Taiwan Semiconductor
Manufacturing Company
Analysts:
JeBang Ahn, Michael Chen, Brian Chung, Eric Sanchez, Sapan Shah
Agenda
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•
•
•
•
Case Overview
Country Risk Analysis
Company and Industry Overview
Market Analysis
Financial Analyses
–
–
–
–
Ratios
Discounted Cash Flows
Comparable Companies
Black-Scholes Options Pricing
• Conclusions
• Questions & Answers
Case Overview
“Things are not always as they seem”
Managed Funds Performance
• Mutual funds investing in technology and
science stocks have plummeted 43% in 2002
Fund
Marketocracy Tech Plus
Jacob Internet Fund
Franklin Cust Dyna A
Fidelity Select Software
Kinetics Internet A
Kinetics Inet Emerg NL
Matthews Asian A Tech
Turner Energy&P Tech II
W&R Adv Science & Tech A
Wasatch Gl Science & Tech
2002
Returns
-10.20%
-13.00%
-19.90%
-23.40%
-24.30%
-24.70%
-24.90%
-26.60%
-26.80%
-27.80%
Avg. science & tech fund
-43.00%
Source: Lipper
Case Overview
• Assist investment manager in determining
whether to invest in Taiwan Semiconductor
Manufacturing Company
– Is the current stock price an attractive entry level for
investors? If so,
– Decisions to make – invest in equity (Taiwan or ADR), or
wait and purchase call options
– Does the Shanghai foreign direct investment add to the
Company’s intrinsic value?
Agenda
•

•
•
•
Case Overview
Country Risk Analysis
Company and Industry Overview
Market Analysis
Financial Analyses
–
–
–
–
Ratios
Discounted Cash Flows
Comparable Companies
Black-Scholes Options Pricing
• Conclusions
• Questions & Answers
Taiwan
Country Overview
• Taiwan, Republic of China
– Governmental System
• Multiparty democratic regime headed by popularly-elected
president (Chen Shui-bian)
• Major Political parties are the Democratic Progressive Party
(DPP), Kuomintang (KMT), and People First Party (PFP)
–
–
–
–
–
GDP: US$ 281,300 Million
Current Account Balance: US$ 18,861 Million
Foreign Reserves (excl. gold): US$ 122,211 Million
External Debt: US$ 18,900 Million
Inflation Rate: 0.5%
- Figures for 2001
GDP Growth
Export Partners
Others, 38.10%
US, 22.50%
Hong Kong,
22.00%
Netherlands,
3.40%
Germany,
3.60%
Japan, 10.40%
Country Risk Analysis
• Political
– Alleviated political tension with Mainland China
– Government (DPP) strongly advocates for foreign investment
– Alliance between Kuomintang and People First Party looks
promising in next Presidential election in 2004
• Economic
– Strong Current Account Balance and Foreign Reserves
– Free and liquid capital market with high trading volume
– To stabilize market, daily price fluctuation is limited:
• Stocks and convertible bonds: 7%
• Bonds: 5%
…of the closing price of the preceding business day
Country Risk Analysis
• Intangibles
– Chairman/CEO Morris Chang
• Advice is highly regarded and valued by the government as
well as business sphere
– In 1985, Taiwanese government recruited him to head its Industrial
Technology Research Institute (ITRI)
•
•
•
•
Ph.D in Electrical Engineering from Stanford University
Masters in Mechanical Engineering from M.I.T.
