M
Idea
August 20, 2023 08:25 PM GMT
Greater China Semiconductors | Asia Pacific
Morgan Stanley Taiwan Limited+
Daniel Yen, CFA
Equity Analyst
Driver ICs: Hampered by
Weaker Demand
Daniel.Yen@morganstanley.com
+886 2 2730-2863
Charlie Chan
Equity Analyst
Charlie.Chan@morganstanley.com
+886 2 2730-1725
Ray Wu, CFA
Equity Analyst
Overall consumer weakness and intensified competition could
be negative for most DDI vendors. We remain conservative and
think producers could face more near-term GM headwinds.
Ray.Wu@morganstanley.com
+886 2 2730-2871
Morgan Stanley Asia Limited+
Daisy Dai, CFA
Equity Analyst
Daisy.Dai@morganstanley.com
+852 2848-7310
A potential second dip in 2H? In June, we wrote that we were conservative on the
Morgan Stanley Taiwan Limited+
DDI space overall (link), and 2Q earnings results suggest conservatism is warranted
Dylan Liu
– amid weaker 3Q revenue guidance, especially from tier-1 DDI design vendors,
Novatek and Himax ( Exhibit 9 ), which guided for revenue to decline Q/Q in 3Q.
There's also ongoing capacity ramp from Chinese DDI foundry (link). With the
slower demand recovery into 2H and increasing wafer supply on DDI, we believe the
DDI supply chain may face increasing pricing pressure and potential de-stocking. This
could affect the producers more, given both lower utilization (UT) and pricing.
DDI design – Weaker demand and pricing outlook: We believe consumer demand
remains weak – in contrast to market expectations of a 2H recovery. In particular,
Novatek mentioned that its PC business could see the largest shortfall into 3Q
(link). We believe this will impact the pricing outlook for LDDI, which could still see
5-10% pricing erosion into 2H. TDDI demand remains weak (partially due to OLED
migration), which could see more pricing pressure even into 4Q, in our view. Some
design houses could even see 0% GM. For OLED DDI, we believe the market
underestimates the competition from China and pressure from Chinese panel
customers, driving ongoing pricing pressure heading into 4Q.
Equity Analyst
Dylan.Liu@morganstanley.com
+886 2 2730-1723
Tiffany Yeh
Research Associate
Tiffany.Yeh@morganstanley.com
+886 2 7712-3032
Greater China Technology Semiconductors
Asia Pacific
Industry View
Attractive
Exhibit 1 : DDIC supply chain
Ticker
Company
300327.SZ
603501.SS
2330.TW
3034.TW
4966.TWO
6147.TWO
5347.TWO
6770.TW
Sino Wealth
Will Semi
TSMC
Novatek
Parade
Chipbond
Vanguard
PSMC
Rating Price Target Price Close
OW
OW
OW
EW
EW
EW
UW
UW
37.10
118.00
718.00
399.00
822.00
66.00
62.00
22.50
25.88
88.23
539.00
386.00
818.00
67.80
70.40
27.25
Upside/downside %
43%
34%
33%
3%
0%
-3%
-12%
-17%
Source: Refinitiv, Morgan Stanley Research estimates. Note: Prices as of
market close on Aug 18, 2023, unless otherwise indicated. Prices in local
currency.
Foundry and OSAT – Momentum appears unsustainable into 3Q: Chipbond and
ChipMOS (8150.TW, Not Covered) both cut their back-end service prices ~5% in mid2Q, and we don't rule out the possibility of further price erosion given their
customers' pressure on lowered IC prices. As mentioned in our last DDI report in
June, we believe 2Q rush orders likely reflected poor visibility for end-demand, and
thus customers placed last-minute orders. Now, we expect DDI back-end demand to
fall in 3Q, given slower end-demand. DDI foundry wafer prices may fall in 2H23,
judging from SMIC's and Nexchip's (688249.SS, Not Covered) comments on gross
margin and wafer price outlook.
Stock implications – Vanguard, PSMC, Chipbond could see more downside, near
term: On top of the demand weakness, high risk of China's competition could weigh
on Vanguard. We believe its fab utilization rate will not reach 65% in the next nine
months. Valuation is at 2.6x 2024e BVPS vs. <20% ROE. This also applies to PSMC,
with the key difference at valuation (1.3x 2024 BVPS vs. 9% ROE). Chipbond could
see lower UT and potential pricing erosion as well, which drives our earnings cut.
For Novatek, the near-term challenges may be partially offset by the lower costs on
both foundry and OSAT. However, we are concerned about GM downside into 2024
and lower share allocation from Apple OLED DDI.
Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As a result,
investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of Morgan Stanley
Research. Investors should consider Morgan Stanley
Research as only a single factor in making their investment
decision.
For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of this
report.
+= Analysts employed by non-U.S. affiliates are not registered
with FINRA, may not be associated persons of the member
and may not be subject to FINRA restrictions on
communications with a subject company, public appearances
and trading securities held by a research analyst account.
M
Idea
Key charts
Exhibit 2:
Panel makers' DOI was down to 50 days in 2Q, still
above normal levels
Exhibit 3:
DDI design house DOI – edged down to 99 days
170
150
130
60
110
90
50
70
50
40
30
1Q23
3Q22
1Q22
3Q21
1Q21
3Q20
1Q19
3Q19
1Q20
3Q18
1Q18
3Q17
1Q17
3Q16
1Q16
3Q14
1Q15
3Q15
1Q14
3Q13
1Q13
Panel Avg DOI
Median @ 43 days
1Q23
3Q22
1Q22
3Q21
1Q21
3Q20
1Q20
3Q19
1Q19
3Q18
1Q18
3Q17
1Q17
3Q16
1Q16
3Q15
1Q15
3Q14
1Q14
3Q13
1Q13
30
DDI Avg DOI
Median @ 80 days
Source: Novatek, Himax, Focaltech, LX Semicon, Raydium, Fitipower, Bloomberg, TEJ
Source: AUO, Innolux, BOE, LGD, TEJ, Bloomberg. Note: BOE's DOI is excluded for 2Q23.
Exhibit 4:
PC brand inventory levels
Exhibit 5:
TFT-LCD TV panel price Y/Y trends
90
80
70
60
50
40
30
Source: Witsview, Morgan Stanley Research
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
20
PC Brand average days of inventory
Median @55days
Source: Bloomberg, Morgan Stanley Research Note: Dell, HP and Lenovo's DOI is excluded for 2Q23 as
the data is not yet released.
Exhibit 6:
PC channel inventory level is 17% above pre-COVID
levels (as of Aug 6, 2023)
Exhibit 7:
As of Aug 6, 2023, desktop US channel inventory
levels were still near trough and stable; notebook inventory is
piling up
Source: Morgan Stanley Research (using industry survey feedback from our US hardware team)
Source: Morgan Stanley Research (using industry survey feedback from our US hardware team)
2
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Idea
Exhibit 8:
2Q23 Revenue and GM review
P&L Comparison
Novatek
30,299
26.0%
41.7%
Revenue (NT$mn)
Revenue Q/Q (%)
Gross margin (%)
2Q23 Result
Raydium
4,748
29.6%
28.1%
Himax
7,215
-3.8%
21.7%
Focaltech
3,112
-3.5%
20.5%
Fitipower
4,341
10.3%
32.0%
Source: Company data, Morgan Stanley Research
Exhibit 9:
3Q23 revenue and GM outlook based on management commentary*
Revenue (NT$mn)
Revenue Q/Q
Novatek
28,100-29,100
-4~-7%
Growth breakdown
SMDDIC/TV SoC/Auto: grow Q/Q
LDDI/SP TDDI/Tcon: down Q/Q
Gross margin
38-40%
Himax
6,645-7,145
0~-7%
LDDI: down single digit Q/Q
SMDDI: flat to slightly up Q/Q
Auto: up double digit Q/Q
Tcon: down single digit Q/Q
AMOLED DDI: launch in end of '23
30.5-32%
3Q23 Guidance & Remark
Raydium
"flat to up Q/Q"
NA
Focaltech
"3Q to be similar to 2Q"
NA
Fitipower
"Hope to be up Q/Q"
NA
AMOLED/LDDI/Tcon/Auto: flat
to up Q/Q
TDDI: lack of growth momentum
AMOLED Tcon: shipment to see increase
Tcon: gaining market shares
TDDI: weak demand
AMOLED DDI: postpone launch to 1Q24
"GM will be more stable"
NA
NA
Source: Company data. *Himax, Radium, Focaltech and Fitipower are Not Covered by Morgan Stanley Research
Morgan Stanley Research
3
M
Idea
DDI Group and Featured Companies
In our April 2022 global tech report, we highlighted that semi shortages were normalizing
and weaker demand could hit the tech sector, with DDI companies suffering most from
the downturn. With the chip supply shortage now easing, we believe DDI companies' gross
margins and ASPs will continue to deflate in 2023, but at a slower pace, as some enddemand starts to bottom after the correction since 1H22.
