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May 28, 2017

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Merrill Lynch keeps TSMC shares at buy amid lost order fears

TAIPEI--Bank of America Merrill Lynch kept its "buy" rating on shares of Taiwan Semiconductor Manufacturing Co. (TSMC,台積電), the world's largest contract chip-maker, despite fears the Taiwanese company may lose market share next year.

At an investor conference on July 16, TSMC Chairman Morris Chang (張忠謀) said his company's market share in 16 nanometer (nm) technology is likely to lag behind a rival in 2015. But Chang said he had faith that the disadvantage would be reversed with a higher market share in 2016.

TSMC said it is scheduled to begin mass production of chips using the 16nm process in the third quarter of next year, with the technology expected to make up only a single-digit percentage of its total sales in the fourth quarter of 2015.

Dan Heyler, head of global semiconductor research at Merrill Lynch, said Chang's prediction of TSMC's loss of market share in 2015 and the regaining of market share in 2016 "appears premature" to him.

The analyst said his optimism was based on the fact that Samsung Electronics Co., a rising threat to TSMC, has not improved its yield rates to a high level, while TSMC is aggressively closing a six-month gap behind its rivals in its 16nm development.

Samsung is Coming

"We see the Samsung threat is as real while Intel has been a lot more bark than bite," Heyler said of TSMC's two major rivals in a note to clients dated July 22.

"However, Samsung is limited in the damage it can cause to TSMC," Heyler said, because its immature foundry tools and operations could make it difficult for the Korean electronics giant to snare its main target customers, Qualcomm and Apple.

Heyler believed that Qualcomm is likely to shift some business from TSMC to Samsung because it needs more support to stay ahead of Taiwanese chip designer MediaTek Inc., which has just about closed its technology gap with Qualcomm.

Apple, however, is expected to place its chip orders with TSMC in 2015 because of TSMC's advantage in manufacturing 64-bit chips, as well as Apple's tendency to use mature and proven technologies, Heyler said.

TSMC's earnings per share (EPS) in 2015 is estimated at NT$11.83 (US$1.80) if the company loses 20 percent of the orders placed by Qualcomm next year but maintains orders for the A8 and follow-up application processors placed by Apple, Heyler said.

If TSMC loses orders from both Qualcomm and Apple next year, TSMC's EPS in 2015 will be NT$10.32, Heyler predicted.

TSMC shares edged up 0.81 percent at NT$124.50 Tuesday in Taipei. The local market was closed Wednesday because of a typhoon.

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