Board of Directors of Goldman Sachs
Cognizant of corporate governance issues
China
Country Overview
• China
– Population: 1,273 Million
– Governmental System
• Communist State
• President and vice president elected by the National People’s
Congress for five-year terms (President Hu Jintao)
–
–
–
–
–
GDP: US$ 1,159,000 Million
Current Account Balance: US$ 17,400 Million
Foreign Reserves (excl. gold): US$ 215,600 Million
External Debt: US$ 147,700 Million
Inflation Rate: -0.8% (2002 E)
- Figures for 2001
GDP Growth
Export Partners
Others, 29.30%
US, 20.40%
Singapore,
2.20%
Hong Kong,
17.50%
UK, 2.60%
Netherlands,
2.70%
Japan, 16.90%
Germany,
3.70%
South Korea,
4.70%
Country Risk Analysis
• Political
– Admittance to WTO has led to further liberalization of rules
and statutes
– Current President Hu Jintao and his predecessor Jiang
Zhemin have embraced western ideals (i.e. FDI)
– “Roach Motel” – strict capital controls has created difficulty
in ceasing operations if deemed unprofitable
• Economic
– Utilized considerable foreign reserves in maintaining a
constant currency exchange rate
– Focus on infrastructure development (soft-budget policy)
– Currently improving Mergers & Acquisitions regulations
Exchange Rate Stability
Exchange Rate Fluctuation
(RMB Per Unit Of Currency)
100.25
100.00
99.75
99.50
US Dollar
HK Dollar
99.25
1997
1998
1999
2000
2001
Agenda
•
•

•
•
Case Overview
Country Risk Analysis
Company and Industry Overview
Market Analysis
Financial Analyses
–
–
–
–
Ratios
Discounted Cash Flows
Comparable Companies
Black-Scholes Options Pricing
• Conclusions
• Questions & Answers
Company Overview
• Leading dedicated Integrated Circuit (IC) foundry
– IC used for microprocessors, graphics chips, wireless
communications platforms and programmable logic
devices
– Currently operates 7 wafer fabrication plants and 3 joint
ventures
• Major customers include:
– Altera, Nvidia, Motorola, Texas Instruments, and others
• Listed on:
– Taiwan Stock Exchange (TW 2330)
– New York Stock Exchange (NYSE: TSM ADR)
Company Overview
Company Overview
• Sales
– FY 2001 = 125,885
– FY 2002(E) = 158,645
– FY 2003(E) = 192,817
• Net Income
– FY 2001 = 14,483
– FY 2002(E) = 22,755
– FY 2003(E) = 33,189
- Figures in New Taiwanese Dollars (Millions)
Regional Sales
Europe
6.0%
Asia
26.6%
USA
67.4%
Industry Overview
• Integrated circuits are semiconductor wafers
containing resistors, capacitors, and transistors
– Used for a variety of devices, including microprocessors,
audio and video equipment, and automobiles
• TSMC has grasped approx. 60% of IC market
• Pure-play competitors’ market share:
Industry Overview
• Current state
– Slow growth due to excess production in the late 1990’s,
leading to high inventory levels
– Scaled back capital expenditures
– Pricing pressure due to market over-saturation
– A leading source of growth is the wireless communications
sector, which is a significant portion of the Company’s
revenues
Agenda
•
•
•

•
Case Overview
Country Risk Analysis
Company and Industry Overview
Market Analysis
Financial Analyses
–
–
–
–
Ratios
Discounted Cash Flows
Comparable Companies
Black-Scholes Options Pricing
• Conclusions
• Questions & Answers
5-Year Stock Chart
Earnings Per Share
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
1998
1999
2000
2001
2002 (E)
2003 (E)
2004 (E)
Price/Earnings
100.00x
90.00x
80.00x
70.00x
60.00x
50.00x
40.00x
30.00x
20.00x
10.00x
0.00x
1998
1999
2000
2001
2002 (E)
2003 (E)
2004 (E)
Market Analysis
• Book-to-Bill Ratio has been below one over the
past year
– Measures the orders shipped to new orders received
– However, there are signs of life
• Investor Sentiment
– Suspicious in regards to high-technology stocks
– Poor performance of competitors in the industry
• Should the investment manager invest in the
Company’s Common Stock or ADR?