We believe Novatek's stock price reflected weaker consumer demand in 2022. However, it
has rebounded 62% since October 2022 (vs. Taiex up 27%), which we think is mainly
thanks to rush orders from TV and high-end IT. We argued that the potential for price
hikes in 3Q23 was low in our DDI update note in March, and this has now played out. We
continue to believe that increasing supply from China and tapering of restocking will cap
ASP upside for DDI players into 3Q, despite stable panel prices (refer to Derrick Yang's
note). We also believe TDDI will still be under pressure as we enter 2H23, given weak
smartphone demand and piled inventories at all vendors' sides. We also note that the
demand for LDDIC is stabilizing after 3 quarters of restocking, although there's some
pickup on the auto side after a half-year of correction, and OLED DDI demand continues
to grow. Overall, we remain conservative on the DDI space.
We are still concerned about the long-term competitive landscape, as Chinese vendors
continue to enter the market. We expect oversupply (of 15-20%) in 2023, along with
market share losses, will pressure Novatek's earnings for the next three years. As for
Chipbond, while we view Chinese peers, such as Tongfu (Not Covered) as trying to
penetrate the DDI back-end market, meaningful competition from Chinese peers remains
to be seen.
Our proprietary industry model suggests that the DDI market will be in oversupply by
about 16.2% in 2023 and 16% in 2024, vs. undersupply of 12% in 2021, suggesting ASP will
still trend downward in the coming quarters. Please refer to Exhibit 10 .
Exhibit 10: LDDI (large display driver ICs) and midsize DDI
Exhibit 11: SDDI (small display driver ICs) supply and demand –
supply and demand – gap from ~14% undersupply in 2021 to
gap from ~5% undersupply in 2021 to 9% oversupply in 2023e
17% oversupply in 2023e
Source: Company data (e.g., TSMC, UMC, Vanguard, Nexchip, SMIC), Morgan Stanley Research (e)
estimates
Source: Company data (e.g., TSMC, UMC, Vanguard, Nexchip, SMIC), Morgan Stanley Research (e)
estimates
4
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Idea
Chipbond (EW; PT NT$66)
Price erosion may continue
Chipbond and ChipMOS are the two major suppliers for DDI back-end, with similar
technological offerings, and therefore pricing dynamics were stable during 1Q23 despite
sluggish DDI back-end demand.
However, due to weak consumer demand, our back-end semi supply chain checks suggest
that ~5% price erosion for both players occurred in mid-2Q across all services, such as
testing, bumping, COF (chip on film) and COG (chip on glass). We believe the lowered
prices are unlikely to recover, given pricing pressure among DDI design houses, and
therefore the medium-term growth outlook is likely to be weaker even if volume picks up
when overall demand recovers. We even don't rule out the possibility that the key
suppliers may need to further lower the prices for their back-end services given continued
deterioration of DDI prices.
Our back-end supply chain checks indicate that some Chinese OSATs, such as Tongfu
Microelectronics are looking into DDI back-end opportunities, and therefore Chinese
vendors' action needs to be monitored in the longer term.
Demand visibility remains limited
There were some rush orders in early-2Q – usually, rush orders imply a demand recovery.
However, we think this time it reflected the poor visibility for end-demand, and therefore
customers placed orders only at the last minute. Our supply chain checks across different
product segments still suggest muted semi component demand. As such, any rush orders
should not be construed as an overall demand recovery if demand visibility remains low.
Looking into 3Q, we expect Chipbond's revenue to be down 5-10% Q/Q, given still-elevated
inventories on the DDI customers' side. The overall inventory has been meaningfully
reduced as of 2Q, but end-demand does not appear set to recover in 3Q, either. This is
why the industry is conservative in any kind of supply chain activities – after all, the
supply should be an issue if there were any demand upside. Given the decreasing revenue
into 3Q, we expect Chipbond's gross margin to fall sequentially as on a lower utilization
rate.
Morgan Stanley Research
5
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Idea
Exhibit 12: Chipbond's packaging utilization rates to slightly recover, but price erosion
may limit 2H recovery momentum
Chipbond: Utilization rate by packaging type
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
COF
COG
Source: Company data, Morgan Stanley Research (E) estimates
Estimate changes
We raise our 2023 EPS estimate by 1%, but lower our 2024 EPS estimate by 2%: We
cut our revenue assumptions to reflect slower inventory re-stocking due to weak enddemand and therefore a less significant utilization rate recovery in 2H23. Our reduced
gross margin assumptions factor in lowered volume for DDI packaging and test as well as
pricing erosion. We reflect the investment gain from dividend income in 2Q23, and
therefore we increased our 2023 EPS estimate despite a reduced operating profit.
Exhibit 13: Chipbond: Estimate change summary
(NT$ mn)
Net sales
Gross profit
Operating profit
Pretax Income
Net income
Reported EPS
Margins
Gross margin
Operating margin
Pretax margin
Net margin
New '23E
Old '23E
Diff.
New '24E
Old '24E
Diff.
New '25E
Old '25E
Diff.
20,687
5,575
3,749
4,599
3,896
5.22
21,440
6,073
4,355
4,582
3,851
5.16
-4%
-8%
-14%
0%
1%
1%
24,099
7,062
5,127
5,322
4,468
5.99
24,466
7,322
5,371
5,478
4,565
6.12
-2%
-4%
-5%
-3%
-2%
-2%
26,505
7,940
5,787
5,982
5,071
6.80
26,665
8,113
5,934
6,041
5,072
6.80
-1%
-2%
-2%
-1%
0%
0%
26.9%
18.1%
22.2%
18.8%
28.3%
20.3%
21.4%
18.0%
Source: Company data, Morgan Stanley Research (E) estimates
6
29.3%
21.3%
22.1%
18.5%
29.9%
22.0%
22.4%
18.7%
30.0%
21.8%
22.6%
19.1%
30.4%
22.3%
22.7%
19.0%
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Idea
Exhibit 14: Chipbond: Quarterly financials
NT$ in million
1Q23
2Q23
3Q23E
4Q23E
1Q24E
2Q24E
3Q24E
4Q24E
4,603
-14.5%
-31.8%
5,471
18.9%
-17.5%
5,067
-7.4%
-3.5%
5,546
9.5%
3.0%
5,306
-4.3%
15.3%
5,830
9.9%
6.6%
6,529
12.0%
28.8%
6,433
-1.5%
16.0%
27,082
21.6%
-11.3%
-13.8%
16.5%
10.0%
Cost of Sales
Percent of Revenues
Variable costs
as a % of revenue
Depreciation & Amortization expense
3,449
75%
0%
2,489
54%
959
3,988
73%
0%
3,004
55%
984
3,730
74%
0%
2,736
54%
994
3,945
71%
0%
2,941
53%
1,004
3,874
73%
0%
2,854
54%
1,020
4,154
71%
0%
3,120
54%
1,034
4,526
69%
0%
3,473
53%
1,053
4,483
70%
0%
3,411
53%
1,072
18,330
68%
0%
14,775
55%
3,555
16,177
67%
0%
12,451
52%
3,726
15,112
73%
0%
11,171
54%
3,941
17,037
71%
0%
12,859
53%
4,179
18,565
70%
0%
14,101
53%
4,463
Gross Margin
Percent of Revenues
1,154
25.1%
1,482
27.1%
1,337
26.4%
1,601
28.9%
1,432
27.0%
1,676
28.8%
2,003
30.7%
1,951
30.3%
8,752
32.3%
7,833
32.6%
5,575
26.9%
7,062
29.3%
7,940
30.0%
Total Opex
Percent of Revenues
397
8.6%
453
8.3%
494
9.8%
482
8.7%
442
8.3%
454
7.8%
526
8.1%
512
8.0%
1,858
6.9%
1,956
8.1%
1,826
8.8%
1,935
8.0%
2,154
8.1%
R&D
Percent of Revenues
153
3.3%
138
2.5%
159
3.1%
166
3.0%
158
3.0%
159
2.7%
212
3.3%
190
3.0%
660
2.4%
762
3.2%
617
3.0%
720
3.0%
758
2.9%
General & administrative
Percent of Revenues
204
4.4%
273
5.0%
293
5.8%
273
4.9%
240
4.5%
250
4.3%
260
4.0%
275
4.3%
1,026
3.8%
1,008
4.2%
1,043
5.0%
1,025
4.3%
1,185
4.5%
Selling & marketing
Percent of Revenues
39
0.8%
42
0.8%
42
0.8%
43
0.8%
44
0.8%
44
0.8%
54
0.8%
47
0.7%
172
0.6%
186
0.8%
166
0.8%
190
0.8%
211
0.8%
Operating Income
Percent of Revenues
Change vs Year Ago
758
16.5%
-56.4%
1,029
18.8%
-37.3%
843
16.6%
-25.3%
1,119
20.2%
-18.3%
990
18.7%
30.6%
1,223
21.0%
18.8%
1,476
22.6%
75.2%
1,438
22.4%
28.5%
6,894
25.5%
43%
5,877
24.5%
-15%
3,749
18.1%
-36%
5,127
21.3%
37%
5,787
21.8%
13%
Total Revenues
Sequential Change
Change vs Year Ago
Total Non-operating Income(Loss)
Profit Before Taxes
Percent of Revenues
Taxes
Tax Rate
Reported Income (TW GAAP)
Percent of Revenues
Change vs Year Ago
ModelWare EPS
Change vs Year Ago
2021
2022
24,010
2023E
20,687
2024E
24,099
2025E
26,505
(14)
729
67
67
29
109
29
29
534
1,781
849
195
195
744
16%
1,759
32%
910
18%
1,186
21%
1,018
19%
1,331
23%
1,505
23%
1,467
23%
7,428
27%
7,659
32%
4,599
22%
5,322
22%
5,982
23%
78
10.5%
336
19.1%
126
13.8%
163
13.7%
152
14.9%
300
22.5%
202
13.4%
200
13.6%
1,291
17%
1,450
19%
703
15%
853
16%
910
15%
666
14%
0%
1,423
26%
0%
784
15%
0%
1,023
18%
0%
867
16%
0%
1,031
18%
0%
1,303
20%
0%
1,267
20%
0%
6,137
23%
68%
6,209
26%
1%
3,896
19%
-37%
4,468
19%
15%
5,071
19%
13%
0.89
-61%
1.91
-20%
1.05
-50%
1.37
-8%
1.16
30%
1.38
-28%
1.75
66%
1.70
24%
9.00
62%
8.30
-8%
5.22
-37%
5.99
15%
6.80
13%
Source: Company data, Morgan Stanley Research (E) estimates
Valuation methodology
We keep our price target unchanged, at NT$66.0: We continue to use a residual Income
model to derive our base case value. We keep all of our key assumptions unchanged,
including an intermediate growth rate of 4.0%, a cost of equity of 9.8% (beta of 1.3, equity
risk premium of 6.0%, risk free rate of 2.0%), and terminal growth rate of 3.0%.
