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Post: The Ratings Game: Taiwan Semi rallies as exposure to China restrictions minimal, capital spending cut

Taiwan Semiconductor Manufacturing Co. injected some much needed optimism into the chip sector Thursday, after the third-party silicon-wafer fabricator reported results and an outlook that indicated the market wasn’t in as dire a shape as some feared.

American depositary receipts of Hsinchu, Taiwan-based TSMC

rallied nearly 10% in Thursday’s session, hours after the company not only reported that net income nearly doubled from a year ago, as revenue surged nearly 50%, but forecast a “flattish” outlook that still exceeded the Street consensus at the time.

As the largest market-cap component of the 30 that make up the PHLX Semiconductor Index
TSMC earnings were seen as a litmus test for the broader chip market heading into earnings season. The SOX index advanced more than 3%, while the S&P 500 index

and the tech-heavy Nasdaq Composite Index

both rose nearly 3%.

Chip stocks have fallen since Friday, when U.S. regulators widened a list of products with restricted sales to China to help pump the brakes on the country’s military expansion.

On top of results, TSMC got an added boost during afternoon trading Thursday when The Wall Street Journal reported that it and South Korea’s Samsung Electronics Co.

both won exemptions from those restrictions concerning certain tech products to China. Ever since the updated restrictions were issued on Friday, tech stocks have stumbled as chip makers gauge their exposure.

Read: Chip stocks could suffer worst year ever as effects of shortage-turned-glut spread

Citi Research analyst Laura Chen, who has a buy rating on the stock, said that TSMC was “resilient despite rising geopolitical risk,” and that the impact of the restrictions are “limited and manageable as we believe its most advanced technology is mainly for the U.S. clients such as Apple

and Intel

“While Chinese clients contribute about 10-12% of TSMC’s revenue, these are mostly for trailing edge process,” Chen said. “To address the rising geopolitical risk, TSMC also mentioned that it will be closely working with customers to diversify their production.”

Even with TSMC trimming its 2022 capital spending to $36 billion from a previous estimated range of $40 billion to $42 billion, the company appears to still be on track with expansions in Taiwan, Japan, and Arizona by 2024.

“Only very high-end compute chips are restricted & we estimate that amounts to only ~0.4% of TSMC’s 2023 revenue or ~5% in an unreasonably extreme case,” said Bernstein analyst Mark Li in a note.

“Our research still indicates that CPU does not exceed the threshold set by the U.S.,” said Li, who has an overweight rating on TSMC. “Additionally only one GPU from Intel (Ponte Vecchio) and another from Biren (a Chinese private startup) likely will be restricted, and so will supercomputer chips.”

Read: Chip stocks crushed to two-year low as more tech, AI ban to China add to woes

“For TSMC, the damage is nearly entirely from A100/H100 [AI products] of Nvidia and only for China, and hence the size is much smaller than feared,” Li said.

Hours before TSMC reported earnings, Applied Materials Inc.
which supplies fabs with the complicated machinery required in cleanrooms, warned that widened restrictions on products it can sell to China will cost it upwards of $1 billion in sales spread over a six-month period.

TSMC “once again posted a beat and raise overnight,” said Evercore ISI analyst C.J. Muse, who expects high-performance computing and auto customers to provide steady demand to offset consumer-facing ofversupply.

“Due to consumer demand weakness, mgmt. envisions a supply chain inventory burn through 1H23 – with inventories expected to peak in 3Q22, reduce in 4Q22, and have the greatest declines in 1H23 before rebalancing to a healthy level into the back half of CY23,” Muse said.

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