Taiwan Trading Volume
500,000
450,000
400,000
350,000
Volume
300,000
250,000
200,000
150,000
100,000
50,000
0
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
US Trading Volume
35,000,000
30,000,000
Volume
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Analyst Recommendations
Broker Recommendations:
This Month
Strong Buy
3
Buy
4
Hold
0
Sell
1
Strong Sell
0
Mean*
1.85
* (Buy) 1.00 - 5.00 (Sell)
Last Month
2
3
3
0
0
2 Months Ago
1
3
3
0
0
3 Months Ago
1
4
2
0
0
2.1
2.3
2.1
Agenda
•
•
•
•

Case Overview
Country Risk Analysis
Company and Industry Overview
Market Analysis
Financial Analyses
–
–
–
–
Ratios
Discounted Cash Flows
Comparable Companies
Black-Scholes Options Pricing
• Conclusions
• Questions & Answers
Ratios
Risk Ratios
Current Ratio
Quick Ratio
Accounts Receivable Turnover
Inventory Turnover
Debt/Equity Ratio
Interest Coverage Ratio
Profitability Ratio
Profit Margin
Return on Assets
Return on Common Equity
1999
2.261
0.893
1.623
0.734
7.603
8.135
9.342
8.037
0.363
0.301
9.535
0.599
2000
1.965
2.298
1.389
1.955
8.232
9.147
9.018
8.291
0.216
0.183
24.519
21.757
2001
2.124
2.919
1.620
2.522
5.787
4.857
8.157
7.338
0.190
0.259
4.431
-0.104
1999
0.339
0.659
0.159
0.179
0.230
0.120
2000
0.404
0.469
0.222
0.237
0.314
0.243
2001
0.133
-0.023
0.046
-0.005
0.054
-0.011
Industry Sales Growth
Taiwan Semiconductor Manufacturing
Winbond Electronics
United Microelectronics
Advanced Micro Devices
Tower Seminconductor
ASE Test
Chartered Semiconductor
ON Semiconductor
Advanced Semiconductor Engineering
Average
(In $US Millions)
1999
2000
2001
CAGR
2,195.2
930.6
970.5
2,857.6
69.8
270.3
694.3
798.7
938.1
4,781.3
1,414.2
3,325.9
4,644.2
104.8
440.3
1,134.1
2,073.9
1,464.1
3,621.5
694.2
2,008.5
3,891.8
52.4
298.5
462.7
1,214.6
1,103.8
18.16%
-9.30%
27.44%
10.84%
-9.14%
3.37%
-12.65%
15.00%
5.57%
5.48%
Sales Growth Determination
• Used a 4.70% growth rate for 2005-2007
– 2002-2004 I/B/E/S estimates relatively high, as Company
benefits:
• Status as industry leader
• Continued trend towards outsourcing
– Businesses expected to replace information technology
components
– High growth rate is not expected to continue:
• Company already possesses a sizable portion of IC market
• Industry consolidation is expected, increasing competition for
a currently stagnant industry
Pro Forma Cash Flows
2000
2001
2002
2003
2004
2005
2006
2007
Revenues
166,198
125,885
158,645
192,817
248,116
259,777
271,987
284,770
Cost Of Goods Sold
Cost Of Goods Sold Margin
(89,682)
54.0%
(92,228)
73.3%
(116,229)
73.3%
(141,265)
73.3%
(181,779)
73.3%
(187,299)
72.1%
(193,111)
71.0%
(197,915)
69.5%
Operating Expenses:
Research and development
General and administrative
Marketing
Total Operating Expenses
(5,132)
(7,408)
(2,682)
(15,221)
(10,649)
(7,940)
(2,290)
(20,879)
(13,420)
(8,599)
(2,886)
(24,905)
(16,311)
(9,313)
(3,508)
(29,131)
(20,989)
(10,086)
(4,514)
(35,588)
(21,975)
(10,923)
(4,726)
(37,624)
(23,008)
(11,829)
(4,948)
(39,785)
(24,090)
(12,811)
(5,181)
(42,081)
EBIT
Depreciation & Amortization
EBITDA
Tax Benefit (Provision)
Tax Shield On Facility Loan
61,295
(41,446)
102,741
1,168
-
12,778
(55,323)
68,101
3,741
-
17,510
(66,941)
84,451
4,714
-
22,421
(76,045)
98,465
5,730
-
30,748
(86,387)
117,135
7,373
2
34,854
(98,135)
132,989
7,719
2
39,091
(111,138)
150,229
8,082
2
44,774
(122,586)
167,359
8,462
2
Operating Cash Flow
NetWorking Capital
Capital Expenditures
103,909
(12,502)
(2,107)
71,842
8,297
(5,121)
89,165
(4,149)
(6,196)
104,195
(5,601)
(7,039)
124,510
(19,004)
(39,210)
140,711
(7,537)
(9,083)
158,313
(8,072)
(10,287)
175,823
(8,758)
(11,346)
89,299
75,018
78,821
91,556
66,296
124,090
139,954
155,719
Free Cash Flow
Note: Chinese Manufacturing Facility Assumed To Be Fully Operational By 2005.