Exhibit 15: Chipbond: Residual income model
(NT$ mn)
Total Equity
Net Profit
ROAE
Residual Income
Spread
Ending Equity Capital
PV of Forecast Period
PV of Continuing Value
Equity Value
No. of Shares
Projected Price (NT$)
2023e
2024e
2025e
2026e
2027e
2028e
2029e
2030e
2031e
2032e
2033e
2034e
40,723 42,636 44,776 46,965 49,241 51,608 54,070 56,631 59,293 62,063 64,943 67,938
3,896
4,468
5,071
5,274
5,485
5,704
5,932
6,170
6,417
6,673
6,940
7,218
9.5%
10.7%
11.6%
11.5%
11.4%
11.3%
11.2%
11.1%
11.1%
11.0%
10.9%
10.9%
(104)
-0.3%
375
0.9%
769
1.8%
760
1.7%
753
1.6%
745
1.5%
737
1.4%
728
1.3%
719
1.3%
710
1.2%
701
1.1%
691
1.1%
40,723
4,258
3,741
48,722
739
66
Source: Company data, Morgan Stanley Research (e) estimates
Our price target implies 11x our 2024 EPS estimate, similar to Chipbond's historical
average valuation of 10x in the past 5 years.
Morgan Stanley Research
7
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Exhibit 16: Chipbond: One-year forward P/E trend
22
P/E (x)
18
14
Plus one SD: 11.0x
Average: 9.5x
10
Minus one SD: 7.9x
6
2
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source: Company data, Morgan Stanley Research estimates
Novatek (EW; PT NT$390)
Slower PC Drives Weaker 3Q Guidance; Long-term growth potential
appears capped
Novatek's gross margin was in the 28-30% range in 2013-17 but improved to above 30%
from 2018. However, the DDI market underwent some consolidation and spec migration in
2016-1H20, which brought Novatek's gross margin up to around 33%. Margin expansion to
50%+ from 2H21 to 1Q22 was purely from ASP hikes due to shortages during Covid.
We believe that consumer demand remains weak, in contrast to the market's expectation
of 2H recovery. In particular, Novatek mentioned that its PC business could see its largest
shortfall into 3Q (link). We believe this will impact the pricing outlook for LDDI, which
could still see 5-10% pricing erosion into 2H. TDDI demand remains weak (partially due to
OLED migration), which could see more pricing pressure even into 4Q, in our view. Some
design houses could see even 0% GM. For OLED DDI, we believe the market
underestimates the pressure coming from Chinese panel customers, which drives ongoing
pricing pressure heading into 4Q.
For the medium-to-long term, we remain concerned about the level of competition from
Chinese vendors. Capacity constraints capped competition from Chinese peers in 2020-22.
We expect Chinese peers to continue to gain share. For example, we expect competition
from ChipOne in LDDI and TDDI, and see share gains for Sino Wealth in AMOLED and Will
Semi in TDDI and AMOLED. We also expect Taiwanese suppliers to compete more
aggressively on pricing, likely leading to market share losses for Novatek, down to 20%
market share in 2024, from 25% in 2021.
If increased competition from China does arise in 2H23, we think Novatek's GM could
return to its pre-Covid levels of 30-35%.
8
M
Idea
Exhibit 17: Novatek – FY2 EPS estimate revisions (3MMA) vs.
Exhibit 18: Novatek – historical trading band (2006-22)
YoY share price performance
19
300%
40%
250%
15
200%
20%
+One Standard
Deviation
P/E (x)
150%
0%
100%
Average
11
50%
-20%
0%
-One Standard Deviation
-40%
7
-50%
-60%
Jun-18
Jun-19
Jun-20
Jun-21
Novatek FY2 EPS Revision (3MMA)
-100%
Jun-23
Jun-22
3
2011
Share price perf. (YoY, RHS)
2013
2015
2017
2019
2021
2023
Source: Refinitiv, Morgan Stanley Research. Past performance is no guarantee of future results. Results
shown do not include transaction costs.
Source: Company data, TEJ, Morgan Stanley Research
Exhibit 19: Novatek – consensus P/E vs. LDDI ASP change Y/Y
Exhibit 20: Novatek – consensus P/E vs. TDDI (Touch and
Display Driver IC) ASP change Y/Y
18
140%
16
120%
18
80%
14
100%
16
60%
80%
14
60%
12
40%
10
20%
8
6
0%
6
4
-20%
4
-40%
2
-40%
2
-60%
20%
0%
NOVATEK MICROELS. - PE RATIO 12M FWD
NOVATEK MICROELS. - PE RATIO 12M FWD
Q4 2024
Q3 2024
Q2 2024
Q1 2024
Q4 2023
Q3 2023
Q2 2023
Q1 2023
Q4 2022
Q3 2022
Q2 2022
Q1 2022
Q4 2021
Q3 2021
Q2 2021
Q1 2021
Q4 2020
Q3 2020
Q2 2020
Q1 2020
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
-20%
Q1 2018
Q3 2024
Q1 2024
Q3 2023
Q1 2023
Q3 2022
Q1 2022
Q3 2021
Q1 2021
Q3 2020
Q1 2020
Q3 2019
Q1 2019
Q3 2018
Q1 2018
Q3 2017
Q1 2017
Q3 2016
Q1 2016
8
40%
Q3 2018
10
Q2 2018
12
TDDI ASP YoY Change (RHS)
LDDI ASP Change YoY (RHS)
Source: Refinitiv, Morgan Stanley Research
Source: Refinitiv, Morgan Stanley Research
Exhibit 21: Novatek – EV to forward 12-month sales above +1 .S.D historical average
3.5
3
2.5
2
1.5
1
NOVATEK MICROELS. - CURRENT EV / 12M FWD SALES
Avg
+1 s.d.
Mar-23
Sep-22
Mar-22
Sep-21
Mar-21
Sep-20
Mar-20
Sep-19
Mar-19
Sep-18
Mar-18
Sep-17
Mar-17
Sep-16
Mar-16
0.5
-1 s.d.
Source: Refinitiv, Morgan Stanley Research
Vanguard (UW; PT NT$62)
Losing pricing power
Morgan Stanley Research
9
M
Idea
We remain concerned about Vanguard's gross margin profile, given intensifying
competition from peers, primarily from Chinese foundries Nexchip and SMIC. Management
said that it doesn’t expect the company's utilization rate to pick up significantly in 4Q23
and 1Q24. 3Q23 utilization rate should remain low, at 60-65%. Vanguard and PSMC
(6770.TW, UW) remain the two mature node foundry players facing the lowest production
utilization rates within our Greater China coverage, and we don’t expect Vanguard's
utilization rate to reach >65% before 2Q24.
The company's PMIC clients still need to digest inventory in 2H23, and demand will remain
weak. We believe pricing pressure should continue to year-end for the Chinese market.
Vanguard has 10%+ revenue exposure to Chinese PMIC IC design houses, which should
lead to weaker PMIC business.
We stay UW on the stock, as Vanguard continues to cut prices, which should put pressure
on its 2023e GM, and we believe Fab 5 expansion could have a 5ppt+ negative impact on
GM owing to higher depreciation.
