TSMC Q1 2023 – Yin and Yang.

Inventory correction offset by China.

• TSMC reported weak Q1 2023 results and guided down expectations, but this had been anticipated which combined with some initial positive signs on the Chinese economy, sets up a better H2 2023.
• Q1 2023 revenues / EPS were TWD 507bn / TWD 7.98 representing incremental growth from Q1 2022 but down significantly from Q4 2022 mostly due to seasonality.
• However, the overall outlook for 2023 is now for a moderate decline in revenues as customers adjust their inventories downwards in response to the weaker demand they are experiencing.
• I expect that this will be particularly pronounced in PCs for which demand appears to have declined double digits in Q1 2023.
• Inventory adjustments in H1 2022 are within the expectations that I have had for the semiconductor market for over 6 months, and it is in China where the real question mark lies.
• China is the world’s largest consumer of silicon chips given that so many products are made there and so its economic performance is a key indicator for the health of the semiconductor market.
• The big question on everyone’s lips right now is how big will the post-Covid bounce be from the world’s 2^nd largest economy as this time last year it was effectively frozen with lockdowns.
• I have been looking for a big bounce driven by economic stimulus as President Xi and the CCP need to regain the standing with the Chinese people that they lost as a result of the draconian Covid Zero policy.
• Unfortunately, there has been no visible stimulus in terms of government policy that came out of the recent congress which has dampened my enthusiasm somewhat.
• However, recent economic data is showing some green shoots and so perhaps the CCP has taken the line that the economy will recover on its own without any stimulus to get things going.
• This would lead to a slower but more prolonged recovery but at the same time will reduce the risk of inflation getting out of control.
• Consequently, I continue to think that there will be a recovery in China in H2 2023 but perhaps not quite the sharp bounce that I was previously expecting.
• This means that the first half of 2023 is going to be rough as many have already signalled but should at least stabilize or improve in H2 2023.
• The net result is going to be a trade-off with weaker-than-expected developed markets offset by stronger-than-expected China as no one seems to be expecting anything from China in 2023 at the moment.
• How this plays out for companies with global sales is very uncertain and I think that is going to continue to be the major theme for this year.
• Here I find TSMC, Qualcomm, MediaTek and Samsung to be the most attractive due to the fact that they already have a cheap valuation and are not pricing in any recovery.
• However, I remain somewhat nervous about owning factories at the moment given how sensitive financial performance is to volume fluctuations.