Taiwan Information Technology 19 May 2023

Taiwan Semiconductor Manufacturing (2330 TT)

Tai wan Semic onductor M anufacturing

Target price: TWD615.00 (from TWD620.00)

Share price (19 May): TWD532.00 | Up/downside: +15.6%

Cyclicality still intact despite higher volatility (III)

Rick Hsu
(886) 2 8758 6261
 Trimming forecasts on a likely prolonged inventory correction … rick.hsu@daiwacm-cathay.com.tw

 … yet no harm to our positive stance on 2024 upcycle Fion Chiu

(886) 2 8758 6249
 Reiterating our Buy (1) call; lowering 12-month TP to TWD615 fion.chiu@daiwacm-cathay.com.tw

What’s new: We trim our 2023 forecasts and 12-month TP for TSMC as Forecast revisions (%)
we see a likely prolonged inventory correction against the backdrop of the Year to 31 Dec 23E 24E 25E
Revenue change (2.0) 0.2 0.5
recent industry dynamics dwarfing the magnitude of its recovery in 2H23. Net profit change (3.0) 1.5 2.5
This leads us to believe that TSMC may miss its annual guidance for 2023, Core EPS (FD) change (3.0) 1.5 2.5
weighing on the stock performance in the near term. That said, we remain Source: Daiwa forecasts
comfortable with our Buy (1) call, as the next upturn is still in sight, despite
higher volatility in the course of the current correction. We suggest that
investors accumulate into any weakness ahead of the likely 2024 upcycle.

What’s the impact: Downside risk to 2H23 recovery yet… We cut our
3Q23E revenue by 6% to TWD522bn (c.USD17bn), now up just 10% QoQ
and 7% below the consensus forecast, resulting in our lower EPS for
2023E on a top-line decline of 5% YoY, or a drop of 8% YoY in USD terms
to USD70bn, which is below TSMC’s guidance of a low- to mid-single-digit
percentage YoY decline. Our revisions factor in: 1) slower-than-expected
inventory digestion in the semiconductor food chain as a result of still 12-month range 371.00-560.00
Market cap (USDbn) 448.42
muted sell-through (ie, end-demand), especially in the consumer space, 3m avg daily turnover (USDm) 371.94
and 2) possible delays in the effects of order cuts on inventory build. Shares outstanding (m) 25,932
However, we believe this likely prolonged inventory correction would result Major shareholder National Development Fund (6.4%)
in a counter-seasonal performance for TSMC in 1Q24 when customers
push back on restocking; thus, we fine-tune up our 2024-25E EPS. Financial summary (TWD)
Year to 31 Dec 23E 24E 25E
Revenue (m) 2,143,015 2,549,442 2,833,414
…no harm to our positive stance on the cycle. We see a likely Operating profit (m) 921,701 1,090,030 1,177,122
expectation reset by the street for the magnitude of TSMC’s recovery in Net profit (m) 801,953 988,991 1,072,388
2H23, yet our positive stance on its structural outlook remains intact as the Core EPS (fully-diluted) 30.925 38.138 41.354
EPS change (%) (21.1) 23.3 8.4
next upturn is still in sight, with a turnaround in the chip cycle to kick in from Daiwa vs Cons. EPS (%) (3.2) (2.7) (4.5)
4Q23 or 1Q24 (we will be reviewing our industry model in due course). For PER (x) 17.2 13.9 12.9
2H23, we expect TSMC’s revenue to recover by +17% HoH, with the N3 Dividend yield (%) 2.3 2.3 2.6
DPS 12.0 12.0 14.0
ramp of new AP for the iOS platform to lead the growth, followed by broad-
PBR (x) 3.9 3.3 2.8
based restocking by other customers ahead of a likely inventory EV/EBITDA (x) 9.0 7.5 6.3
normalisation towards end-2023. For 2024 and beyond, we reinforce the 2 ROE (%) 24.7 25.5 23.3
secular themes of HPC and 5G to help drive TSMC’s structural profitability Source: FactSet, Daiwa forecasts
for a 52-54% gross margin on a c.mid-teens revenue CAGR, transforming
the foundry leader from a mobile computing to an AI company globally.

What we recommend: We trim our 12-month TP for TSMC to TWD615,

still based on our ROE-adjusted 2023E PBR of 4.5x. We reiterate our Buy
(1) rating and suggest that investors accumulate into any weakness. Key
downside risks: lingering inflation and geopolitical uncertainties.

How we differ: Our 2023-25E EPS are 3-5% below the consensus
forecasts, as we believe the street has yet to realign to reality its
expectation of TSMC’s recovery in 2H23.

See important disclosures, including any required research certifications, beginning on page 13
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Financial summary
Key assumptions
Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Capacity utilization (%) 91 84 96 102 98 83 89 91
Blended ASP (USD) 1,367 1,429 1,526 1,642 1,933 1,916 1,929 1,964
Wafer shipment (8" equ., '000) 24,193 22,655 27,890 31,902 34,320 31,077 36,721 40,098

Profit and loss (TWDm)

Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Wafer Foundry Revenue 997,435 1,000,002 1,252,435 1,463,145 1,979,215 1,819,011 2,167,773 2,409,232
Sub & Other Revenue 34,039 69,983 86,820 124,270 284,677 324,004 381,669 424,182
Other Revenue 0 0 0 0 0 0 0 0
Total Revenue 1,031,474 1,069,985 1,339,255 1,587,415 2,263,891 2,143,015 2,549,442 2,833,414
Other income 0 0 0 0 0 0 0 0
COGS (533,599) (577,284) (628,125) (767,878) (915,536) (987,605) (1,188,897) (1,358,677)
SG&A (28,355) (28,582) (34,860) (44,822) (63,825) (65,638) (70,626) (76,856)
Other op.expenses (85,896) (91,419) (109,486) (124,735) (163,262) (168,071) (199,889) (220,759)
Operating profit 383,623 372,701 566,784 649,981 1,121,267 921,701 1,090,030 1,177,122
Net-interest inc./(exp.) 11,643 12,939 7,165 488 10,672 12,620 13,290 18,600
Assoc/forex/extraord./others 2,244 4,205 10,829 12,657 12,250 10,739 9,156 10,564
Pre-tax profit 397,510 389,845 584,777 663,126 1,144,190 945,060 1,112,476 1,206,285
Tax (46,326) (44,502) (66,619) (66,053) (127,290) (142,444) (122,372) (132,691)
Min. int./pref. div./others (54) (80) (273) (533) (370) (663) (1,112) (1,206)
Net profit (reported) 351,131 345,263 517,885 596,540 1,016,530 801,953 988,991 1,072,388
Net profit (adjusted) 351,131 345,263 517,885 596,540 1,016,530 801,953 988,991 1,072,388
EPS (reported)(TWD) 13.541 13.315 19.972 23.005 39.204 30.925 38.138 41.354
EPS (adjusted)(TWD) 13.541 13.315 19.972 23.005 39.204 30.925 38.138 41.354
EPS (adjusted fully-diluted)(TWD) 13.541 13.315 19.972 23.006 39.203 30.925 38.138 41.354
DPS (TWD) 8.000 10.000 10.000 10.250 11.001 12.000 12.000 14.000
EBIT 383,623 372,701 566,784 649,981 1,121,267 921,701 1,090,030 1,177,122
EBITDA 676,170 659,586 898,508 1,072,375 1,558,521 1,443,523 1,740,535 1,955,278

