Core Viewpoint - HSBC maintains a "Buy" rating for TSMC, raising the target price from NT$1,800 to NT$2,050, supported by strong performance, robust AI demand, and expansion of advanced technology [1][6] Group 1: Investment Signals - The rationale for TSMC's "Buy" rating is straightforward: risks are decreasing while potential is increasing [1] - HSBC projects TSMC's earnings per share (EPS) to be NT$81.45 by 2026, applying a price-to-earnings (P/E) ratio of 25x, which is deemed reasonable as previous concerns over foreign exchange fluctuations and semiconductor tariffs are diminishing [1][6] Group 2: Q3 Performance - TSMC's Q3 results exceeded expectations across the board, with revenue at NT$99 billion, a 6% quarter-over-quarter increase, and surpassing HSBC's forecast by 0.1% and market consensus by 2.3% [2] - Gross margin reached 59.5%, exceeding management's guidance of 56.5% and HSBC's prediction of 58.1% [2] - Net profit was NT$45.23 billion, with EPS at NT$17.44, exceeding HSBC's expectations by 20.7% and 11.2% respectively [2] Group 3: Business Structure - Advanced process nodes (7nm and below) accounted for 74% of revenue, with 3nm contributing 23%, 5nm 37%, and 7nm 14% [3] - High-performance computing represented 57% of revenue, while smartphones accounted for 30%, together making up 87% of total revenue, indicating that AI demand is a primary driver [3] Group 4: Growth Engines - TSMC's long-term growth is driven by AI demand and advanced technology iterations, both of which are essential [3] - AI demand has strengthened compared to three months ago, with management expressing confidence in the ongoing trend [3] - TSMC plans to expand CoWoS (advanced packaging technology) capacity from 930,000 wafers to 1,100,000 wafers by 2026 to meet AI demand [4] Group 5: Advanced Technology - TSMC is set to begin mass production of 2nm technology in the second half of 2025, which is expected to be 10-15% faster and reduce power consumption by 20-30% [5] - The N2P (2nm upgrade) is scheduled for mass production in the second half of 2026, with further performance and power optimizations [5] - Long-term technology reserves are strong, with additional advancements planned for A16 and A14 technologies [5] Group 6: Global Factory Layout - TSMC is accelerating its global factory deployment to match demand, with significant investments in the U.S., Japan, Europe, and Taiwan [6] - In Arizona, TSMC is investing $16.5 billion to build six wafer fabs and two packaging plants, with the first fab expected to start production in Q4 2024 [6] - The first special technology factory in Japan is set to begin production by the end of 2024, with plans for further expansion [6] Group 7: Long-term Logic - HSBC expresses confidence in TSMC's long-term certainty, with AI demand supporting revenue growth and advanced technology maintaining competitive advantages [6][7] - As long as the AI trend continues and technology iterations keep pace, TSMC's valuation reassessment is expected to persist [7]

Financial Highlights - Third quarter revenue increased 10.1% sequentially to $33.1 billion, slightly exceeding guidance, driven by strong demand for leading-edge process technologies [3][10] - Gross margin rose 0.9 percentage points sequentially to 59.5%, attributed to cost improvements and higher capacity utilization, despite foreign exchange challenges [3][6] - Operating margin increased 1.0 percentage point sequentially to 50.6% [3] - Earnings per share (EPS) was 17.44 NT, up 39% year over year, with a return on equity (ROE) of 37.8% [3] Business Line Performance - Revenue contribution from 3-nanometer process technology was 23%, while 5-nanometer and 7-nanometer accounted for 37% and 14% respectively [4] - High-Performance Computing (HPC) remained flat at 57% of revenue, while smartphone revenue increased 19% to 30%, IoT grew 20% to 5%, and automotive rose 18% to 5% [4] - Data Center Equipment (DCE) revenue decreased 20% to 1% [4] Market Data - The company ended the third quarter with cash and marketable securities of 2.8 trillion NT ($90 billion) [4] - Current liabilities decreased by 101 billion NT, mainly due to a reduction in accrued liabilities [4] Company Strategy and Industry Competition - TSMC is narrowing its 2025 capital expenditures (CAPEX) guidance to between $40 billion and $42 billion, with 70% allocated for advanced process technologies [9] - The company expects gross margin dilution from overseas fabs to be between 1% to 2% for the full year 2025, improved from previous estimates [7] - TSMC aims to leverage its manufacturing technology leadership and large-scale production to remain competitive [8] Management Commentary on Operating Environment and Future Outlook - Management noted strong AI-related demand and a mild recovery in non-AI segments, projecting full-year 2025 revenue growth of close to mid-30% year over year in U.S. dollar terms [10][11] - The company remains cautious about potential tariff impacts on consumer-related markets but is committed to investing in future megatrends [11] - TSMC is focused on technology leadership, manufacturing excellence, and customer trust to strengthen its competitive position [11] Other Important Information - TSMC is expanding its global manufacturing footprint, with significant progress in Arizona and plans for additional fabs in Japan and Germany [16][17] - The company is preparing for the ramp-up of its 2-nanometer technology, with volume production expected later this quarter [18] Q&A Session Summary Question: AI Demand Growth - Management confirmed that AI demand is stronger than previously anticipated, with an expected CAGR in the mid-40% range for AI accelerators [21][24] Question: CAPEX Outlook - Management indicated that CAPEX will correlate with business opportunities, and they will continue to invest as long as growth opportunities exist [26][27] Question: CoWoS Capacity - Management is working to increase CoWoS capacity to meet demand but did not provide specific numbers for 2026 [30] Question: Competition and Foundry 2.0 - TSMC is focusing on system performance and advanced packaging as part of its Foundry 2.0 strategy to enhance competitiveness [74][76] Question: Smartphone Prebuilt Concerns - Management expressed no concerns about prebuilt inventory levels, indicating they are healthy and seasonal [79]