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June 27, 2017

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Investment banks at odds with TSMC's forecast

Investment banks are at odds with the report of Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip-maker, announced on July 19. Barclays PLC, Daiwa Securities Group Inc., Merrill Lynch and Credit Suisse Group AG expressed concern for the coming correction of industry and high capital intensity of the company, while JPMorgan Chase & Co., Citibank, Royal Bank of Scotland (RBS), and Morgan Stanley stressed its profitability and technological edge.

The quarterly report of TSMC shows a 24.9-percent increase on its net profit in the second quarter compared to the previous quarter and forecasts 7-percent sales growth quarter-on-quarter in the third quarter because of its increased sales of 28-nanometer technology products.

TSMC CEO Morris Chang, however, did caution that there would be a coming correction of the industry in the fourth quarter and the first quarter next year, but he also pointed out that the company would rebound strongly, starting in the second quarter of next year.

Barclays stated that despite the short-term correction, TSMC still has other long-term risks such as the possibility of downgrading its profit in the fourth quarter and first quarter next year, the pressure from its competitors' ability to produce 28-nanometer technology products, high depreciation costs resulting from its high capital intensity.

Echoing the concerns of Barclays, Credit Suisse said that despite the company's rising sales, correction in the industry and its depreciation costs may bring down their profits eventually.

Merrill Lynch expected the gloomy economic condition, lack of attractiveness of TSMC's products and lack of new innovation concerning its 28-nm technology would bring down the company's profits.

Daiwa expected the company's revenues in the fourth quarter to decrease by 16.5 percent and its pre-tax profits in 2012 to be only 7 percent, which is lower than the market expectation of 20 percent.

RBS, however, suggests investors buy TSMC stocks, citing TSMC's higher-than-expected sales growth and its competitive edge of 20-nm technology. RBS pointed out that TSMC is going to launch its 16nm technology products between 2013 and 2014 to vie with Intel's 14nm technology products.

Citibank stated that TSMC has twice cut its costs, and has a future plan to sustain its technological advantage. The target price of TSMC set by Citibank remains at NT$104, which is higher than yesterday.

Morgan Stanley sees the growing demand of mobile devices as a positive factor for the company, but noted that the increase of capital spending to produce 28nm technology products might increase its depreciation costs in the future. Morgan Stanley is positive about the company's 20nm technology products and sees TSMC as a potential supplier for Apple.

JP Morgan Chase increased the target price of TSMC's stock to NT$99, representing a positive response for TSMC's quarter report. JP Morgan expected the company's sales to decrease by 8 percent and 7 percent, respectively, in the fourth quarter and the first quarter next year.

Stock prices for TSMC opened lower in the stock market yesterday and returned to NT$76.7 by the end of trading. Its stock price was down by 1 percent compared to that of a day before. The trading volume of the TSMC's stock was the largest yesterday, indicating the diverse points of view among investors.

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