Under Nvidia, on TSMC

On July 5, local time, New Street Research analyst Pierre Ferragu downgraded Nvidia from buy to neutral. He believes that after rising 240% last year and 157% this year, Nvidia's shares have fully priced in valuation. "While Nvidia remains the strongest franchise in the AI data center space, near-term expectations and valuations justify a more cautious view on the stock," Ferragu wrote. Nvidia fell 1.91 percent on Friday, closing at $125.83. According to documents disclosed by the US Securities and Exchange Commission (SEC) on the same day, HUANG JEN HSUN, founder of Nvidia, sold 240,000 shares of common stock on July 2 and 3 at an average price of $123.2567 per share, valued at about $29,581,600. While downgrading Nvidia's stock, Ferragu is bullish on the stock performance of two other AI beneficiaries, AMD and TSMC, and his 12-month price targets for these two stocks are $235 and T $1,200, respectively, which are 38% and about 19% higher than their current stock prices.

TSMC customers agree to price increases

Macquarie Securities pointed out in the latest stock report issued by the supply chain inspection, most of TSMC's customers have agreed to increase the price of wafer foundry, driving TSMC's gross profit margin, profit performance better than expected and rising year by year. According to statistics, the target price given to TSMC by the foreign investment circle at present has almost reached a consensus of more than 1,000 yuan, from high to low: HSBC 1370 yuan, Macquarie 1280 yuan, Goldman Sachs 1160 yuan, Citi 1150 yuan, Barclays 1096 yuan, Morgan Stanley and jpmorgan Chase are 1080 yuan, UBS 1070 yuan, Bank of America 1040 yuan. In fact, after TSMC's share price reached the thousand yuan mark, the global market attention increased greatly; Macquarie semiconductor industry analyst Lai Yuzhang pointed out that because most of TSMC's customers have agreed to increase the price of wafer foundry in exchange for stable and reliable supply, the future gross profit margin will rise year by year. According to Lai's estimates, TSMC's gross margin will climb to 55.1% in 2025, and will approach 60% in 2026, reaching 59.3%. This year, the gross profit margin has increased to 52.6% under the improvement of production efficiency. With the long-term trend of AI, coupled with the increase in gross margin, so that TSMC 2023-2026 profit compound annual growth rate (CAGR) will reach 26%, Lai Yuzhang will be TSMC 2024-2026 net profit per share (EPS) increased by 5%, 2%, 1%, adjusted EPS of 39.2 yuan, 51.2 yuan, and 65.3 yuan. Based on strong profit growth and relatively low PE ratio (only 19.6 times, far lower than Nvidia's 34.9 times, ASML's 32.9 times, etc.), therefore, Lai Yuzhang raised TSMC's applicable PE ratio to 25 times, giving the "outperform" rating, and the target price rose from 1000 yuan to 1280 yuan, an amplitude of 28%, which was the second highest in the foreign capital circle.

In addition, on the capital expenditure aspect of market concern, Lai Yuzhang believes that based on the continuous investment in advanced processes, especially 3nm and 2nm, the capital expenditure forecast of TSMC in 2025 and 2026 is raised to $35 billion and $37 billion. Lai also expects TSMC to complete a 2nm production capacity of 5,000 pieces per year by the end of this year, and to expand significantly to 90,000 pieces by the end of 2027.

Advanced manufacturing processes stand out

According to the latest survey of global market research organization TrendForce Jibang Consulting, the expectations of the 6.18 promotion festival in Chinese Mainland, the release of new smartphones in the second half of the year and the year-end sales peak season have driven the supply chain to start inventory replenishment, which has a positive impact on the utilization rate of foundry capacity, and the operation has officially passed the trough. Observe the dynamics of foundry in Chinese Mainland. Benefiting from the domestic substitution of IC, the recovery of foundry capacity utilization in Chinese Mainland is faster than that of other peers, and even some process capacity cannot meet customer demand, which has been fully loaded. On the other hand, in response to the traditional peak stock season in the second half of the year and the US equipment export control, the tight production capacity situation may continue to the end of the year, making the foundry of wafers in Chinese Mainland expected to stop falling and recover, and even further brewing the atmosphere of price rise in specific processes.

This increase in foundry prices of wafers in Chinese Mainland is aimed at manufacturing process nodes with relatively tight production capacity such as CIS in the second half of the year, and the current price is lower than the market average price. It is not a signal of overall demand recovery. Although this specific process succeeded in supplementing customers, it is still difficult to return to the price level during the epidemic. Although the Taiwan factory has benefited from the demand for conversion orders, PSMC and Vanguard have seen a better than expected increase in capacity utilization in the second half of this year. However, the overall mature process demand is still shrouded in the impact of economic weakness, and the average capacity utilization rate is still between 70-80%, without any shortage. Only TSMC, driven by HPC applications such as AI applications and PC new platforms, as well as high-end new products for smartphones, is expected to achieve full load of 5/4nm and 3nm. The production capacity utilization rate is expected to exceed 100% in the second half of this year, and visibility has been extended to 2025; With cost pressures such as overseas expansion and electricity price hikes, TSMC plans to increase prices for advanced processes with high demand.

It is worth noting that global inflation pressure still exists in 2024, and the recovery of terminal demand is not significant. The momentum of inventory replenishment is sometimes strong or weak, and wafer foundries are mostly using price discounts to attract customers to invest and improve capacity utilization, resulting in a decline in the overall ASP (average selling price) trend. In 2025, there will also be many new production capacity releases globally, such as TSMC JASM, PSMC P5, SMIC Beijing/Shanghai new factories, HHGrace Fab9, HLMC Fab10, Nexchip N1A3, etc. It is expected that mature process competition will remain relatively fierce, which may affect future bargaining space.