Cash flow (TWDm)

Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Profit before tax 397,510 389,845 584,777 663,126 1,144,190 945,060 1,112,476 1,206,285
Depreciation and amortisation 292,546 286,884 331,725 422,395 437,254 521,822 650,505 778,157
Tax paid (46,326) (44,502) (66,619) (66,053) (127,290) (142,444) (122,372) (132,691)
Change in working capital (31,942) 7,701 (61,074) (100,384) (53,286) 42,000 (130,000) 35,000
Other operational CF items (37,834) (24,790) 33,857 193,077 209,731 (7,266) (8,045) (8,485)
Cash flow from operations 573,954 615,139 822,666 1,112,161 1,610,599 1,359,173 1,502,563 1,878,265
Capex (315,582) (460,422) (507,239) (839,196) (1,082,672) (995,806) (1,121,045) (867,512)
Net (acquisitions)/disposals (9,657) (13,077) 49 4,676 (128,712) 68,669 0 0
Other investing CF items 10,970 14,697 1,408 (1,847) 20,456 0 0 0
Cash flow from investing (314,269) (458,802) (505,782) (836,366) (1,190,928) (927,137) (1,121,045) (867,512)
Change in debt (58,025) (34,900) (29,800) (1,090) (1,730) (19,314) (83,434) (75,090)
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (207,443) (259,304) (259,304) (265,786) (285,234) (311,184) (311,184) (363,048)
Other financing CF items 5,218 (14,316) (27,758) (3,622) 59,198 0 0 0
Cash flow from financing (260,250) (308,520) (316,862) (270,499) (227,766) (330,498) (394,618) (438,138)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (565) (152,183) 23 5,296 191,905 101,538 (13,100) 572,615
Free cash flow 258,372 154,717 315,427 272,965 527,927 363,367 381,518 1,010,753
Source: FactSet, Daiwa forecasts

2
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Financial summary continued …

Balance sheet (TWDm)
Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Cash & short-term investment 695,182 583,449 791,477 1,188,442 1,561,483 1,594,352 1,581,252 2,153,867
Inventory 103,231 82,981 137,353 193,102 221,149 186,149 236,149 251,149
Accounts receivable 129,198 147,595 155,374 207,637 231,409 234,409 329,409 289,409
Other current assets 24,069 8,589 7,982 17,892 38,856 25,000 30,000 30,000
Total current assets 951,680 822,614 1,092,185 1,607,073 2,052,897 2,039,910 2,176,810 2,724,425
Fixed assets 1,072,050 1,352,377 1,555,589 1,975,119 2,693,837 2,903,952 3,409,543 3,597,622
Goodwill & intangibles 37,093 59,642 85,209 113,927 149,117 150,000 150,500 152,000
Other non-current assets 29,305 30,172 27,728 29,385 68,928 68,928 68,928 68,928
Total assets 2,090,128 2,264,805 2,760,711 3,725,503 4,964,779 5,162,790 5,805,781 6,542,975
Short-term debt 123,655 150,322 89,536 127,171 19,314 83,434 75,090 67,581
Accounts payable 34,357 40,206 41,283 48,911 56,522 66,522 81,522 91,522
Other current liabilities 182,531 400,207 486,332 563,421 868,391 634,901 664,969 708,046
Total current liabilities 340,543 590,736 617,151 739,503 944,227 784,857 821,582 867,149
Long-term debt 56,900 25,100 254,105 610,071 834,336 750,903 675,813 608,231
Other non-current liabilities 15,189 26,874 38,833 205,196 225,727 70,000 70,000 68,000
Total liabilities 412,632 642,710 910,089 1,554,770 2,004,290 1,605,760 1,567,394 1,543,380
Share capital 259,304 259,304 259,304 259,304 259,304 259,304 259,304 259,304
Reserves/R.E./others 1,417,514 1,362,106 1,590,353 1,908,983 2,686,349 3,282,227 3,962,472 4,722,473
Shareholders' equity 1,676,818 1,621,410 1,849,657 2,168,287 2,945,653 3,541,530 4,221,775 4,981,777
Minority interests 679 685 965 2,447 14,836 15,499 16,611 17,818
Total equity & liabilities 2,090,128 2,264,805 2,760,711 3,725,503 4,964,779 5,162,790 5,805,781 6,542,975
EV 13,281,875 13,388,483 13,348,953 13,347,070 13,102,827 13,051,307 12,982,086 12,335,587
Net debt/(cash) (514,627) (408,026) (447,835) (451,200) (707,833) (760,016) (830,349) (1,478,055)
BVPS (TWD) 64.667 62.530 71.333 83.621 113.600 136.570 162.802 192.109

Key ratios (%)