2023E P/B (x)
Exhibit 22: Global foundry players: P/B vs. ROE
5.0
4.5
4.0
3.5
3.0 AWSC
2.5
WIN Semi
2.0
1.5
1.0
0.5
0.0
0%
TSMC
GlobalFoundries
Vanguard
UMC
PSMC
SMIC Hua Hong
5%
10%
2023E ROAE
Logic Foundries
15%
20%
25%
Specialty Foundries
Source: Company data, Refinitiv, Morgan Stanley Research (E) estimates
Powerchip (UW; PT NT$22.5)
Powerchip guided for 3Q revenue to decline by single-digit percentage Q/Q (vs. Street
expectations of a 10-15% rise Q/Q) and GM to fall further Q/Q (2Q23 GM was just 16.8%),
which reflects weaker-than-expected momentum. Although the company stated that the
demand for DDIC and CIS has reached the trough in 1H23, we remain cautious on the
ongoing demand for PSMC, as competition persists, and the restocking demand for LDDIC
is coming to an end. PSMC's PMIC buisness was the last to correct, causing the company
to require more time for recovery, similar to that of Vanguard. As of 2Q23, DDIC
customers account for 23% of Powerchip's revenue.
We remain UW on the stock, as our industry checks suggest that China matured node
foundry peers are dealing with more severe pricing strategies in 2H23, which should lead
to further pricing pressure on PSMC. Although Powerchip has slowed down/terminated
some of its new expansions, we expect the depreciation from previous new expansion to
still weigh on its profitability in the near term.
10
M
Idea
Estimate changes
We cut our 2023 EPS estimate by 14%, but lift 2024 and 2025 by 2% and 2%,
respectively: We cut our revenue assumptions to reflect a lower utilization rate recovery
in 2H23, and customer demand remains weak. Our reduced gross margin assumptions
factor in pricing erosion and depreciation impact. We slightly reduced our opex expense
outlook to reflect better cost control.
Exhibit 23: PSMC: Estimate change summary
(NT$ mn)
Net sales
Gross profit
Operating profit
Pretax income
Net income
EPS (NT$)
New 2023e
45,016
7,757
402
1,587
1,453
0.34
Old 2023e
46,548
10,252
2,450
2,111
1,684
0.40
Diff.% New 2024e
-3%
59,487
-24%
20,433
-84%
11,807
-25%
11,027
-14%
8,822
-14%
2.09
17.2%
0.9%
3.5%
3.2%
22.0%
5.3%
4.5%
3.6%
34.3%
19.8%
18.5%
14.8%
Margins
Gross margin
Operating margin
Pretax margin
Net margin
Old 2024e Diff.% New 2025e
61,076
-3%
63,727
20,861
-2%
21,439
11,561
2%
12,319
10,781
2%
11,539
8,625
2%
9,231
2.04
2%
2.18
34.2%
18.9%
17.7%
14.1%
33.6%
19.3%
18.1%
14.5%
Old 2025e Diff.%
63,368
1%
21,748
-1%
12,047
2%
11,267
2%
9,014
2%
2.13
2%
34.3%
19.0%
17.8%
14.2%
Source: Company data, Morgan Stanley Research (E) estimates
Exhibit 24: PSMC: Quarterly financials
YE Dec 31
(NT$ mn)
1Q22
2Q22
3Q22
4Q22
1Q23
2Q23
3Q23e
4Q23e
Total Revenues
Sequential Change
Change vs Year Ago
20,708
4.8%
56.4%
21,832
5.4%
42.4%
19,184
-12.1%
10.9%
14,362
-25.1%
-27.3%
11,450
-20.3%
-44.7%
11,009
-3.8%
-49.6%
10,907
-0.9%
-43.1%
11,650
6.8%
-18.9%
45,685
27.3%
43.6%
15.9%
-40.8%
32.1%
7.1%
Cost of Sales
Percent of Revenues
(10,191)
49.2%
(10,666)
48.9%
(10,293)
53.7%
(9,358)
65.2%
(9,307)
81.3%
(9,157)
83.2%
(9,183)
84.2%
(9,612)
82.5%
(34,692)
75.9%
(38,038)
58.0%
(40,508)
53.2%
(37,259)
82.8%
(39,054)
65.7%
(42,288)
66.4%
Gross Profit
Percent of Revenues
10,517
50.8%
11,166
51.1%
8,891
46.3%
5,004
34.8%
2,143
18.7%
1,852
16.8%
1,724
15.8%
2,038
17.5%
10,992
24.1%
27,585
42.0%
35,579
46.8%
7,757
17.2%
20,433
34.3%
21,439
33.6%
Total Opex
Percent of Revenues
(2,198)
10.6%
(2,353)
10.8%
(2,504)
13.1%
(2,195)
15.3%
(1,808)
15.8%
(1,918)
17.4%
(1,811)
16.6%
(1,817)
15.6%
(5,248)
11.5%
(7,494)
11.4%
(9,251)
12.2%
(7,355)
16.3%
(8,626)
14.5%
(9,120)
14.3%
R&D
Percent of Revenues
(1,161)
5.6%
(1,194)
5.5%
(1,215)
6.3%
(1,471)
10.2%
(1,019)
8.9%
(1,039)
9.4%
(1,020)
9.4%
(1,020)
8.8%
(3,235)
7.1%
(4,208)
6.4%
(5,040)
6.6%
(4,097)
9.1%
(4,520)
7.6%
(4,920)
7.7%
Sales and Marketing
Percent of Revenues
(155)
0.7%
(164)
0.8%
(149)
0.8%
(118)
0.8%
(96)
0.8%
(92)
0.8%
(91)
0.8%
(97)
0.8%
(335)
0.7%
(531)
0.8%
(586)
0.8%
(377)
0.8%
(476)
0.8%
(510)
0.8%
General and Admin
Percent of Revenues
(883)
4.3%
(996)
4.6%
(1,140)
5.9%
(606)
4.2%
(694)
6.1%
(787)
7.2%
(700)
6.4%
(700)
6.0%
(1,678)
3.7%
(2,754)
4.2%
(3,624)
4.8%
(2,881)
6.4%
(3,630)
6.1%
(3,690)
5.8%
Operating Income
Percent of Revenues
8,319
40.2%
8,813
40.4%
6,387
33.3%
2,809
19.6%
(87)
220
1.9%
5,744
12.6%
20,091
30.6%
26,328
34.6%
402
0.9%
11,807
19.8%
12,319
19.3%
Total Non-operating Income(Loss)
334
2.9% NM
(66)
NM
2020
2021
65,623
2022
76,087
2023e
45,016
2024e
59,487
2025e
63,727
(34)
12
1,068
(402)
(94)
603
339
339
(945)
(876)
645
1,186
(780)
(780)
8,285
40.0%
222.1%
8,825
40.4%
124.4%
7,455
38.9%
40.0%
2,407
16.8%
-67.4%
240
2.1%
-97.1%
536
4.9%
-93.9%
252
2.3%
-96.6%
559
4.8%
-76.8%
4,799
10.5%
19,215
29.3%
26,973
35.4%
1,587
3.5%
11,027
18.5%
11,539
18.1%
(1,663)
20.1%
(1,802)
20.4%
(1,385)
18.6%
(488)
20.3%
(53)
22.1%
81
-15.0%
(50)
20.0%
(112)
20.0%
(993)
20.7%
(3,122)
16.3%
(5,338)
19.8%
(135)
8.5%
(2,205)
20.0%
(2,308)
20.0%
Reported Income (TW GAAP)
Percent of Revenues
Change vs Year Ago
6,622
32.0%
214.2%
7,023
32.2%
108.6%
6,071
31.6%
37.4%
1,920
13.4%
-69.0%
187
1.6%
-97.2%
617
5.6%
-91.2%
202
1.8%
-96.7%
447
3.8%
-76.7%
3,806
8.3%
NM
16,092
24.5%
322.8%
21,635
28.4%
34.4%
1,453
3.2%
-93.3%
8,822
14.8%
507.3%
9,231
14.5%
4.6%
EPS (NT$)
Change vs Year Ago
1.71
157.0%
1.80
74.0%
1.48
25.6%
0.47
-75.2%
0.04
-97.4%
0.15
-91.9%
0.05
-96.8%
0.11
-77.4%
1.21
NM
4.41
265.1%
5.42
22.9%
0.34
-93.7%
2.09
507.3%
2.18
4.6%
Profit Before Taxes
Percent of Revenues
Change vs Year Ago
Taxes
Tax Rate
Source: Company data, Morgan Stanley Research (E) estimates
Valuation methodology
We keep our price target at NT$22.5: This reflects our earnings estimate changes for
PSMC and a rise in our dividend payout ratio assumption.
Our price target is our base case value, derived from a residual income model because we
believe this best captures the stock's long-term value. We continue to assume a 9.2% cost
of equity (beta 1.2, risk-free rate 2.0% and risk premium 6.0%), intermediate growth rate
Morgan Stanley Research
11
M
Idea
of 7%, and terminal growth rate of 4.0%, all of which are in line with other foundry
companies under our coverage. We also lift our dividend payout ratio assumption to 90%
from 75% because we expect more disciplined capex in the future.