Shanghai Mfg. Facility
• Will be used to manufacture 8-inch wafers
– Cost of Goods Sold Implications – lower direct labor costs,
tariff reductions and tax breaks
• Cost of Factory = NT$ 31,214 Million
• Sources of Funds:
– Cash = NT$ 12,896 Million
– Leverage = NT$ 14,530 Million
– Retained Earnings = NT$ 3,789 Million
• Exchange Ratio = 34.8 NT$/US$
• Assumptions:
– Interest rate = Company’s Cost of Debt
– Tax Rate = 15%
International Cost of Capital
• Goldman Integrated Model for Cost of Equity
– US Risk-Free + Sovereign Yield Spread + Beta (World
Historical Risk Premium)
– Beta (ADR relative to S&P 500) = 0.9
– US Treasury 10-Yr Bond Yield = 3.96%
– Taiwanese Government 10-Yr Bond = 2.16%
– S&P 500 Historical Returns = 8.00%
– Cost of Equity = 5.80%
International Cost of Capital
• Cost of Debt calculated through Altman Z-Score
–
–
–
–
–
Altman Z-Score: 3.25+6.56*X1+3.26*X2+6.72*X3+1.05*X4
X1 = Working Capital / Total Assets = 0.10
X2 = Retained Earnings / Total Assets = 0.10
X3 = EBIT / Total Assets = 0.03
X4 = Book Value / Total Liabilities = 3.11
• Comparable Bond Rating = AA+
Adjustment of Altman Score
• No adjustment for foreign currency fluctuation
– Low vulnerability of revenues (73.3% of revenues outside
Asia)
• No adjustment for industry risk
– Very low leverage industry
• No adjustment for competitive position
– Leading player, but not considered dominant due to
competition
• +2 adjustment for Market vs. Book Value
– Market Cap (NT$ 875,275 Million), Book Value (NT$
295,853 Million)
Adjustment of Altman Score
• No bond specific adjustment
– Some unsecured debt outstanding, but unsure about
contingencies (collateral, guarantees)
• No sovereign risk spread adjustment
– Taiwanese yield slightly lower than comparable US Bond
yield
Debt Rating Conclusion
• EM Adjustment suggests AAA
• Company Rating on Taiwan Ratings Agency
(Affiliate of Standard & Poor’s) = AA+
• We, conservatively, used AA+ as the credit rating
for the Company
• Cost of Debt = 3.06%
– Taiwan Government 10-Yr Bond Yield = 2.16%
– Bridge spread for AA+ Bond = .90%
WACC Assumption
• Weighted Average Cost of Capital = 5.28%
• Assumptions:
– Constant Debt/Equity Ratio of .19
– BV of Equity (from Company) = NT$ 295,853 Million
– Projected Debt = NT$ 56,343 Million
Discounted Cash Flows
• Three cases:
– Case 1: Precedent Transactions Multiple
– Case 2: Technology Industry Multiple
– Case 3: Gordon Growth Model
Case 1 DCF
• Used 3 mergers & acquisitions transactions to determine
EBITDA Multiple to be applied
–
–
–
–
Target companies integrated circuits manufacturers
Min PP/EBITDA Multiple of 12.19x
Implied value per share = NT$ 112.06
Implied value per share (ADR) = US$ 16.12
Target
Dallas Semiconductor
Telcom Semiconductor
Jumptec Industrielle Computer
Acquirer
Maxim Integrated Products
Microchip Technology
Kontron AG
Purchase Price / EBITDA
12.19x
17.94x
34.96x
Case 2 DCF
• Technology industry multiple used to calculated
terminal value
– Typical PP/EBITDA Multiple = 7.00x
– Implied value per share = NT$ 75.95
– Implied value per share (ADR) = US$ 10.93
Case 3 DCF
• Gordon Growth Model to calculate terminal
value
–
–
–
–
TV = FCF /(WACC – LT Growth)
LT Growth Rate = 2%
Implied value per share = NT$ 223.43
Implied value per share (ADR) = US$ 32.24
DCF Conclusion
• DCF Range of Values:
– Based on Taiwanese Stock: NT$ 75.95 – 223.43
– Based on US ADR: $10.93 – 32.24
• Current Price Per Share:
– Taiwanese Exchange = NT$ 47.00
– New York Stock Exchange = $ 8.18
“The Force is strong with this one”