Year to 31 Dec 2018 2019 2020 2021 2022 2023E 2024E 2025E
Sales (YoY) 5.5 3.7 25.2 18.5 42.6 (5.3) 19.0 11.1
EBITDA (YoY) 4.7 (2.5) 36.2 19.4 45.3 (7.4) 20.6 12.3
Operating profit (YoY) (0.5) (2.8) 52.1 14.7 72.5 (17.8) 18.3 8.0
Net profit (YoY) 2.3 (1.7) 50.0 15.2 70.4 (21.1) 23.3 8.4
Core EPS (fully-diluted) (YoY) 2.3 (1.7) 50.0 15.2 70.4 (21.1) 23.3 8.4
Gross-profit margin 48.3 46.0 53.1 51.6 59.6 53.9 53.4 52.0
EBITDA margin 65.6 61.6 67.1 67.6 68.8 67.4 68.3 69.0
Operating-profit margin 37.2 34.8 42.3 40.9 49.5 43.0 42.8 41.5
Net profit margin 34.0 32.3 38.7 37.6 44.9 37.4 38.8 37.8
ROAE 22.0 20.9 29.8 29.7 39.8 24.7 25.5 23.3
ROAA 17.2 15.9 20.6 18.4 23.4 15.8 18.0 17.4
ROCE 21.3 20.4 28.4 25.5 33.4 22.5 23.2 22.1
ROIC 30.1 27.8 38.4 37.5 50.2 31.0 31.3 30.2
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 11.7 11.4 11.4 10.0 11.1 15.1 11.0 11.0
Accounts receivable (days) 44.5 47.2 41.3 41.7 35.4 39.7 40.4 39.9
Current ratio (x) 2.8 1.4 1.8 2.2 2.2 2.6 2.6 3.1
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 60.5 73.8 75.1 55.1 47.8 38.8 31.5 33.9
Free cash flow yield 1.9 1.1 2.3 2.0 3.8 2.6 2.8 7.3
Source: FactSet, Daiwa forecasts

Company profile

Incorporated in Taiwan in 1987, Taiwan Semiconductor Manufacturing Co. (TSMC) is the world’s largest
complementary metal oxide semiconductor (CMOS) foundry in revenue terms. TSMC offers foundry
services such as wafer masking, fabrication, probing, packaging and testing, to a high variety of
customers including fabless chipmakers and IDMs. Its manufacturing fabs are located in Taiwan, China,
the US and Singapore.

3
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Cyclicality still intact despite higher volatility

We trim our forecasts We trim our 2023 forecasts and 12-month TP for TSMC as we see a likely prolonged
and TP, but reaffirm our inventory correction against the backdrop of the recent industry dynamics, which will likely
Buy (1) call; we suggest dwarf the magnitude of its 2H23 recovery. This leads us to believe that the market would
that investors have to reset its high expectation on the 2H23 recovery, and TSMC would miss its annual
accumulate into any guidance for 2023, both of which will likely weigh on the stock performance in the near
weakness term. That said, we remain comfortable with our Buy (1) call, as the next upturn still within
our sight despite a slight delay, with higher volatility in the course of the current correction.
We suggest that investors accumulate into any weakness ahead of the 2024 upcycle
based on the industry forecasts envisioned in our 2023 Tech Outlook report: V-shape, U-
shape or double dip?.

Downside risk to 2H23 recovery yet…

We cut our 3Q23 We cut our 3Q23 revenue forecast for TSMC by 6% to TWD522bn (c.USD17bn), now up
forecasts and see just 10% QoQ (-15% YoY) and 7% below the current consensus forecast, resulting in our
downside risk to TSMC’s lower 2023E EPS of TWD30.9, on a top-line decline of 5% YoY, or a drop of 8% YoY in
2023 revenue guidance USD terms to USD70bn, below TSMC’s guidance of a low-to-mid-single-digit percentage
YoY decline for its 2023 revenue (see tables on page 10 for more details). Our revisions
factor in: 1) a slower-than-expected inventory digestion in the semiconductor food chain as
a result of still muted sell-through (ie, end-demand), especially in the consumer electronics
markets such as Android smartphones, generic PCs and IoT devices, and 2) possible
delays in the effects of order cuts on the inventory build at TSMC’s customers.

According to our market research, wafer capacity across N7 to N16 process nodes at
TSMC remains only 50-70% utilised based on current wafer starts, and 8” loadings are
also suboptimal, while N3 and N28/22 seem to be the only 2 nodes that are optimally
loaded, leading to a likely total output-utilisation of >80% for 3Q23, on our estimate.

Illustrated in several charts below, inventory days of many fabless majors, including
Qualcomm, MediaTek (MTK), AMD and Realtek, which have already reported, failed to
drop as we had expected after reaching their all-time highs since Y2k. Only Novatek cut its
inventory markedly on rush orders for display drivers (D/D) and SoC from TV and gaming
PC, as a result of a “FIFO” effect as D/D makers entered inventory correction ahead of the
pack. Cirrus Logic managed its inventory well thanks to: 1) its exposure in the iOS
platform, which has been resilient relative to the Android platform since COVID-19 hit, and
2) the diversification of its high-performance mixed signal (HPMS) products for market-
share gain. Nevertheless, we believe such “localised” restocking, as a result of these rush
orders, is too small in scale to move the needle, as most of the big firms that were still
running high inventories are operating businesses of big-ticket items such as smartphones
and PCs, and consuming in aggregate around two-thirds of the global semiconductor
chips.

But 1Q24 could be Accordingly, we think this inventory correction is now likely to be prolonged by one more
counter-seasonal on quarter compared with our previous expectation, likely peaking in 1Q23 (rather than in
restocking pushback 4Q22) and normalising only in 4Q23, if not later. That said, this likely prolonged inventory
correction would result in a counter-seasonal performance for TSMC in 1Q24, when its
customers push back restocking and concentrate on new wafer builds in 1Q24. As a result,
we fine-tune up our 2024-25 EPS forecasts for TSMC to reflect this volatility in the order
trajectory.

4
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Inventory trend: Qualcomm Inventory trend: MTK

USDm Day USDm Day
8,000 160 3,5 00 140
7,000 140 3,000 120
6,000 120 2,5 00 100
5,000 100
2,0 00 80
4,000 80
1,500 60
3,000 60
1,000 40
2,000 40
1,000 20 50 0 20
0 0 0 0

1Q00
1Q01
1Q02
1Q03
1Q04
1Q05

1Q07
1Q08
1Q09
1Q10
1Q11
1Q12

1Q14
1Q15
1Q16
1Q17
1Q18
1Q19

1Q21
1Q22
1Q23
1Q06

1Q13

1Q20
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23
Dollar invent ory (LHS) Inventory days historical average Dollar invent ory (LHS) Inventory days historical average

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

Inventory trend: AMD Inventory trend: Nvidia*

USDm Day USDm Day
4,500 140
6,000 250
4,0 00 12 0
3,500 5,000 200
10 0
3,0 00 4,000
2,5 00 80 150
2,000 3,000
60
100
1,5 00 2,000
40
1,000 50
20 1,000
500
0 0 0 0
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23