Our price target implies 0.5x 2024e BVPS, which is 1SD below its historical average since
listing on the emerging board and factors in the higher risks emerging after the cycle
peaks.
Exhibit 25: PSMC: Residual income model
(NT$ mn)
Total Equity
Net Profit
2023e
78,838
1,453
2024e
87,221
8,822
2025e
89,015
9,439
2026e
90,934
10,100
2027e
92,987
10,807
2028e
95,184
11,564
2029e
97,535
12,373
2030e
100,051
13,239
2031e
102,742
14,166
2032e
105,622
15,158
2033e
108,704
16,219
2034e
112,001
17,354
1.8%
10.6%
10.7%
11.2%
11.8%
12.3%
12.8%
13.4%
14.0%
14.5%
15.1%
15.7%
Residual Income
Spread
(6,219)
-7.4%
1,123
1.4%
1,319
1.5%
1,803
2.0%
2,321
2.6%
2,874
3.1%
3,465
3.6%
4,097
4.2%
4,773
4.8%
5,496
5.3%
6,268
5.9%
7,094
6.5%
Ending Equity Capital
PV of Forecast Period
PV of Continuing Value
Equity Value
No. of Shares
Projected Price (NT$)
2H23-1H24
78,838
6,599
6,028
91,464
4,230
21.6
22.5
ROAE
87,221
5,493
6,028
98,742
4,230
23.3
Source: Company data, Morgan Stanley Research (e) estimates
Exhibit 26: PSMC: One-year forward P/E trend
P/B (x)
4
+2 Stdev
+1 Stdev
3
Average
2
-1 Stdev
P/B
-1 Stdev
+1 Stdev
Aug-23
Apr-23
Dec-22
Aug-22
Apr-22
Dec-21
Aug-21
Apr-21
Dec-20
1
+2 Stdev
Source: Company data, Morgan Stanley Research estimates
Where we could be wrong
Novatek:
• Slower-than-expected capacity ramp-up from China, equipment shipment delays
for legacy nodes, higher growth in other applications to squeeze capacity for DDI
• Faster-than-expected rollout of new products, which might sustain gross margin
• Faster 8k TV adoption
• Accelerating AMOLED adoption in smartphones
• Breakthrough in VR headset technology
12
M
Idea
Chipbond:
• Further pricing pressure from OSAT customers
• Weaker-than-expected 4K2K TV demand
• Faster-than-expected capacity expansion by industry peers
• Weaker-than-expected demand for OLED driver IC back-end services
Powerchip:
• Pricing power is sustained in 2023
• Slower-than-expected capacity expansion by peers (e.g., Nexchip and SMIC)
• Firmer-than-expected wafer pricing outlook for LCD DDI
• Demand from consumer electronics clients recovers rapidly
Vanguard:
• Faster-than-expected 12-inch fab process
• Slower-than-expected capacity expansion by peers (e.g., Nexchip and SMIC)
• Firmer-than-expected wafer pricing outlook for LCD DDI
Morgan Stanley Research
13
M
Idea
Five Key Charts on the Display Supply Chain
Exhibit 27: TV, smartphone, and tablet panel driver ICs – Y/Y
Exhibit 28: Supply chain tracker: driver IC design revenue Y/Y vs.
revenue growth
driver IC OSAT Y/Y
Source: Company data, TEJ, Morgan Stanley Research. Note: Driver IC companies include Novatek,
Himax, Raydium and Ilitek; Ilitek is excluded starting from June 2016, as it was acquired by MediaTek in
May 2016.
Source: Display Search, Morgan Stanley Research
Exhibit 29: China's PC export value growth vs. Novatek's PC
Exhibit 30: China's monthly smartphone shipments – down 21%
LDDI shipment growth
Y/Y in Jun
China smartphone monthly shipment
100%
120%
80%
40
100%
60%
80%
32
40%
20%
60%
40%
24
20%
0%
16
-20%
0%
-20%
8
-40%
-40%
-60%
0
Novatek PC LDDI Shipment YoY Growth
Source: MIIT, Morgan Stanley Research
Source: CEIC, Morgan Stanley Research
14
Foreign smartphone shipment
Jan-23
Apr-23
Jul-22
Oct-22
Jan-22
Apr-22
Jul-21
Oct-21
Jan-21
Apr-21
Jul-20
Oct-20
Jan-20
Domestic smartphone shipment
China PC Export Value YoY growth
Apr-20
Feb-23
Jul-19
Jul-22
Oct-19
Dec-21
Jan-19
May-21
Apr-19
Oct-20
Jul-18
Mar-20
Oct-18
Aug-19
Jan-18
Jan-19
-60%
Apr-18
-80%
Jun-18
Total shipment Y/Y (%)
M
Idea
Risk Reward - Chipbond Technology Corp (6147.TWO)
Risk Reward – Chipbond Technology Corp (6147.TWO)
Price erosion emerges, but OLED smartphone migration helps
EQUAL-WEIGHT THESIS
PRICE TARGET NT$66.00
Base case, residual income model. Key assumptions: a cost of equity of 9.8% (2.0% risk-free
rate, 6% risk premium, beta of 1.3), medium-term growth rate of 4.0%, and a long-term
growth rate of 3%.
NT$69.71
Consensus Price Target Distribution
NT$53.00
MS PT
Source: Refinitiv, Morgan Stanley Research
Mean
NT$84.00
Morgan Stanley Estimates
▪ Our back-end supply chain checks suggest
eroding DDI packaging and testing prices of
~5% in mid-2Q23, likely due to muted
consumer demand and limited order
visibility.
We don't rule out the possibility of further
price erosion for DDI back-end vendors given
continuously declining DDI prices.
We think rush orders in early-2Q reflected
poor demand visibility, judging by customers'
last-minute orders, and therefore we expect
3Q revenue to decline Q/Q for DDI back-end
players.
Our price target implies 11x our 2024e
EPS, which appears fair compared to its 5year average of 9-10x one-year forward P/E.
▪
▪
RISK REWARD CHART
TWD
▪
NT$85.00(+25.37%)
NT$85.00(+25.37%)
80
NT$67.80
NT$66.00(-2.65%)
NT$66.00(-2.65%)
Consensus Rating Distribution
60
40
45% Overweight
45% Equal-weight
9% Underweight
NT$48.00(-29.20%)
NT$48.00(-29.20%)
MS Rating
20
Source: Refinitiv, Morgan Stanley Research
0
AUG '22
Key:
FEB '23
Historical Stock Performance
AUG '23
Current Stock Price
Risk Reward Themes
AUG '24
Market Share:
Pricing Power:
Secular Growth:
Price Target
Source: Refinitiv, Morgan Stanley Research
Negative
Negative
Positive
View descriptions of Risk Rewards Themes here
BULL CASE
NT$85.00
BASE CASE
NT$66.00
BEAR CASE
NT$48.00
14x 2024e EPS
11x 2024e EPS
8x 2024e EPS
Stronger-than-expected 4K2K and 8K4K TV;
Android driver IC business continues to
expand; stronger-than-expected TDDI
demand: 1) 4K2K TV penetration rate rises
significantly in 2024, thanks to price
elasticity; 2) increasing pricing for LCD driver
IC back-end in 2023, given limited supply; 3)
COF contributes >40% of sales in 2024; and
4) RF business continues to grow
substantially; 5) Apple business through LG
Display and LX Semicon is stronger than
expected.
TDDI demand gradually replaced by OLED
thanks to technology migration, while backend pricing remains stable: 1) COF
contributes around 30% of sales in 2024; 2)
COG, COF and bumping services remain
stable; 3) RF business contributes 15-20% of
revenue, thanks to customers' share gain.
Disappointing 4K2K TV sell-through; large
market share loss given competition; TDDI
demand further deteriorates: 1) 4K2K
penetration rate is stagnant in 2024; 2)
Chipbond's market share falls below 60% in
2024 amid stiff competition from ChipMOS;
3) lack of COF demand in 2024 given
accelerated adoption of flexible OLED.
