This article was compiled from GF Securities's “TSMC: Advanced Process+Advanced Packaging: Continuing to Impress the Market”

The pure wafer foundry market will surge 19% in 2020

According to the latest IC Insights report, benefiting from the growing sales of 5G smartphones and other telecom equipment, the pure-play foundry (pure-play foundry) market will reach 67.7 billion US dollars this year, a significant increase of 19% over last year, the biggest increase in nearly 7 years. Looking forward to next year (2021) the pure wafer foundry market size will grow another 7% to 72.6 billion US dollars. Industry leader TSMC is expected to benefit the most.

According to the data, TSMC's market share reached 50% in 2019, far higher than Samsung (18%) and GF (8%), which are the second and third largest. Apple is its largest customer, contributing 23% of revenue in 2019.

Advanced manufacturing processes are TSMC's biggest revenue driver

TSMC's customers are mainly IC designers, and a small portion of the revenue comes from IDM companies. Among them, 7 nm in 1H20 is the process node that accounts for the largest share of foundry revenue (36%), followed by 16 nm (18%), 28 nm (14%), and 40/45 nm (10%). Advanced process nodes (<16 nm) account for 54%.

Looking back over the past few years, due to the high investment costs of advanced manufacturing processes, it is difficult to recover the investment costs if there are not enough orders. As a result, UMC and GF announced in 2017 and 2018 respectively that they would no longer invest in advanced process R&D.

On the other hand, Intel is ahead of other fabs in the 22 nm (16 nm equivalent to TSMC) and 14 nm (10 nm equivalent to TSMC) process progress. However, mass production has been delayed since the beginning of 10 nm, so the 7 nm will probably only enter mass production in 2H22, which is about 2 years behind TSMC. Intel's 2Q20 performance conference will also acknowledge that it will start outsourcing if necessary.

However, TSMC's other main competitor, Samsung, although its manufacturing nodes were on par with TSMC before 7 nm (even overtaking TSMC's 16 nm at 14 nm), the 7 nm and 5 nm are behind TSMC's mass production schedule for nearly half a year. Although the 5 nm has an opportunity to enter mass production in 2H20, the customer is currently only Qualcomm. Unlike TSMC, which currently has Apple and Xilinx, it will also join Qualcomm, MediaTek, and Ultra Micro in 2021.

HPC and 5G phones continue to stimulate demand for advanced manufacturing processes

Smartphones and HPC (high-performance computing) are the company's two main revenue pillars, accounting for nearly 80% in total, and are also the company's main growth drivers in recent years.

In terms of the HPC business, AMD+ TSMC is expected to seize more server CPU market share from leading Intel, and demand for accelerated computing chips, including GPUs, ASICs, and FPGAs, driven by applications such as AI, big data, and machine learning, will usher in a significant increase, and TSMC is expected to benefit from this growth wave.

In the smartphone sector, although overall shipment growth has slowed due to the impact of the epidemic and the gradual saturation of the market, thanks to the continued increase in the 5G penetration rate, the volume of 5G phones will drive the semiconductor value of the processor part to continue to increase, and TSMC's mobile phone business growth momentum is unhindered.

Advanced packaging will strengthen the moat

In recent years, the importance of advanced packaging processes for multi-chip integration has been increasing, mainly influenced by 2 trends:

1. Higher integration allows the chipset to meet today's requirements for faster processing speed. For example, in the past, the integration and interconnection of memory and CPU/GPU components was mainly achieved through carrier boards, while next-generation packaging technology introduced structural processes such as silicon interlayers to greatly shorten the interconnection distance between logic elements and memory, thereby reducing signal latency and loss, and achieving faster and more efficient computational performance.

2. As advanced semiconductor manufacturing processes continue to move towards 7nm/5nm or even below, the difficulty, cost, and development time of chip design and manufacturing processes are growing by leaps and bounds. Faced with this problem, chip makers are trying to achieve high-density interconnection between chips through advanced packaging to provide the same level of performance at a lower cost.

Under this line of thought, Chiplet (small chip) design gradually became mainstream, that is, the individual functional chips of a single large chip were made independently into each small bare chip, and then re-integrated into a single chip group through high-density packaging. This approach can improve design flexibility and manufacturing yield, and ultimately reduce the cost of the overall chip set. Intel and AMD have been actively introducing the Chiplet architecture into their high-end products in recent years.

However, in the face of this trend of high integration, TSMC is already leading the layout. In a recent technical forum, TSMC integrated its product lines such as the Info/CoWOS upgrade (2.5D package solution) and SoIC (3D packaging solution) mentioned above into an integrated packaging platform and named it “3D Fabric” to provide customers with extremely complete and diverse advanced packaging solutions from front-end 3D to back-end 2.5D/3D.

TSMC's advanced packaging business grew rapidly, accounting for more than 9% of revenue in 2019.

Looking ahead, revenue growth from advanced packaging is expected to accelerate further. The short-term momentum is mainly due to market demand for upgraded Info/CowOS versions. It is expected that the Info_LSI package will be introduced to Apple servers and is expected to be launched as soon as 2021. As the current mainstream packaging solution for HPC/accelerated computing chips, CoWS-S will continue to benefit from the booming development of the accelerated computing market. With its cost advantage, CoWoS-L has the opportunity to be introduced into customers' next generation of high-end GPU, CPU/APU and other products.

Although TSMC's SoIC package currently has no related products on the market, the company estimates that the first commercial product will be released after 2021.

High House Capital opened a warehouse with TSMC in Q2

Gen Gao Lin Capital announced to the US SEC the US stock holdings at the end of the second quarter of 2020. According to the US SEC, Gao Lin added 1.1005 million new shares of TSMC in Q2, and the cost price was about 56.77 US dollars.

GF Securities is optimistic that TSMC's advanced manufacturing process will receive more orders from major customers such as Apple, MediaTek, AMD, and Nvidia in 2021, driving revenue and profit to continue to reach new highs in 2021, with year-on-year growth of 13%/11%, respectively. The reasonable value of NT$587.6/share is calculated based on 28 times the earnings per share in '21. Corresponding to the US issuance of ADR (TSM.O), the reasonable value is $97.9/ADR.