1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11

1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23
1Q12
1Q13
1Q14
1Q15
Dollar invent ory (LHS) Inventory days historical average Dollar invent ory (LHS) Inventory days historical average

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

Note: April-quarter results not reported yet

Inventory trend: Marvell* Inventory trend: Broadcom*

USDm Day USDm Day
4,500 140 2,500 90
4,0 00 12 0 80
3,500 2,000 70
10 0
3,0 00 60
2,5 00 80 1,500
50
2,000 60 40
1,000
1,5 00 30
40
1,000 500 20
500 20 10
0 0 0 0
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23

1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23

Dollar invent ory (LHS) Inventory days historical average Dollar invent ory (LHS) Inventory days historical average

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

Note: April-quarter results not reported yet Note: April-quarter results not reported yet

Inventory trend: Realtek Inventory trend: WillSemi

USDm Day CNYm Day
90 0 250 16,000 450
800 14,000 400
700 200 35 0
12,000
600 300
150 10,000
500 25 0
8,000
40 0 200
100 6,000
30 0 150
20 0 4,000 10 0
50
10 0 2,000 50
0 0 0 0
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23

Dollar invent ory (LHS) Inventory days historical average Dollar invent ory (LHS) Inventory days historical average

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

5
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Inventory trend: Novatek Inventory trend: Himax

USDm Day USDm Day
700 160 45 0 300
600 140 40 0
250
120 35 0
500
300 200
10 0
400 250
80 150
300 200
60
150 100
200 40 100
100 50
20 50
0 0 0 0

1Q00

1Q02
1Q03
1Q04
1Q05

1Q07
1Q08
1Q09

1Q11
1Q12
1Q13
1Q14

1Q16
1Q17
1Q18

1Q20
1Q21
1Q22
1Q23
1Q01

1Q06

1Q10

1Q15

1Q19
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23
Dollar invent ory (LHS) Inven tory days historical a ve rag e Dollar invent ory (LHS) Inventory days historical average

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

Inventory trend: Cirrus Logic Inventory trend: Silicon Lab

USDm Day USDm Day
250 180 140 160
160 120 140
200 140
100 120
120
150 100
100 80
80
80 60
100 60
60
40 40
50 40
20 20 20
0 0 0 0
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23

1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
1Q23
Dollar invent ory (LHS) Inventory days historical average Dollar invent ory (LHS) Inven tory days historical a ve rag e

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

…no harm to our positive stance on the cycle

We anticipate an We anticipate an expectation reset by the street for the magnitude of TSMC’s recovery in
expectation reset by the 2H23, as a result of the prolonged inventory correction discussed above. Nonetheless, our
street, but … positive stance on its structural outlook remains intact, as the next upturn is still in sight, in
our view, with a turnaround in the chip cycle to kick in from 4Q23 or 1Q24. Note that we
currently expect the cycle, in terms of semiconductor revenue YoY growth (ex-memory), to
return to positive from 4Q23, after turning negative in 4Q22 (see page 30 of our 2023 Tech
Outlook for more details). We will review our industry model in due course.

…our positive stance on
the next upturn is still
intact, though likely to
be pushed back slightly
For 2H23, we now expect TSMC’s revenue to recover by +17% HoH (consensus: +23%
HoH), with the N3 ramp-up of new application processors (AP) for the iOS platform to lead
the growth, followed by a broad-based restocking by other customers ahead of a likely
inventory normalisation towards end-2023. For 2024 and beyond, we reinforce the 2
secular themes of high-performance compute (HPC) and 5G, under the multi-year trends
of compute and connectivity upgrades in the logic/analog semiconductor space to help
drive TSMC’s structural profitability for a 52-54% gross margin on a c.mid-teens revenue
CAGR, and transform the foundry leader from a mobile computing to an artificial
intelligence (AI) company in the global chip industry, best capitalising on the AI megatrend.

6
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

HPC to enable AI for ubiquitous compute

We forecast the AI HPC Depicted in our 2018 Tech Outlook: Focus on themes that are set to shine (page 26-28),
market to exceed surging data flow and computing power under the BigData/IoT mega-demand cycle are
USD100bn in 2025 for a combining to spur AI demand. Defined as machine learning evolving into deep learning
20% CAGR, with with implementation of neural network processes (NNPs) to simulate a biological brain, AI
generative AI further is redefining the need in the global IT industry for HPC processors to facilitate a paradigm
adding to upside risk shift in the compute architecture – from serial to parallel. Thanks to its cross-platform
coverage, AI should serve as a ubiquitous technology, handling Big Data analytics through
comprehensive computing across multiple demand verticals, with 5 applications rising
faster than others in terms of adoption: datacentre (DC), smartphone, advanced driver
assistance systems (ADAS), Industrial IoT (IIoT) and AIoT.

Despite a full-blown inventory correction weighing on the chip cycle, AI HPC demand
unfolded intact in 2022, thanks to robust demand for accelerators from DC lifting AI
penetration from data training to data inference for cloud compute, though this was partially
offset by weak demand from smartphones for edge compute. For 2023, we forecast the AI
HPC market to expand by 17% YoY (+24% YoY for 2022), contributed by AI DC for cloud
compute (60% of total, up 20% YoY), AI smartphone for edge compute (30% of total, up
7% YoY) and ADAS (7% of total, up 25% YoY) (see chart on next page).

We further expect the AI HPC market to surpass the USD100bn milestone in 2025 for a
20% CAGR over 2022-25, premised upon our assumption for AI penetration in DC to reach
24% (2% for data training, 22% for inference) in 2023 and c.30% in 2025 (from 22% for
2022). The emergence of generative AI from late 2022 would mushroom in the next 1-2
years to further add to upside potential of the market’s growth, in our view.

5G to facilitate AI for broadband transmission

We forecast 5G As advances in computing power are helping to process surging data flows, connectivity
smartphones to surpass needs to be upgraded in the ecosystem to handle data transmission within both wireline
1bn units in 2025 for a and wireless networking & communication (N&C) architectures, as detailed in our 2016
22% CAGR optical communication report (Head for the leading lights) and 2018 5G report (Let’s talk
about 5G). This way, both data connectivity and compute will go hand-in-hand to help drive
digital transformation in human lives and digitalise the world into a data economy, making
OC (wireline) and 5G (wireless) the 2 key technologies.