Morgan Stanley Research
15
M
Idea
Risk Reward – Chipbond Technology Corp (6147.TWO)
KEY EARNINGS INPUTS
Drivers
Revenue from Bumping 8-inch (NT$,
mn)
Revenue from Bumping 12-inch
(NT$, mn)
Revenue from Chip Probing (NT$,
mn)
2022
2023e
2024e
2025e
5,510
4,757
5,146
5,194
5,629
5,121
5,739
6,204
6,588
5,691
7,421
9,084
INVESTMENT DRIVERS
Further price hikes in the entire process given
tightness in testers
Chinese smartphone makers adopting COF to
enable true full screens
Rush orders or order wins from PA customers
Potential for smartphones to move
aggressively to Korean OLED with bundled
sales of display ICs, shrinking the TAM for
Chipbond
Weaker-than-expected 4K2K TV demand
More losses from COF substrate business
Industry peers announce significant capacity
expansion
Europe ex UK
Japan
Mainland China
North America
APAC, ex Japan, Mainland
50-60% China and India
Inst. Owners, % Active
SUSTAINABILITY & ESG
16
29%
59.1%
Source: Refinitiv, Morgan Stanley Research
+1.0
Sales /
Revenue
(NT$, mn)
20,687
20,507
7,690
EBITDA
(NT$, mn)
7,497
Net income
(NT$, mn)
3,551
EPS
(NT$)
22,625
21,529
8,514
8,021
3,896
4,434
3,989
OWNERSHIP POSITIONING
Source: Morgan Stanley Research Estimate
View explanation of regional hierarchies here
Disclosure Rate
FY Dec 2023e
RISKS TO DOWNSIDE
0-10%
0-10%
10-20%
10-20%
-0.12
MS ESTIMATES VS. CONSENSUS
RISKS TO UPSIDE
Stronger-than-expected 4K2K TV demand
Fewer losses from COF substrate business
GLOBAL REVENUE EXPOSURE
Indicator of Change
RISKS TO PT/RATING
5.22
4.81
6.00
5.40
-1.0
Mean
Morgan Stanley Estimates
Source: Refinitiv, Morgan Stanley Research
M
Idea
Chipbond: Financial summary
Exhibit 31: Financial summary
Income Statement
NT$mn (Years End Dec )
Cash Flow Statement
2022
2023E
2024E
2025E
24,010
20,687
24,099
26,505
(16,177)
(15,112)
(17,037)
(18,565)
7,833
5,575
7,062
7,940
(1,956)
(1,826)
(1,935)
(2,154)
Operating income
5,877
3,749
5,127
5,787
Non-operating income
1,781
849
195
195
Pre-tax income
7,659
4,599
5,322
5,982
Income tax
1,450
703
853
910
Change of LT Investment
0
0
0
0
Change of ST Investment
Net sales
COGS
Gross profit
Operating expenses
Minority Interest
NT$mn (Years End Dec )
2022
2023E
2024E
2025E
10,443
8,408
7,815
8,946
Reported net profits
6,209
3,896
4,468
5,071
Depreciation
3,652
3,941
4,179
4,463
Working Capital Change
1,348
571
(832)
(588)
Other adjustments
(766)
0
0
0
Cashflow from Investing
(3,209)
(2,678)
(2,678)
(2,678)
Capex
(3,678)
(2,678)
(2,678)
(2,678)
0
0
0
0
0
0
0
0
Cashflow from Operations
6,209
3,896
4,468
5,071
469
0
0
0
Adj.wtd.avg.shrs( m)
739
739
739
739
Cashflow from financing
(6,954)
(3,363)
(2,955)
(3,331)
Reported EPS (NT$)
8.30
8.30
5.22
5.22
5.99
5.99
6.80
6.80
Increase in L/T debt
Increase in S/T debt
(550)
(1,950)
(300)
1,000
(300)
(100)
(300)
(100)
Cash Dividend Paid
MW Net Income
Modelware EPS (NT$)
Other adjustments
(4,432)
(4,063)
(2,555)
(2,931)
Dir& Emp Bonus Paid
0
0
0
0
Issuance of stock
0
0
0
0
(22)
0
0
0
Other adjustments
Balance Sheet
NT$mn (Years End Dec )
1
0
0
0
281
2,368
2,182
2,937
2022
2023E
2024E
2025E
Turnover
-11.3
-13.8
16.5
10.0
Operating profits
-14.7
-36.2
36.7
12.9
3.1
-40.0
15.7
12.4
1.2
-37.3
14.7
13.5
-7.7
-37.1
14.7
13.5
Exchange rate adjustment
Net change in cash
2022
2023E
2024E
2025E
5,856
8,224
10,405
13,343
2
2
2
2
4,600
1,772
4,933
1,013
5,746
1,142
6,320
1,244
56
56
56
56
Current Assets
12,285
14,226
17,351
20,964
Long-term investments
15,011
15,011
15,011
15,011
Fixed assets
17,809
16,546
15,045
13,259
Pretax profits
Cash
Mkt Securities
AR/NR
Inventory
Other
Financial Ratios
Growth(%)
236
236
236
236
Other assets
5,615
5,615
5,615
5,615
Total Assets
50,957
51,634
53,258
55,086
S/T borrowings
300
1,300
1,200
1,100
Gross Margin
32.6
26.9
29.3
30.0
AP/NP
723
868
979
1,066
Operating Margin
24.5
18.1
21.3
21.8
Other ST liabilities
5,139
5,139
5,139
5,139
Pretax Margin
31.9
22.2
22.1
22.6
LT debt
2,700
2,400
2,100
1,800
Net Profit
25.9
18.8
18.5
19.1
Other LT liabilities
1,205
1,205
1,205
1,205
Return (%)
Deferred assets
Net profits
EPS
Margins (%)
Common shares
7,387
7,387
7,387
7,387
ROAE
15.0
9.5
10.7
11.6
Total Liabilities
10,066
10,911
10,622
10,310
ROAA
11.9
7.6
8.5
9.4
Additional capital
8,347
8,347
8,347
8,347
Retained earning
26,126
25,958
27,871
30,011
Net Debt/Equity
(7.0)
(11.1)
(16.7)
(23.3)
(969)
(969)
(969)
(969)
Liabilities/Equity
24.6
26.8
24.9
23.0
Total Equity
40,890
40,723
42,636
44,776
Ratios (X)
Total Liab. & Shrhldr's Equity
50,957
51,634
53,258
55,086
Current ratio
2.0
1.9
2.4
2.9
Quick ratio
1.7
1.8
2.2
2.7
AR/NR Turnover (days)
87
87
87
87
Inventory Turnover (days)
24
24
24
24
AP Turnover (days)
21
21
21
21
Cash Conversion (days)
91
91
91
91
Other shareholders' equity
Gearing (%)
Others
E = Morgan Stanley Research Estimates
Source: Morgan Stanley Research, Company Data
Morgan Stanley Research
17
M
Idea
Risk Reward - Powerchip Semiconductor Manufacturing Co
Operating
momentum remains weak; UW
(6770.TW)
Risk Reward – Powerchip Semiconductor Manufacturing Co (6770.TW)
UNDERWEIGHT THESIS
PRICE TARGET NT$22.50
Base case, residual income (RI) analysis, in line with our Greater China foundry coverage. Our
RI model is based on the following assumptions: 9.2% cost of equity (beta 1.2, risk-free rate
2.0%, and risk premium 6.0%), medium-term growth rate of 7.0%, terminal growth rate of
4.0%, and dividend payout ratio of 90%.
NT$34.93
Consensus Price Target Distribution
NT$18.00
Source: Refinitiv, Morgan Stanley Research
NT$90.00
MS PT
Mean
Morgan Stanley Estimates
▪ This is still a high-conviction UW call.
▪ 1H23 business momentum is weak, and
PSMC is losing its pricing power rapidly,
which we think is likely to be sustained into
2H.
PSMC has the largest revenue exposure to
consumer electronics among mature node
foundry players and was the most
aggressive foundry player in hiking wafer
prices for its clients.
We see rising risk of default on long-term
agreements. Meanwhile, management said
that it has extended the duration of LTAs 12
months for customers, in view of weak endmarket demand.
Plus, Nexchip's aggressive expansion is an
emerging threat to PSMC.
Our price target implies 1.1x 2023e BVPS,
which is 1 SD below its historical average
since listing.
▪
▪
RISK REWARD CHART
TWD
▪
▪
NT$39.50(+44.95%)
NT$39.50(+44.95%)
40
30
NT$27.25
NT$22.50(-17.43%)
NT$22.50(-17.43%)
Consensus Rating Distribution
20
10% Overweight
60% Equal-weight
30% Underweight
10
NT$11.50(-57.80%)
NT$11.50(-57.80%)
MS Rating
0
AUG '22
Key:
FEB '23
Historical Stock Performance
AUG '23
Current Stock Price
Source: Refinitiv, Morgan Stanley Research
AUG '24
Price Target
Risk Reward Themes
Source: Refinitiv, Morgan Stanley Research
Disruption:
Pricing Power:
Negative
Negative
View descriptions of Risk Rewards Themes here
BULL CASE
NT$39.50
BASE CASE
NT$22.50
BEAR CASE
NT$11.50
2.0x 2023e BVPS
1.2x 2023e BVPS
0.6x 2023e BVPS
Strong sales growth with gross margin
expansion: Our assumptions include: 1)
revenue CAGR of 10% in 2022-24; 2) gross
margin expands to 40%+ by 2023 from 42%
in 2021; 3) ASP erosion is milder while
utilization rate increases more than
expected.
Flat revenue with GM erosion: Our
assumptions include: 1) a revenue CAGR of
-10% in 2022-24; and 2) a gross margin
decline to 17.2% by 2023 from 42% in 2021.
3) ASP erosion continues while utilization
rate increases slightly.
