J P M O R G A N Asia Pacific Equity Research 13 March 2026 This material is neither intended to be distributed to Mainland China investors nor to provide securities investment consultancy services within the territory of Mainland China. This material or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. Semiconductor/SPE sector Strong growth to continue into CY2027 We raise our WFE (wafer fabrication equipment) market forecasts. We now expect 21% YoY g ...

Core Viewpoint - Taiwan Semiconductor Manufacturing (TSMC) shares have increased over 40% in 2025, with analysts predicting further growth, particularly with a price target increase from $300 to $400 by Susquehanna analyst Mehdi Hosseini ahead of Q3 earnings [1][2]. Group 1: Demand Trends - TSMC is witnessing accelerated demand for AI-optimized chips, with expectations of AI accelerator demand growing at a mid-40% compound annual growth rate through 2029, potentially exceeding forecasts [3]. - The exponential increase in token usage across AI models has led to a surge in demand for high-performance, energy-efficient chips, benefiting TSMC, as advanced nodes (7-nanometer and below) constituted 74% of its wafer revenues in Q3 [4]. Group 2: Financial Performance - In Q3, TSMC's revenues rose 41% year over year to $33.1 billion, while earnings per share increased by 50% to $2.91 [5]. Group 3: Future Catalysts - TSMC is expanding its chip-on-wafer-on-substrate (CoWoS) packaging capacity, with projections to reach 120,000 to 130,000 wafers per month by the end of 2026, up from 75,000 to 80,000 wafers per month [6]. - The company anticipates volume production of its N2P and A16 technologies to begin in 2026, potentially initiating a multiyear upgrade cycle in data centers, smartphones, and AI accelerators [7]. - TSMC's growing AI demand enhances long-term visibility for its foundry business, positioning the company for further share price gains in 2026 [8].

Company Overview - Taiwan Semiconductor Manufacturing Company Limited (TSM) has a current share price of around $228 and is experiencing strong performance due to the rising demand for artificial intelligence (AI) and the recovery in semiconductor stocks [1] - TSM is a dominant player in the semiconductor industry, controlling approximately two-thirds of the global third-party market and manufacturing chips for major AI companies like Nvidia, AMD, and Broadcom [3] Financial Performance - TSM reported first-quarter 2025 earnings of $2.12 per share, surpassing the Zacks Consensus Estimate of $2.03, resulting in an earnings surprise of 4.4% [4] - The company achieved revenues of $25.5 billion, exceeding the Zacks Consensus Estimate of $25.3 billion [4] - TSM's AI-chip business is projected to double in 2025, with annual AI-specific revenues expected to reach around $20 billion [5] Market Position and Growth - TSM is not only benefiting from a cyclical upswing in the semiconductor market but is also central to the structural transformation in computing driven by AI [5] - The company's CoWoS packaging margins exceed 60%, largely due to demand from AI and high-performance computing [5] - Year to date, TSM has grown 15.8%, outperforming its Zacks Peer Group, which advanced by 13.4% [7] Challenges and Risks - TSM faces headwinds from geopolitical tensions, particularly between the U.S. and China, and has allocated about $18 billion to hedge against Taiwan-dollar volatility [6] - Cybersecurity threats and supply-chain nationalization efforts pose additional risks as TSM expands its manufacturing facilities in the U.S., Japan, and Germany [6] Strategic Outlook - TSM is viewed as a backbone of AI infrastructure, with a long runway for growth as it supplies chips for various applications, including generative AI and AI-powered smartphones [8] - The company maintains a Zacks Rank 2 (Buy), indicating positive market sentiment towards its future performance [7]