- Star Wars
Sensitivity Analyses
Case 1: Discount Rate vs. Terminal Value Multiple
112.06
6.19x
9.19x
12.19x
15.19x
18.19x
21.19x
24.19x
3.28%
76.41
99.35
122.30
145.24
168.18
191.13
214.07
4.28%
73.32
95.18
117.05
138.91
160.77
182.64
204.50
5.28%
70.39
91.24
112.08
132.92
153.77
174.61
195.46
6.28%
67.62
87.50
107.38
127.26
147.14
167.03
186.91
7.28%
64.98
83.96
102.93
121.90
140.88
159.85
178.82
6.28%
66.36
69.67
72.98
76.30
79.61
82.92
7.28%
63.78
66.95
70.11
73.27
76.43
79.59
Case 2: Discount Rate vs. Terminal Value Multiple
76.00
6.00x
6.50x
7.00x
7.50x
8.00x
8.50x
3.28%
74.96
78.78
82.61
86.43
90.25
94.08
4.28%
71.93
75.58
79.22
82.87
86.51
90.15
5.28%
69.07
72.54
76.02
79.49
82.97
86.44
Sensitivity Analyses
Case 3: Discount Rate vs. LT Growth
224.14
0.50%
1.00%
1.50%
2.00%
2.50%
3.28%
285.03
341.16
428.83
584.98
941.33
4.28%
207.60
234.94
272.13
325.62
409.16
5.28%
162.63
178.43
198.41
224.48
259.93
6.28%
133.28
143.38
155.60
170.67
189.73
7.28%
112.63
119.54
127.64
137.28
148.94
Comparable Companies
Price/Earnings
Taiwan Semiconductor Manufacturing
Winbond Electronics
United Microelectronics
Advanced Micro Devices
Tower Seminconductor
ASE Test
Chartered Semiconductor
ON Semiconductor
Advanced Semiconductor Engineering
Max
Mean
Median
Min
Price/Book
Price/Sales
EV/EBITDA
60.43x
NM
NM
NM
NM
NM
NM
NM
NM
3.16x
0.94x
0.05x
0.63x
0.48x
0.49x
0.59x
NM
0.21x
6.95x
2.59x
0.15x
0.57x
2.31x
0.98x
2.03x
0.20x
0.23x
13.06x
NM
0.46x
3.01x
NM
3.78x
16.56x
19.07x
4.25x
NM
NM
NM
NM
3.16x
0.73x
0.54x
0.05x
6.95x
1.78x
0.98x
0.15x
19.07x
6.69x
4.25x
0.46x
Conclusion
• Multiples serve as a testament to the relative strength of
the Company
– TSMC at the higher end of each respective multiple
– Market price may be high, relative to competitors, as investors
recognize:
• Robust Cash Flows, Revenues and Balance Sheet
• Company as industry leader
Multiple
Price / Book
Price / Sales
Enterprise Value / EBITDA
Range of Values
0.05x – 3.16x
Price range: NT$ 0.73 – 47.00
Mean: 10.83
0.15x – 6.95x
Price range: 1.01 – 47.00
Mean: 12.03
0.46x – 19.07x
EV range: 1.68 – 69.73
Mean: 24.45
Black-Scholes Pricing
Assumptions:
Current Stock Price (S)
Exercise Price (E)
Yrs. Till Exp. (t)
$
7.75
7.50
0.33
Intinsic Value of Call:
Call Price
$
0.35
d1
1.81
d2
1.78
10-Yr Treasury
3.96%
NormDist(d1)
0.965
Variance
0.20%
NormDist(d2)
0.963
Prevailing Market Call Price
Formulas:
a. Call Price = [S * NormDist(d1)] - [E * e(-rt) * NormDist(d2)]
b. d1 = [ln(S/E) + t * (r + .5(Var))] / (Var * t).5
c. d2 = d1 - (Var * t).5
$
0.95
Agenda
•
•
•
•
•
Case Overview
Country Risk Analysis
Company and Industry Overview
Market Analysis
Financial Analyses
–
–
–
–
Ratios
Discounted Cash Flows
Comparable Companies
Black-Scholes Options Pricing
 Conclusions
• Questions & Answers
Insight / Take Home Points
• Investors should not be averse towards
investing in a particular sector/industry
– Due Diligence
– Use of various methodologies to evaluate equity
• Ride the wave
– Investment in technology companies could be a profitable
venture in the long run
• If there is the potential to make “a killing,” pull
the trigger
Insight / Take Home Points
• “…從過去的財報數字中，我們從巴菲特
(Warren Buffet) 選股邏輯的複式篩選，選
出了下列完全符合條件的八檔公司，其中
前五名包括有億豐、中華、台積電、裕隆、
寶成…”
• “…By using Warren Buffet’s highly-regarded
methodology, TSMC will be selected as one of
the eight companies to invest in Taiwan.”
- Taiwan Economic Information Co.
Insight / Take Home Points
Taiwan Semiconductor
Manufacturing Company
“Will Be Back!!!”
Q & A Session