 8,257 7,964 7,633 9,974

Total current asset 812,491 852,525 709,591 817,729 825,662 814,844 763,373 877,988 626,567 746,744 817,729 877,988

LT investment 46,335 53,398 49,910 46,154 44,519 44,519 44,519 44,519 30,052 34,994 46,154 44,519

Fixed assets 844,305 875,870 934,928 997,778 1,037,364 1,050,989 1,048,880 1,045,710 818,199 853,470 997,778 1,045,710

Intangible assets 13,990 14,067 14,631 14,615 16,939 16,939 16,939 16,939 13,532 14,066 14,615 16,939

Other LT assets 9,405 8,632 9,626 10,180 10,180 10,180 10,180 10,180 6,785 8,244 10,180 10,180

Total non-current assets 914,035 951,966 1,009,095 1,068,726 1,109,002 1,122,627 1,120,518 1,117,348 868,567 910,774 1,068,726 1,117,348

Total assets 1,726,526 1,804,492 1,718,687 1,886,455 1,934,664 1,937,471 1,883,891 1,995,337 1,495,134 1,657,518 1,886,455 1,995,337

Accounts payable 19,629 23,154 25,977 27,325 24,253 21,691 26,683 28,504 23,370 19,725 27,325 28,504

ST interest bearing liabilities 67,963 60,750 75,758 96,068 99,576 99,576 99,576 99,576 36,159 62,992 96,068 99,576

Other current liabilities 148,301 314,835 155,820 194,847 197,752 143,180 172,525 182,861 141,486 129,512 194,847 182,861

Total current liabilities 235,893 398,739 257,555 318,239 321,581 264,447 298,784 310,940 201,015 212,229 318,239 310,940

LT liabilities 181,181 181,303 152,163 153,115 134,199 134,199 134,199 134,199 214,516 191,998 153,115 134,199

Other LT liabilities 28,505 27,119 25,076 25,050 22,574 15,649 15,614 15,569 33,927 30,658 25,050 15,569

Total LT liabilities 209,686 208,422 177,239 178,165 156,773 149,848 149,813 149,768 248,443 222,655 178,165 149,768

Total liabilities 445,580 607,161 434,794 496,404 478,354 414,295 448,597 460,708 449,458 434,884 496,404 460,708

Share capital 259,304 259,304 259,304 259,304 259,304 259,304 259,304 259,304 259,297 259,304 259,304 259,304

Share premium & other reserves 233,958 264,561 264,568 264,570 264,580 264,580 264,580 264,580 207,241 233,941 264,570 264,580

Retained earnings 781,435 667,701 764,460 863,710 951,339 1,018,205 930,324 1,029,658 553,262 716,653 863,710 1,029,658

Preferred stocks 0 0 0 0 0 0 0 0 0 0 0 0

Treasury stock 0 0 0 0 0 0 0 0 0 0 0 0

Other equity 5,277 4,888 -5,219 1,664 -19,710 -19,710 -19,710 -19,710 25,749 11,774 1,664 -19,710

Total equity 1,279,973 1,196,454 1,283,113 1,389,248 1,455,513 1,522,379 1,434,497 1,533,831 1,045,549 1,221,672 1,389,248 1,533,831

Minority interest 973 877 780 803 797 797 797 797 127 963 803 797

Total liabilities & equity 1,726,526 1,804,492 1,718,687 1,886,455 1,934,664 1,937,471 1,883,891 1,995,337 1,495,134 1,657,518 1,886,455 1,995,337

Profitability Ratios 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2014 2015 2016 2017E

Return on equity (ROE) (%) 5.1 6.1 7.5 7.2 6.0 4.4 6.5 6.5 25.2 23.5 24.1 22.7

Return on assets (ROA) (%) 3.8 4.0 5.6 5.3 4.5 3.5 5.0 5.0 17.6 17.3 17.7 17.4

Return on net assets (RONA) (%) 6.0 6.4 8.1 8.0 6.9 5.2 7.1 7.5 24.9 26.8 26.7 26.3

Return on sales (%) 31.8 32.7 37.2 38.2 37.5 31.1 36.2 36.2 34.6 34.1 35.3 35.4

Efficiency Ratios

Asset turns (annualized sales / assets) 0.5 0.5 0.6 0.6 0.5 0.4 0.5 0.5 0.5 0.5 0.5 0.5

Days sales outstanding (DSO) 43.5 46.0 45.3 45.0 42.5 45.0 45.0 45.0 55.0 37.0 49.8 50.3

Days of inventory 46.6 51.5 38.3 35.5 40.9 40.6 40.6 40.6 62.9 56.5 37.6 46.1

Cash conversion cycle 74.1 77.8 65.1 60.6 63.7 66.6 66.6 66.6 95.8 76.9 66.3 74.8

Per Share Values

Book value per common share 49.36 46.14 49.48 53.58 56.13 58.71 55.32 59.16 40.32 47.11 53.58 59.15

Net cash total 445,588 479,211 338,944 429,080 470,067 465,565 380,131 482,650 216,301 366,167 429,080 482,650

Net cash per common share 17.18 18.48 13.07 16.55 18.13 17.96 14.66 18.61 8.34 14.12 16.55 18.61

18 April 2017


Figure 32: TSMC’s cash flow summary


NT$ mn 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2014 2015 2016 2017E

Net income 64,793 72,528 96,789 100,228 87,613 66,866 93,631 99,334 263,781 306,556 334,338 347,444

Depreciation & amortization 55,847 55,275 56,269 56,438 60,172 65,575 67,108 68,170 200,252 222,506 223,828 261,026