For the wireless bandwidth upgrades, the 5G cellular technology should be the most viable
solution. As we had expected, 2019 was a tipping point for the 5G cellular migration to kick
off at the infrastructure end, followed by a ramp-up in 2020 at the smartphone end. Total
smartphone demand was weak over the past 3 years as a result of the pandemic hurting
global economies; yet the 5G phone build in terms of penetration unfolded intact, ramping
up from nothing in 2019 to 49% in 2022. Our positive stance on the 5G’s structural growth
remains unchanged as we forecast 5G smartphone shipments to grow by c.20% YoY in
2023 to exceed 700m units and account for c.60% penetration, and surpassing the 1bn
mark in 2025, registering a 22% CAGR over 2022-25. TSMC stands to benefit, as 5G and
HPC customers together drive 80% of its revenue (see chart on next page).

7
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Global AI HPC market forecasts Global 5G smartphone penetration forecasts

(USDm) m units
120,000 100% 1,200 90%
90% 80%
100,000 80 % 1,000
70%
80,000 70 %
800 60%
60%
60,000 50% 50%
600
40% 40%
40,000 30 % 400 30%
20,000 20 % 20%
10% 200
10%
0 0%
0 0%
2016 2017 20 18 2019 2020 20 21 20 22 2023E 20 24E 2025E
2018 2019 2020 2021 2022 2023E 2024E 2025E
AI datacentre AI smartp hon e ADAS
5G smartphone Penetration (RHS)
IIoT & others* Growth (RHS)
Source: Company, Daiwa estimates Source: Daiwa estimates and forecasts
Note: * Others include supercomputer accelerators, AIaaS cloud, AIoT, etc.
TSMC: revenue mix trend by application
AI HPC surpassed 100%
mobile (5G) for the first
time in 2022, reaching 80%
41% of revenue (mobile:
60 %
39%)
40 %

20%

0%
1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

4Q20

1Q21

2Q21

3Q21

4Q21

1Q22

2Q22

3Q22

4Q22

1Q23
Mobile (smartphone) HPC (AI) IoT Automotive Digital consumer & others
Source: Company

Valuation and risk

We continue to employ our ROE-adjusted PBR method to value semiconductor foundries,
where we compare our projected ROE of c.mid-20s percentage pa for TSMC over the next
3-5 years with its average ROE of low-20s percentage over 1988-2022, working out a
premium of 16%. We then apply this premium to its historical average PBR of 3.8x,
resulting in our ROE-adjusted PBR of 4.5x and 12-month TP of TWD615 by multiplying our
2023E BVPS with this PBR. We reiterate our Buy (1) rating and suggest that investors
accumulate into any weakness by taking advantage of the street’s likely expectation reset
that would weigh on the stock price in the near term. Key downside risk: any negative
impact on the end-demand recovery from the lingering inflation and geopolitical
uncertainties.

TSMC: ROE trend* TSMC: PBR trend

45% (x )
11.9
12
40% 11 10.0
35% 10
9
30% 7.8
8
25% 7
6 5.5
20% 4.8
5 4.2
15% 4
3
10% 2 2.0 2.2 2.0
5% 1
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23

0%
1995

19 97

1999

2001

20 03

2005

2007

20 09

2011

2013

20 15

2017

2019

2021

2023E

2025E

P/BV Mean Mean + s Mean - s

Source: Company, Daiwa forecasts Source: Company, TEJ, Daiwa forecasts

Note: * Single-year ROE based on year-end equity, not 2-year average

8
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

TSMC: quarterly P&L forecasts

TWDbn 1Q23 2Q23E 3Q23E 4Q23E 1Q24E 2Q24E 3Q24E 4Q24E 2022 2023E 2024E 2025E
Wafer shipment (12" equ) 3,227 3,164 3,468 3,953 3,834 3,949 4,226 4,310 15,253 13,812 16,320 17,821
Capacity utilisation 81% 77% 82% 91% 88% 88% 90% 90% 98% 83% 89% 91%
Blended ASP (USD) 4,373 4,195 4,185 4,466 4,368 4,160 4,410 4,415 4,350 4,311 4,341 4,418
Foundry revenue 429 405 444 540 513 503 570 582 1,979 1,819 2,168 2,409
Sub & other revenue* 79 71 78 95 90 89 100 103 285 324 382 424
Total revenue 509 477 522 635 603 591 671 685 2,264 2,143 2,549 2,833
COGS -222 -222 -247 -297 -284 -284 -308 -313 -916 -988 -1,189 -1,359
Gross profit 287 255 275 339 307 387 377 194 1,348 1,155 1,361 1,475
Opex -55 -57 -57 -65 -54 -144 -84 107 -227 -234 -271 -298
Operating profit 231 198 219 274 253 243 293 301 1,121 922 1,090 1,177
EBITDA 342 313 352 437 410 401 460 470 1,559 1,444 1,741 1,955
Pretax profit 244 201 222 278 256 249 299 309 1,144 945 1,112 1,206
Income taxes -37 -30 -33 -42 -28 -27 -33 -34 -127 -142 -122 -133
Net profit 207 171 188 236 227 221 266 275 1,017 802 989 1,072
FD O/S (m) 26 26 26 26 26 26 26 26 26 26 26 26
FD EPS (TWD) 7.98 6.60 7.25 9.09 8.77 8.52 10.24 10.61 39.20 30.93 38.14 41.35
Margin
Gross 56% 53% 53% 53% 51% 65% 56% 28% 60% 54% 53% 52%
Operating 45% 41% 42% 43% 42% 41% 44% 44% 50% 43% 43% 42%
EBITDA 67% 66% 67% 69% 68% 68% 69% 69% 69% 67% 68% 69%
Net 41% 36% 36% 37% 38% 37% 40% 40% 45% 37% 39% 38%
Growth (QoQ)
Total revenue -19% -6% 10% 22% -5% -2% 13% 2%
Gross profit -26% -11% 8% 23% -9% 26% -3% -49%
Operating profit -29% -14% 11% 25% -8% -4% 20% 3%
EBITDA -21% -8% 12% 24% -6% -2% 15% 2%
Net profit -30% -17% 10% 25% -4% -3% 20% 4%
FD EPS -30% -17% 10% 25% -4% -3% 20% 4%
Growth (YoY)
Total revenue 4% -11% -15% 2% 19% 24% 28% 8% 43% -5% 19% 11%
Gross profit 5% -19% -26% -13% 7% 52% 37% -43% 65% -14% 18% 8%
Operating profit 3% -25% -29% -16% 9% 23% 34% 10% 73% -18% 18% 8%
EBITDA 2% -17% -15% 1% 20% 28% 31% 7% 45% -7% 21% 12%
Net profit 2% -28% -33% -20% 10% 29% 41% 17% 70% -21% 23% 8%
FD EPS 2% -28% -33% -20% 10% 29% 41% 17% 70% -21% 23% 8%
Source: Company, Daiwa estimates and forecasts
Note: * Including TSMC’s internal masking and 3D fabric backend packaging and testing services

