TSMC_ Assessing scenarios on US Fab expansion and Intel Cooperation. Sun Feb 16 2025

Summary of TSMC Conference Call Company and Industry - Company: TSMC (Taiwan Semiconductor Manufacturing Company) - Industry: Semiconductor Manufacturing Key Points and Arguments 1. Expansion of US Fabs - TSMC plans to expand its Arizona facilities to include up to 6 Fabs over the next several years, with 3 already announced (Fab 1 - N4, Fab 2 - likely N3, and Fab 3 - A16/A14) - Potential for an additional Fab 5 and an advanced packaging Fab 4, leading to a capex exceeding $100 billion in the US over the next 5-10 years, significantly higher than the $65 billion announced for Fab 1-3 in April 2024 [4][8] 2. Support from the US Chips Act - Continued support from the Chips Act, particularly in the form of Investment Tax Credits (ITC), is crucial for TSMC's expansion plans - The ITC, which credits back 25% of qualified capex, is deemed more important than upfront grants due to TSMC's healthy free cash flow position [4][8] 3. Tariff Threats - President Trump has threatened tariffs of 25-100% on semiconductor exports to the US, which could significantly impact TSMC and its customers - TSMC's direct exports to the US are minimal (7% of Taiwan's US exports), but indirect exports could have a larger economic impact - TSMC is expected to pass on tariffs to customers, but this could lead to cost inflation and negatively affect unit growth [4][8] 4. R&D Expansion in the US - TSMC may consider minor R&D expansions in the US, similar to its operations in Japan, but centralized R&D in Taiwan remains a key differentiator - Close cooperation between R&D and manufacturing is essential for leading-edge process ramp, which is challenging to achieve overseas [5][6] 5. Joint Ventures and Acquisitions with Intel - Speculation exists about TSMC participating in a joint venture with Intel or acquiring Intel Fabs, but TSMC management has indicated this is not a preferred route due to differences in Fab layouts and organizational culture - Such actions would require strong financial subsidies and commitments from the US government [6][8] 6. Sharing Process Know-How with Intel - Proposals to share TSMC's process know-how with Intel are considered unlikely, as TSMC is expected to protect its intellectual property vigorously [6] 7. Stock Price Implications - TSMC's stock is expected to react neutrally to positive announcements regarding US capacity expansion, with potential dilution in gross margins that should diminish over time - Any joint venture or operational control of Intel Fabs is likely to be viewed negatively in the short term due to significant P&L impacts [9][10] 8. Investment Thesis and Valuation - TSMC is rated as "Overweight" with a price target of NT$1,500, supported by strong growth levers from its near-monopoly position in AI accelerators and ongoing technology leadership - Risks include potential market share losses to competitors like Samsung and a challenging foundry competitive landscape [10][11][13] Additional Important Content - TSMC's pricing power is expected to lead to strong gross margin expansion, and the company is likely to become a larger customer for Intel in the next 3-5 years [11][12]