Revenue decline with faster gross margin
erosion: Our assumptions include: 1) revenue
CAGR of negative 20% in 2022-24; 2) gross
margin declining to 20% by 2023 from 42%
in 2021; 3) ASP erosion becomes more
severe while utilization rate does not
increase much.
18
M
Idea
Risk Reward – Powerchip Semiconductor Manufacturing Co (6770.TW)
KEY EARNINGS INPUTS
Drivers
2022
2023e
2024e
2025e
Wafer shipment (k 8 inch)
2,897
2,072
661
713
Wafer ASP (USD)
612.5
527.6
512.7
504.3
Utilization rate (%) (%)
90.9
61.1
75.0
80.0
INVESTMENT DRIVERS
Demand from consumer electronics clients
Inventory in the supply chain
Utilization rate
Long-term agreements with clients
GLOBAL REVENUE EXPOSURE
Europe ex UK
North America
Japan
Mainland China
APAC, ex Japan, Mainland
60-70% China and India
0-10%
0-10%
10-20%
10-20%
Source: Morgan Stanley Research Estimate
View explanation of regional hierarchies here
MS ALPHA MODELS
4/5
MOST
3 Month
Horizon
Source: Refinitiv, FactSet, Morgan Stanley Research; 1 is
the highest favored Quintile and 5 is the least favored
Quintile
RISKS TO PT/RATING
MS ESTIMATES VS. CONSENSUS
RISKS TO UPSIDE
FY Dec 2023e
Pricing power is sustained in 2023.
Listing on main board attracts investment fund
flows.
Aluminum process enjoys higher margins.
45,016
Sales /
Revenue
(NT$, mn)
43,712
EBITDA
(NT$, mn)
6,844
46,548
45,063
RISKS TO DOWNSIDE
Price erosion is faster than expected.
Demand from consumer electronics clients
weakens further.
Inventory in the supply chain takes longer to
digest.
OWNERSHIP POSITIONING
Inst. Owners, % Active
7,542
12,861
9,133
1,453
Net income
(NT$, mn)
175
EPS
(NT$)
0.04
ROE
(%)
0.9
1,684
885
44.7%
Source: Refinitiv, Morgan Stanley Research
0.34
0.40
0.22
1.7
7.1
2.3
Mean
Morgan Stanley Estimates
Source: Refinitiv, Morgan Stanley Research
Morgan Stanley Research
19
M
Idea
PSMC: Financial Summary
Income Statement
NT$ mn (Years End Dec )
Net sales
COGS
Gross profit
Operating expenses
R&D
SG&A
Operating income
Non-operating income
Pre-tax income
Income tax
Net income
Adj.wtd.avg.shrs (mn)
Reported EPS (NT$)
Modelware EPS (NT$)
2022
2023e
2024e
2025e
76,087
(40,508)
35,579
(9,251)
(5,040)
(4,211)
26,328
645
26,973
(5,338)
21,635
3,991
5.42
5.42
45,016
(37,259)
7,757
(7,355)
(4,097)
(3,258)
402
1,186
1,587
(135)
1,453
4,230
0.34
0.34
59,487
(39,054)
20,433
(8,626)
(4,520)
(4,106)
11,807
(780)
11,027
(2,205)
8,822
4,230
2.09
2.09
63,727
(42,288)
21,439
(9,120)
(4,920)
(4,200)
12,319
(780)
11,539
(2,308)
9,231
4,230
2.18
2.18
Cash Flow Statement
NT$mn (Years End Dec )
Cash flow from Operations
Net profits
Depreciation
Equity investment losses (income)
Other adjustments
Cash flow from Investing
Capex
Change of LT Investment
Change of ST Investment
Other adjustments
Cash flow from financing
Increase in L/T debt
Increase in S/T debt
Cash Dividend Paid
Dir& Emp Bonus Paid
Issuance of stock
Dec/Inc-TreasureSt
Other Adjustments
Net change in cash
Balance Sheet
NT$mn (Years End Dec )
Cash
Mkt Securities
AR/NR
Inventory
Other
Current Assets
Long-term investments
Fixed assets
Other assets
Total Assets
S/T borrowings
AP/NP
Other ST liabilities
LT debt
Other LT liabilities
Total Liabilities
Common shares
Retained earning
Other shareholders' equity
Total Equity
Total Liab. & Shrhldr's Equity
2023e
2024e
2025e
9,711
1,452
7,140
0
1,119
(57,908)
(57,908)
0
0
0
(5,490)
0
1,000
(6,490)
17,763
8,820
9,389
0
(446)
(23,829)
(23,829)
0
0
0
2,564
0
3,000
(436)
20,365
9,229
10,544
0
592
(23,840)
(23,840)
0
0
0
353
0
3,000
(2,647)
0
0
0
0
18,943
0
0
0
0
(53,687)
0
0
0
0
(3,501)
0
0
0
0
(3,121)
2022
2023e
2024e
2025e
15.9
31.0
40.4
34.4
22.9
(40.8)
(98.5)
(94.1)
(93.3)
(93.7)
46.8
34.6
35.4
28.4
Financial Ratios
2022
61,720
9
4,863
3,944
4,148
74,684
0
65,272
13,593
153,549
0
3,018
26,502
0
40,153
69,673
35,352
31,498
17,025
83,876
153,549
2023e
8,033
9
2,877
3,628
4,148
18,695
0
116,039
13,593
148,327
0
2,776
26,561
0
40,153
69,490
35,352
26,460
17,025
78,838
148,327
E = Morgan Stanley Research Estimates
Source: Morgan Stanley Research, Company Data
20
2022
38,723
21,629
5,665
0
11,429
(18,452)
(18,452)
0
0
0
(1,328)
0
3,500
(4,828)
2024e
4,532
9
3,802
3,802
4,148
16,294
0
130,478
13,593
160,365
0
2,909
30,081
0
40,153
73,144
35,352
34,844
17,025
87,221
160,365
2025e
1,411
9
4,073
4,117
4,148
13,758
0
143,775
13,593
171,126
0
3,150
34,018
0
40,153
77,322
35,352
41,427
17,025
93,804
171,126
Growth(%)
Turnover
Operating profits
Pretax profits
Net profits
EPS
Margins (%)
Gross Margin
Operating Margin
Pretax Margin
Net Profit
Return (%)
ROAA
ROAE
Gearing (%)
Net Debt/Equity
Liabilities/Equity
Ratios (X)
Current ratio
Quick ratio
Others
AR/NR Turnover (days)
Inventory Turnover (days)
AP Turnover (days)
Cash Conversion (days)
32.1
2,840.3
594.7
507.3
507.3
7.1
4.3
4.6
4.6
4.6
17.2
0.9
3.5
3.2
34.3
19.8
18.5
14.8
33.6
19.3
18.1
14.5
15.1
28.8
1.0
1.8
5.7
10.6
5.6
10.2
(25.7)
83.1
40.7
88.1
40.8
83.9
41.3
82.4
2.5
2.3
0.6
0.4
0.5
0.3
0.4
0.1
23.3
35.5
27.2
31.7
23.3
35.5
27.2
31.7
23.3
35.5
27.2
31.7
23.3
35.5
27.2
31.7
M
Idea
Important note regarding economic sanctions. This research references U.S. Executive
Order 14032 and/or entities or securities that are designated thereunder. Executive
Order 14032 may prohibit U.S. persons from buying certain securities of entities named
in this note/presentation. The data set forth in this research is for informational
purposes and does not represent Morgan Stanley’s view as to whether or not any of the
instruments discussed in this note are subject to sanctions. Any references in this
report to entities, debt or equity instruments that may be covered by such sanctions
should not be read as recommending or advising as to any investment activities in
relation to such entities or instruments. Users of this report are solely responsible for
ensuring that their investment activities in relation to any sanctioned entities and/or
securities are carried out in compliance with applicable sanctions.
Morgan Stanley Research
21
M
Risk Reward Reference links
1. View explanation of Options Probabilities methodology Options_Probabilities_Exhibit_Link.pdf
2. View descriptions of Risk Rewards Themes - RR_Themes_Exhibit_Link.pdf
3. View explanation of regional hierarchies - Microsoft PowerPoint - Exhibit Links.pptx
4. View explanation of 'Indicator of Change' methodology ESG_Indicator_of_Change_External_Link.pdf
5. View explanation of Theme/Exposure methodology ESG_Sustainable_Solutions_External_Link.pdf
6. View explanation of HERS methodology - ESG_HERS_External_Link.pdf
22
Idea
M
Idea
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Important Regulatory Disclosures on Subject Companies
As of July 31, 2023, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Alchip Technologies
Ltd, ASE Technology Holding Co. Ltd., ASMedia Technology Inc, Aspeed Technology, Egis Technology Inc, Faraday Technology Corp, Global Unichip Corp, King Yuan Electronics Co Ltd, M31
Technology Corp, Novatek, Parade Technologies Ltd, Phison Electronics Corp, Realtek Semiconductor, Silergy Corp., Silicon Motion, TSMC, Will Semiconductor Co Ltd Shanghai, WIN
Semiconductors Corp, Winbond Electronics Corp, Yangjie Technology.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Alchip Technologies Ltd, ASE Technology Holding Co. Ltd.,
ASMedia Technology Inc, ASMPT Ltd, GlobalWafers Co Ltd, King Yuan Electronics Co Ltd, MediaTek, Realtek Semiconductor, Silergy Corp., TSMC, UMC, Universal Scientific Ind. (Shanghai),
UPI Semiconductor Corp., Vanguard International Semiconductor, VeriSilicon Microelectronics Shanghai, WIN Semiconductors Corp, WPG Holdings.
