A Bear Investment Case for TSMC (In-Depth Version)

From end of 2008 to end of 2017, Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) had a remarkable run with the share price up more than 400%. However, TSMC share price has not fared so well in the past year with its share price down nearly 16% during this period. In this report, we provide a BEAR INVESTMENT CASE for TSMC. We do not believe all its troubles are over. Rather, we expect its sales and earnings to be much lower than the consensus in 2020. The following are the seven major reasons that are likely to negatively impact TSMC's share price and its financials in the next two years:

1. Samsung Electronics' technological edge in 7nm EUV foundry process. [More intense competition]
2. SMIC & China [More intense competition]
3. The major tipping point period of higher demand for autonomous vehicles (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2023. [Timing of incremental customers demand]
4. The major tipping point period of higher demand for 5G service (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2021/2022. [Timing of incremental customers demand]
5. Increasing threats to Apple. [Threats to a major customer]
6. Major semiconductor memory prices such as DRAM and NAND Flash have been declining in the past few weeks. This could foreshadow a further softening of demand and prices in the entire semiconductor sector, including the foundry. The semiconductor companies increased their capex excessively in 2017 and this is likely to result in further reduced prices in 2019. [Concerns about oversupply/capex]
7. Collapsing demand for cryptocurrency mining machines. [Concerns about a customer segment]