Worst is not over yet for TSMC

The fact that the malware made it past security protocols is a black eye for a corporation that prides itself on its technological and operational superiority.

HONG KONG: The worst isn’t over yet for Taiwan Semiconductor Manufacturing Co (TSMC) after the stock suffered its most painful quarter in a decade, analysts warn.

TSMC will struggle to plug the hole left by Apple Inc’s declining smartphone orders in 2019, according to Sanford C. Bernstein’s Mark Li, who has told clients to prepare for the firm’s first annual profit drop in eight years.

CGS-CIMB Securities’ Peter Chan, whose recommendation in October to sell the shares proved prescient, says TSMC’s still-high valuations will spook tech investors into owning cheaper alternatives in Asia and the US instead.

The firm lost US$39bil in market value since a peak in September.

When the company releases its financial results tomorrow, shareholders will be looking for clues on whether the world’s biggest supplier of made-to-order chips expects demand to continue to weaken.

While a downturn is widely expected after Apple, its largest customer, cut its revenue outlook this month, another ugly quarter in 2019 could trigger more declines for the MSCI Emerging Market Index’s second-biggest stock.

“Though some investors already expect 1Q19 will be weak, the quarter-on-quarter fall in 2Q19 is not well expected and hence presents a bigger downside risk,” Bernstein analysts led by Li wrote in a note dated Monday.

They say the shares will decline before recovering to NT$225 within 12 months, implying just a 1.8% gain from yesterday’s close.

TSMC, which Bernstein says depends on iPhones for as much as a quarter of its sales, trades at 15 times the next year’s projected earnings.

That’s a 28% premium to Apple, and far pricier than other battered Asian tech giants like Samsung Electronics Co. While analysts on average predict TSMC’s earnings-per-share will sink 6% in the first quarter, they’re counting on a rebound in the following two periods.

Still, analysts have been tempering their forecasts this month following Apple’s shock update, with JPMorgan Chase & Co and HSBC Holdings Plc both trimming their 12-month price targets on Taipei-listed TSMC.

TSMC’s fortunes matter to global investors: it features on about 13% of the world’s active equity portfolios, according to the latest e-Vestment data.

That makes it the most widely held stock in Asia and behind only Alibaba Group Holding Ltd as the second most-owned emerging market company, the data show. About 12% of its shares are held by exchange-traded funds, data compiled by Bloomberg showed.

CGS-CIMB’s Chan, the lone bear analyst and the top-ranked among the 33 tracked by Bloomberg, says TSMC’s prominence in global funds means the selling pressure will be particularly severe when higher US rates attract money out of developing economies.

For now, a more dovish Federal Reserve has helped emerging market equity funds enjoy 13 consecutive weeks of inflows.

“TSMC has passed its prime,” Chan said by phone.

“US stocks are more attractive than Taiwan now and have better growth potential.

“Global investors may soon start re-balancing assets by selling TSMC.” — Bloomberg

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