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from ASE Technology Holding Co. Ltd., King Yuan
Electronics Co Ltd, MediaTek, Nanya Technology Corp., Novatek, Nuvoton Technology Corporation, Realtek Semiconductor, Silicon Motion, SMIC, TSMC, UMC, Universal Scientific Ind.
(Shanghai), Winbond Electronics Corp.
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Alchip
Technologies Ltd, ASE Technology Holding Co. Ltd., ASMedia Technology Inc, ASMPT Ltd, GlobalWafers Co Ltd, King Yuan Electronics Co Ltd, MediaTek, Realtek Semiconductor, Silergy Corp.,
TSMC, UMC, Universal Scientific Ind. (Shanghai), UPI Semiconductor Corp., Vanguard International Semiconductor, VeriSilicon Microelectronics Shanghai, WIN Semiconductors Corp, WPG
Holdings.
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Corp., Novatek, Nuvoton Technology Corporation, Realtek Semiconductor, Silicon Motion, SMIC, TSMC, UMC, Universal Scientific Ind. (Shanghai), Winbond Electronics Corp.
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy,
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Morgan Stanley Research
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to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of July 31, 2023)
The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.
For disclosure purposes only (in accordance with FINRA requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated
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Coverage Universe
Stock Rating
Other Material Investment Services
Investment Banking Clients (IBC)
Clients (MISC)
% of Rating
% of Total
Count
% of Total IBC
Overweight/Buy
1347
37%
276
43%
20%
609
39%
Equal-weight/Hold
1659
46%
294
46%
18%
717
46%
Category
Count
% of Total Other
Count
Category
MISC
Not-Rated/Hold
3
0%
0
0%
0%
1
0%
Underweight/Sell
604
17%
69
11%
11%
227
15%
Total
3,613
639
1554
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the
last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next
12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over
the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next
12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated
below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.
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INDUSTRY COVERAGE: Greater China Technology Semiconductors
Company (Ticker)
Rating (As Of)
Price* (08/18/2023)
Charlie Chan
ACM Research Inc (ACMR.O)
O (03/07/2023)
US$13.01
Advanced Micro-Fabrication Equipment Inc (688012.SS)
U (02/22/2023)
Rmb134.50
Alchip Technologies Ltd (3661.TW)
O (05/14/2021)
NT$1,970.00
Andes Technology Corp (6533.TW)
O (08/04/2022)
NT$416.00
ASE Technology Holding Co. Ltd. (3711.TW)
O (07/07/2023)
NT$107.00
Jiangsu Changjiang Electronics Tech (600584.SS)
E (07/07/2023)
Rmb30.40
Maxscend Microelectronics Co Ltd (300782.SZ)
U (01/11/2021)
Rmb115.55
MediaTek (2454.TW)
U (04/18/2023)
NT$674.00
Nanya Technology Corp. (2408.TW)
E (10/04/2022)
NT$64.60
Phison Electronics Corp (8299.TWO)
O (04/11/2023)
NT$376.50
Silergy Corp. (6415.TW)
U (05/20/2021)
NT$290.00
SMIC (0981.HK)
U (02/22/2023)
HK$17.64
TSMC (2330.TW)
O (02/07/2022)
NT$539.00
UMC (2303.TW)
O (09/14/2020)
NT$43.80
Universal Scientific Ind. (Shanghai) (601231.SS)
O (08/04/2015)
Rmb14.34
Vanguard International Semiconductor (5347.TWO)
U (09/21/2022)
NT$70.40
Will Semiconductor Co Ltd Shanghai (603501.SS)
O (07/07/2023)
Rmb88.23
WIN Semiconductors Corp (3105.TWO)
U (02/04/2021)
NT$132.00
Empyrean Technology Co Ltd (301269.SZ)
O (06/26/2023)
Rmb100.50
Hangzhou Silan Microelectronics Co. Ltd. (600460.SS)
O (07/07/2023)
Rmb25.58
Shanghai Anlogic Infotech Co Ltd (688107.SS)
E (11/01/2022)
Rmb44.27
Daisy Dai, CFA
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Shanghai Fudan Microelectronics (1385.HK)
E (10/18/2022)
HK$18.90
Unigroup Guoxin Microelectronics Co Ltd (002049.SZ)
U (01/10/2023)
Rmb87.43
Yangjie Technology (300373.SZ)
O (06/10/2022)
Rmb35.00
Zhejiang Tony Electronic Co Ltd (603595.SS)
E (06/05/2023)
Rmb31.40
3Peak (688536.SS)
U (11/01/2022)
Rmb175.77
ASMedia Technology Inc (5269.TW)
E (05/30/2023)
NT$900.00
Aspeed Technology (5274.TWO)
E (07/07/2023)
NT$2,325.00
Bestechnic Shanghai Co Ltd (688608.SS)
O (04/23/2021)
Rmb116.79
Chipsea Technologies Shenzhen Corp (688595.SS)
U (05/15/2023)
Rmb28.10
Egis Technology Inc (6462.TWO)
U (04/23/2020)
NT$83.40
Espressif Systems (688018.SS)
O (05/15/2023)
Rmb111.02
GigaDevice Semiconductor Beijing Inc (603986.SS)
E (08/14/2023)
Rmb93.77
Macronix International Co Ltd (2337.TW)
U (10/19/2021)
NT$30.15
Montage Technology Co Ltd (688008.SS)
E (05/04/2023)
Rmb48.62
Novatek (3034.TW)
E (02/22/2023)
NT$386.00
Nuvoton Technology Corporation (4919.TW)
O (07/19/2021)
NT$125.00
Parade Technologies Ltd (4966.TWO)
E (07/21/2023)
NT$818.00
Realtek Semiconductor (2379.TW)
O (02/22/2023)
NT$417.50
Shenzhen Goodix Technology Co Ltd (603160.SS)
E (07/07/2023)
Rmb52.93
Sino Wealth Electronic (300327.SZ)
O (07/19/2021)
Rmb25.88
Winbond Electronics Corp (2344.TW)
O (03/02/2023)
NT$25.65
WPG Holdings (3702.TW)
U (04/09/2021)
NT$53.70
ASMPT Ltd (0522.HK)
O (06/12/2023)
HK$78.20
Chipbond Technology Corp (6147.TWO)
E (06/20/2023)
NT$67.80
Faraday Technology Corp (3035.TW)
O (04/06/2023)
NT$328.00
Global Unichip Corp (3443.TW)
O (05/04/2023)
NT$1,345.00
King Yuan Electronics Co Ltd (2449.TW)
O (03/03/2023)
NT$62.00
M31 Technology Corp (6643.TWO)
O (06/26/2023)
NT$845.00
VeriSilicon Microelectronics Shanghai (688521.SS)
E (04/06/2023)
Rmb63.56
Daniel Yen, CFA
Dylan Liu
Ray Wu, CFA
Advanced Wireless Semiconductor Co (8086.TWO)
E (03/29/2023)
NT$87.50
China Resources Microelectronics Limited (688396.SS)
U (07/08/2022)
Rmb54.42
Episil Technologies Inc (3707.TWO)
O (06/05/2023)
NT$75.10
GlobalWafers Co Ltd (6488.TWO)
E (02/22/2023)
NT$456.00
Hua Hong Semiconductor Ltd (1347.HK)
O (02/04/2022)
HK$19.28
NAURA Technology Group Co Ltd (002371.SZ)
E (11/23/2022)
Rmb257.00
Powerchip Semiconductor Manufacturing Co (6770.TW)
U (07/12/2021)
NT$27.25
RichWave Technology Corp. (4968.TW)
E (07/12/2022)
NT$147.50
SG Micro Corp. (300661.SZ)
E (09/27/2022)
Rmb74.28
Shanghai Awinic Technology (688798.SS)
U (09/27/2022)
Rmb63.56
SICC Co Ltd (688234.SS)
E (06/05/2023)
Rmb53.90
Silicon Motion (SIMO.O)
E (08/12/2021)
US$54.68
StarPower Semiconductor Ltd (603290.SS)
O (03/01/2022)
Rmb199.00
Suzhou Novosense Microelectronics Co Ltd (688052.SS)
U (04/25/2023)
Rmb135.15
UPI Semiconductor Corp. (6719.TW)
E (04/18/2023)
NT$215.00
Wafer Works Corp (6182.TWO)
E (11/07/2022)
NT$41.25
Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.
© 2023 Morgan Stanley
Morgan Stanley Research
27