TSMC: 2Q23 preview and 3Q23 outlook

2Q23E 3Q23E
TWDm Daiwa Consensus Variance Daiwa Consensus Variance
Revenue 476,884 476,561 0% 522,203 564,489 -7%
Gross profit 254,888 275,497
Operating profit 197,900 218,838
Pretax profit 201,471 221,520
Net profit 171,049 171,551 0% 188,070 209,010 -10%
Adjusted EPS (TWD) 6.60 6.62 0% 7.25 8.06 -10%
Margin
Gross 53.4% 52.8%
Operating 41.5% 41.9%
Net 35.9% 36.0%
Operation
Shipment ('000, 12" equ. wafers) 3,164 3,468
Utilization* 77% 82%
≤5nm sales contribution 29% 31%
Source: Bloomberg, Daiwa forecasts
Note: * Calculated as wafer shipment divided by capacity

9
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

ESG analysis
ESG risks
Risks Management Analyst comments
TSMC's board of directors (BoD) has 10 members, including 6 independent directors
representing 60% of total directors. The background of TSMC's BoD is diversified, with members
from industries, academia, and law. Also, its board members include representatives from not
Executive/board only Taiwan but also Europe and the US, bringing their experience in operating international
1
quality businesses to the board.
We believe the high percentage of independent directors and a diverse mix of expertise from the
board members strengthen the functionality of its BoD, as evidenced by TSMC's leading position
in the foundry market.
TSMC pays its dividend on a quarterly basis. In the past 5 years, TSMC has kept its dividend
G payout ratio above 50%. It has managed its dividend payout well, as evidenced by its dividend in
dollar terms, where it has never lowered its dividend in the past 10 years. As the leader in
advanced technology nodes, TSMC has kept expanding its capacity for advanced nodes; as
Capital management 1
such, we expect its capital intensity to increase to the level near or above 40% over 2022-23 (vs.
its long-term target of mid-30%). However, we believe TSMC will at least sustain its cash
dividend payout in dollar terms over 2022-23E. We see its balance between investment and
dividend as appropriate.
TSMC’s sales to related parties were 0.5-0.6% of its total revenue in 2020-21. Its purchase from
Related party &
1 related parties was 1.2% and 1.0% of its total cost of goods sold in 2020 and 2021, respectively.
transaction
We see these percentages as insignificant and thus see limited risk for TSMC.
As the leader in the global foundry industry, TSMC approaches supply chain management by
focusing on 2 main strategies: sustainability risk management and local supply chain
optimisation. It requires all its suppliers to comply with its "Code with Ethics and Business
Conduct", and to follow regulations on human rights and conflict-free minerals.
Supply chain In 2019, 100% of its tier-1 suppliers signed the "Supplier Code of Conduct" and self-assessment
S 1
management questionnaire on sustainable management. Also, TSMC's raw materials purchased are 100%
Democratic Republic of the Congo (DRC) conflict-free. It also requires its critical suppliers to
report on the status of sustainability management in their critical upstream supply chains.
Through these measures, we see TSMC reducing its supply chain risk.

TSMC applies internal and external company resources to develop regenerated water
technology, implements water conservation measures and uses regenerated water in the
Water & wastewater
E 2 manufacturing process. Through its water conservation measures, it reduced unit product wafer
management
usage (liter/12" equivalent wafer mask layer) by 7% YoY in 2021, leading to a reduction of 15%
vs. that of its base year of 2020, better than its target of 9%.
TSMC's waste recycling rate reached 95% in 2021 for 7 years in a row. Also, the percentage of
Waste & hazardous waste sent to landfills was less than 1% for 12 years in a row in 2021.
E materials 1 TSMC reduced its outsourced unit waste disposal (kg/12" equivalent wafer mask layer) to 0.99 in
management 2021, exceeding its target for 2021. Furthermore, TSMC has set a goal to reduce its outsourced
unit waste disposal per wafer to no more than 0.5 in 2030.
TSMC has continued its efforts to reduce greenhouse gas (GHG) emissions to drive low-carbon
manufacturing. It reduced GHG emissions per unit of production by 23% (vs. that of base year in
E GHG emissions 1
2010) in 2021, better than its target of 20%. It has set a goal to reduce its GHG emission per unit
of production by 40% in 2030 compared to the base year of 2010.
Note: Management score represents a company's ability to manage/benefit from certain ESG topics. The scores range from 1 to 3, with 1 being the strongest.
Source: Daiwa

10
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Daiwa’s Asia Pacific Research Directory