Dec (inc)-A/R -11,392 -14,767 -17,564 -16 0 3,114 -21,707 -7,645 -43,106 29,482 -43,739 -26,239

Dec (inc)-inventory 9,810 -3,463 6,824 5,200 0 4,090 -10,655 -3,887 -28,843 -714 18,370 -10,452

Inc (Dec)-A/P -96 3,525 2,822 1,348 0 -2,562 4,992 1,821 7,012 -3,645 7,599 4,251

LT investment loss (gain) -841 -892 -881 -881 0 -1,000 -1,000 -1,000 -2,975 -1,528 -3,496 -3,000

Investment disposal loss (gain) -4 221 -23 191 0 0 0 0 -2,179 -24,511 385 0

Others 3,412 -5,750 -17,825 22,712 13,223 -55,459 27,744 9,772 28,558 4,338 2,549 -4,721

Operating cash flow 121,529 106,676 126,410 185,220 161,008 80,623 160,114 166,565 422,498 532,484 539,835 568,309

Sale(Pur) of ST inv. -8,228 -12,503 -10,201 -22,375 -7,737 0 0 0 598 44,101 -53,308 -7,737

Sale(Pur) of LT inv. -9,622 -9,551 1,434 -5,636 0 -1,000 -1,000 -1,000 333 -7,824 -23,375 -3,000

Sale of FA 12 14 67 4 152 0 0 0 200 817 98 152

Capital spending -38,141 -73,586 -103,775 -112,543 -102,506 -79,200 -65,000 -65,000 -288,540 -257,517 -328,045 -311,706

Others 632 919 5,591 2,047 861 -1,018 -1,018 -1,018 4,989 3,177 9,190 -2,193

Investing cash flow -55,347 -94,706 -106,885 -138,501 -109,230 -81,218 -67,018 -67,018 -282,421 -217,246 -395,440 -324,484

Inc (Dec) of debt -4,776 4,046 -1,093 20,307 -253 0 0 0 20,539 2,506 18,483 -253

Bonds issued (redeemed) 0 -11,472 -12,000 0 -10,000 0 0 0 0 0 -23,472 -10,000

Treasury stock dec(inc) 0 0 0 0 0 0 0 0 0 0 0 0

Proceed from new issue 0 0 0 0 0 0 0 0 0 0 0 0

Dividend paid 0 0 -155,582 0 0 0 -181,513 0 -77,786 -116,683 -155,582 -181,513

Others -30 -677 -516 3,994 -1,657 -6,925 -35 -45 24,918 -2,556 2,771 -8,662

Financing cash flow -4,807 -8,103 -169,192 24,301 -11,910 -6,925 -181,547 -45 -32,328 -116,734 -157,800 -200,428

Exchange influence -6,079 508 -8,721 6,262 -16,397 0 0 0 9,060 8,259 -8,030 -16,397

Change in cash flow 55,295 4,375 -158,388 77,282 23,471 -7,520 -88,452 99,501 116,809 206,763 -21,435 27,001

Operating cash per share (NT$) 4.69 4.11 4.88 7.14 6.21 3.11 6.18 6.42 16.29 20.54 20.82 21.92

Free cash flow per share (NT$) 3.22 1.28 0.87 2.80 2.26 0.05 3.67 3.92 5.17 10.60 8.17 9.90

18 April 2017


Companies Mentioned (Price as of 17-Apr-2017) Advanced Micro Devices, Inc. (AMD.OQ, $12.31) Alcatel Lcnt Tel (ALCTL.IS, TL8.1) Analog Devices Inc. (ADI.OQ, $76.51) Apple Inc (AAPL.OQ, $141.05) Broadcom Ltd (AVGO.OQ, $211.32) Hi Silicon (Unlisted) Intel Corp. (INTC.OQ, $35.25) Marvell Technology Group Ltd. (MRVL.OQ, $14.68) MediaTek Inc. (2454.TW, NT$211.0) Motorola Solutions (MSI.N, $82.34) Philips (PHG.AS, €29.72) QUALCOMM Inc. (QCOM.OQ, $52.79) STMicroelectronics NV (STM.PA, €13.86) Sony (6758.T, ¥3,453) Taiwan Semiconductor Manufacturing (2330.TW, NT$187.5, OUTPERFORM, TP NT$205.0) Texas Instruments Inc. (TXN.OQ, $77.84)

Disclosure Appendix

Analyst Certification I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)

2330.TW Closing Price Target Price

Date (NT$) (NT$) Rating

18-Apr-14 123.00 137.00 O

10-Jul-14 134.50 150.00

17-Jul-14 124.50 145.00

08-Jan-15 138.00 145.00 N

17-Jul-15 140.00 150.00

16-Oct-15 137.50 156.00

11-Dec-15 139.50 163.00 O

31-Mar-16 162.00 177.00

11-Jul-16 170.00 185.00

12-Oct-16 189.50 205.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

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18 April 2017


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Target Price and Rating Valuation Methodology and Risks: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW)

Method: Our NT$205 target price for TSMC is based on 14x 2018 EPS (earnings per share), implying 3x P/B (price-to-book), near the midpoint of its average 11-15x and 2.5-3.5x range. We see its business outlook improving and technology leadership should keep its market share and profitability intact and dividends will likely rise again as capex moderates; we therefore have an OUTPERFORM rating on the stock.

Risk: Risks that could impede achievement of our NT$205 target price and OUTPERFORM rating for TSMC would include: fierce competition, demand failing to pick up or Apple orders not being as strong as expected.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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