HONG KONG AUSTRALIA
Jiro IOKIBE (852) 2773 8702 jiro.iokibe@hk.daiwacm.com Wataru TERADA (61) 3 9916 1323 wataru.terada@au.daiwacm.com
Head of Asia Pacific Research and Deputy Head of Equity Sales & Trading Head of ESG (Asia ex-Japan)
Hiroki IWASE (852) 2848 4946 hiroki.iwase@hk.daiwacm.com
Head of Equity Sales & Trading and Deputy Head of Asia Pacific Research CHINA
John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com Li XIONG (86) 21 6841 3282 li.xiong@daiwacm.cn
Co-head of Asia Pacific Research and Head of Research Publications Head of Shanghai Research; Strategy (Hong Kong/China)
Craig CORK (852) 2848 4463 craig.cork@hk.daiwacm.com Bintuo NI (86) 21 6841 3228 bintuo.ni@daiwacm.cn
Regional Head of Asia Pacific Product Management Automobiles and Components (China)
Patrick PAN (852) 2773 8805 patrick.pan@hk.daiwacm.com Manrui XU (86) 21 6841 3208 manrui.xu@daiwacm.cn
Strategy (Hong Kong/China) Consumer (China)
Yue TAN (852) 2848 4947 yue.tan@hk.daiwacm.com Liam JIANG (86) 21 6841 3238 liam.jiang@daiwacm.cn
Strategy (Hong Kong/China) FinTech and Banking (China)
Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com Melody ZHAO (86) 21 6841 3268 melody.zhao@daiwacm.cn
Head of Automobiles, Transportation and Industrials (Hong Kong/China) IT/Technology Semiconductor (China)
Evelyn ZHANG (852) 2848 4970 evelyn.zhang@hk.daiwacm.com Mavis MA (86) 21 6841 3288 mavis.ma@daiwacm.cn
Automobiles and Components (Hong Kong/China) Power, Utilities, Renewables and ESS (PURE) – Wind, Solar & ESS, Hydro, Grid
Frank YIP (852) 2773 8842 frank.yip@hk.daiwacm.com Equipment (China)
Transportation and Industrials (Hong Kong/China) William WU (86) 21 6841 3200 william.wu@daiwacm.cn
Andy LI (852) 2532 4341 andy.li@hk.daiwacm.com Property (China)
Industrials (Hong Kong/China) Yumeng ZHENG (86) 21 6841 3207 yumeng.zheng@daiwacm.cn
Leon QI (852) 2532 4381 leon.qi@hk.daiwacm.com Steel (China)
Regional Head of Financials, FinTech and HealthTech; Banking, Diversified financials and
Insurance (Hong Kong/China/Taiwan) SOUTH KOREA
Ling TAN (852) 2773 8745 ling.tan@hk.daiwacm.com Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com
Brokers and Diversified Financials (Regional/China), Insurance (Regional/Hong Kong/ Banking, Healthcare, Capital Goods and Utilities
China)
Henny JUNG (82) 2 787 9182 henny.jung@kr.daiwacm.com
Michael ZENG (852) 2532 4180 michael.zeng@hk.daiwacm.com EV Battery and Battery Materials, IT/Electronics (Small/Mid Cap), Automobiles and
Banking and FinTech (China), Exchange (Hong Kong) Components
Carlton LAI (852) 2532 4349 carlton.lai@hk.daiwacm.com Joon LEE (82) 2 787 9151 hj.lee@kr.daiwacm.com
Consumer, Emerging Opportunities (Hong Kong/China), Global Blockchain and Media
Cryptocurrency
Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com
Sybil HU (852) 2532 4308 sybil.hu@hk.daiwacm.com Pan-Asia Head of Internet & Telecommunications; Internet, Online Games and
Consumer (Hong Kong/China) Telecommunications
Steven NIE (852) 2848 4464 steven.nie@hk.daiwacm.com SK KIM (82) 2 787 9173 sk.kim@kr.daiwacm.com
Consumer, Emerging Opportunities (Hong Kong/China), Global Blockchain and Head of Global Memory; IT/Electronics – Semiconductor/Display and Tech Hardware
Cryptocurrency
John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com TAIWAN
Head of China Internet; Regional Head of Emerging Opportunities Rick HSU (886) 2 8758 6261 rick.hsu@daiwacm-cathay.com.tw
Candis CHAN (852) 2848 4976 candis.chan@hk.daiwacm.com Head of Regional Technology; Head of Taiwan Research; Semiconductor (Regional)
Internet and Education (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
Robin LEUNG (852) 2848 4435 robin.leung@hk.daiwacm.com IT/Technology Hardware (Handsets and Components) (Greater China)
Internet (Hong Kong/China) Sheng CHENG (886) 2 8758 6253 sheng.cheng@daiwacm-cathay.com.tw
Dennis IP (852) 2848 4068 dennis.ip@hk.daiwacm.com IT/Technology Hardware (Automation & Datacentre Components) (Greater China)
Regional Head of Power, Utilities, Renewables and ESS (PURE); Elina LIN (886) 2 8758 6262 elina.lin@daiwacm-cathay.com.tw
Head of China/Hong Kong Energy (Solar & ESS, EV Battery Materials, Oil & Gas, Coal,
IT/Technology Semiconductor (IP/IC design service and IC design)
ESG); Head of China Healthcare
Helen CHIEN (886) 2 8758 6254 helen.chien@daiwacm-cathay.com.tw
Leo HO (852) 2848 4469 leo.ho@hk.daiwacm.com
Power, Utilities, Renewables and ESS (PURE) – Battery Materials, Solar & ESS, Oil & Small/Mid Cap
Gas and ESG (China), Utilities (Hong Kong)
Wilfred YUEN (852) 2773 8529 wilfred.yuen@hk.daiwacm.com INDIA
Healthcare (China) Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com
Cynthia CHAN (852) 2773 8243 cynthia.chan@hk.daiwacm.com Head of India Research; Strategy, Banking and Finance
Property (Hong Kong/China) Ajay DEVNANI (91) 22 6622 1015 ajay.devnani@in.daiwacm.com
Kandice KONG (852) 2532 4106 kandice.kong@hk.daiwacm.com Capital Goods and Consumer Electricals
ESG (Asia ex-Japan)
Hans KWAN (852) 2773 8716 hans.kwan@hk.daiwacm.com SINGAPORE
Custom Products Group David LUM (65) 6228 6740 david.lum@sg.daiwacm.com
Johnson HUANG (852) 2773 8731 johnson.huang@hk.daiwacm.com Banking, Property and REITs
Custom Products Group Celine TAN (65) 6228 6750 celine.tan@sg.daiwacm.com
Property and REITs
JAPAN
Shinichiro OZAKI (81) 3 5555 7062 shinichiro.ozaki@hk.daiwacm.com PHILIPPINES
Steel (Japan/ China), Non-ferrous Metals and Electric Cable (Japan) Justin TEMBREVILLA (63) 2 8737 3021 justin.tembrevilla@dbpdaiwacm.com.ph
Banking and Property

11
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Daiwa’s Offices
Office / Branch / Affiliate Address Tel Fax
DAIWA SECURITIES GROUP INC
HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661
Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726
Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129
Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100
Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935
Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600
Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340
Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808
Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441
Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238
Moscow Representative Office Russian Federation
Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113
Manama, Bahrain
Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621
Daiwa Capital Markets Singapore Limited 7 Straits View, Marina One East Tower, #16-05 & #16-06, (65) 6387 8888 (65) 6282 8030
Singapore 018936, Republic of Singapore
Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330
Victoria 3000, Australia
DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105
Makati City, Republic of the Philippines
Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638
Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191
Seoul, Korea
Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594
Beijing 100020, People’s Republic of China
Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111
Shanghai China 200120 , People’s Republic of China
Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665
Lumpini, Pathumwan, Bangkok 10330, Thailand
Daiwa Capital Markets India Private Ltd Unit No. 503, Windsor, Off CST Road, Santacurz East, MUMBAI-400098, (91) 22 6622 1000 (91) 22 6622 1019
Maharashtra, India
Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461
Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603
MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417
London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

12
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly
provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution,
dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its
respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information
contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any
of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments
mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in
this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication
states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it
does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other
interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other
services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore,
investors should be aware that a conflict of interest may exist. The following are additional disclosures.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship
Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings of the equities or relevant securities
of the following companies: Huafang Group Inc (3611 HK), Gaush Meditech Ltd (2407 HK) and AustAsia Group Ltd (2425 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital
Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea
Co., Ltd.
Within the last 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has received compensation for investment banking services from Malayan Banking Bhd (MAY MK),
Lotte Rental Co Ltd (089860 KS), SCGM bhd (SCGM MK) and DL E&C Co. Ltd (375500 KS).
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Investment Banking Relationship
Within the preceding 12 months, Daiwa Capital Markets Hong Kong Limited has lead-managed public offerings and/or secondary offerings of the equities or relevant securities of the following
companies: Huafang Group Inc (3611 HK), Gaush Meditech Ltd (2407 HK) and AustAsia Group Ltd (2425 HK).
Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors
as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa
Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital
Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of
any matter arising from or in connection with the research.
Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act.
Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India
This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board
of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed
or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. The research analyst who prepared this report have no financial interest in
securities of the issuers covered in the report, has not served (nor any members of their household) as officer, employee, director or advisory board member of the issuer(s) covered in the report,
and are not aware of any relevant material conflict of interest involving the analyst or DCMI, and did not receive any compensation from the issuer during the past 12 months. Daiwa India and its
associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party
during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at
https://daiwa3.bluematrix.com/sellside/Disclosures.action.
There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited and Associates of Daiwa India
having office in India but not registered with any Indian regulators include Daiwa Corporate Advisory India Private Limited.
Taiwan
This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it
may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional
institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for
business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-
customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital
Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage
trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept
orders from customers to trade in such foreign securities. Recipients of this research shall carefully judge their own investment risk and take full responsibility for the results of any resulting
investments in the companies and/or sectors featured in this research. Without the prior written permission of Daiwa-Cathay Capital Markets Co., Ltd., recipients of this research are prohibited
from disclosing the research to the media, reprinting the research, or quoting from the research to other parties. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets
Co., Ltd. in respect of any matter arising from or in connection with the research.
Philippines
This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock
Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-
Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting,
and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned
in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively.
Thailand
This research is distributed to only institutional investors in Thailand. This report is provided to you for informational purposes only. Information contained herein is not intended to be, and shall not
be construed as, an offer or an invitation for subscription or purchase of securities in Thailand. This document has not been and will not be registered with, or approved by, the Office of the
Securities and Exchange Commission of Thailand. As neither Daiwa Securities Group Inc. nor any of its subsidiaries or affiliates, nor any of the foregoing entities’ respective directors, officers,
servants and employees are licensed to carry on any securities business in Thailand, this document is intended to be read by the addressee who is an institutional investor only and may not be
circulated or distributed, whether directly or indirectly, to the public or any members of the public in Thailand, unless to the extent permitted by applicable laws and regulations.
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. Neither Daiwa Securities Group Inc. nor any of its subsidiaries or affiliates, nor
any of the foregoing entities’ respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its
contents.
The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, neither Daiwa Securities Group Inc. nor any of its subsidiaries or
affiliates, nor any of the foregoing entities’ respective directors, officers, servants and employees make any representation or warranty, express or implied, as to their accuracy or completeness.

13
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc., its subsidiaries and affiliates and their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this
research. Daiwa Securities Group Inc. and its subsidiaries and affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business
from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom
This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets
Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who
are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into
investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system
may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at
http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany
Research reports are produced by Daiwa Securities Co. Ltd. and/or its affiliates and are distributed by Daiwa Capital Markets Deutschland GmbH in the European Union. Daiwa Capital Markets
Deutschland GmbH is authorised and regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin“) under the reference number 149361. Daiwa Capital Markets Deutschland GmbH and
its affiliates may, from time to time, to the extent permitted by law, participate or invest in, or be mandated in respect of, other financing transactions with the issuer(s) of the securities referred to
herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof.
This publication is intended for investors who are Professional Clients or Eligible Counterparties in the European Union within the meaning of Directive 2014/65/EU (“MiFID II”) and should therefore
not be distributed to Retail Clients in the European Union.
Daiwa Capital Markets Deutschland GmbH has in place organisational arrangements for the identification, prevention and management of conflicts of interest. Information regarding our conflict
management are available at: https://www.de.daiwacm.com/policies/
Additional disclosures regarding specific company names and related financial instruments are available at: https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Bahrain
This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category
2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973
535113
United States
This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited (DCMHK) and in certain cases indirectly by Daiwa Capital Markets America Inc. (DCMA),
a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under
the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). Where this is co-branded research published by
Daiwa’s partners in collaboration with other parties not affiliated with Daiwa, this research is distributed in the United States by DCMHK only. This report is not an offer to sell or the solicitation of
any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S.
customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products
discussed in this report may not be eligible for sale in some jurisdictions.
Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA,
and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT:
https://daiwa3.bluematrix.com/sellside/Disclosures.action
Ownership of Securities
For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this
report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s)
covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months
except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and
all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the
firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named
on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings

Rating Percentage of total
Buy* 78.27%
Hold** 17.72%
Sell*** 4.01%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2023.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following
items.
 In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the
purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
 In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
 For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount
of the transaction will be in excess of the required collateral or margin requirements.
 There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,
real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
 There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
 Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
each transaction etc.

14
 Taiwan Semiconductor Manufacturing (2330 TT): 19 May 2023

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding
the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd.
Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108
Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan,
Japan Securities Investment Advisers Association, Type II Financial Instruments Firms Association,
Japan Security Token Offering Association

15