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TSMC(TSMC) released its second quarter 2024 financial report (as of June 2024) before the U.S. stock market opened on the afternoon of July 18, 2024 Beijing time. The key points are as follows:

1. Revenue: Both volume and price increased, reaching a record high. In the second quarter of 2024, TSMC's revenue reached US$20.8 billion, a record high, exceeding the upper limit of the performance guidance range (US$19.6-20.4 billion).Revenue for the quarter increased 10.3% quarter-on-quarter.The impact of shipment volume was +3.1%, and the impact of average shipment price was +7%.Affected by the increase in 3nm shipments, the company achieved an increase in both volume and price this quarter.

2. Gross profit and gross profit margin: gradually coming out of the trough. In the second quarter of 2024, TSMC's gross profit margin was 53.2%, slightly better than the guidance range (51-53%).The increase in the average price of shipments this quarter offset the increase in costs, and the gross profit margin rose slightly. The increase in 3nm production is expected to drive the gross profit margin out of the trough;

3. Wafer structure: HPC opens 3nm node.along withHPC (High Performance Computing: This includes AI and data center related chips)Open 3nm node,The company's revenue share below 7nm increased to 67% this quarter.The company's current 3nm process mainly covers the needs of smartphones and high-performance computing. As electronic products enter the peak season in the second half of the year, the proportion of 3nm is expected to continue to increase. The proportion of revenue in the United States remained stable at around 65% this quarter.

4. TSMC’s performance guidance：The company expects revenue of $22.4-23.2 billion (market expectation: $22.528 billion) and gross margin of 53.5-55.5% (market expectation: 52.5%) in the third quarter of 2024. Revenue increased by 7.7%-11.5% month-on-month, mainly due to the demand for high-performance computing andappleThe gross profit margin continued to rise, mainly due to the growth of 3nm shipments, which brought about an increase in the average price of the company's products.

Dolphin’s overall opinion: The company’s financial report this time is good.

This quarter's revenue and gross profit margin both exceeded market expectations, mainly due to the increase in 3nm mass production driven by demands such as AI, the company's overall performance has further concentrated on advanced processes.

Compared with the financial report data, the company also gave guidance for the next quarter that exceeded expectations.The company expects third-quarter revenue of $22.4-23.2 billion (market expectation is $22.53 billion) and gross profit margin of 53.5-55.5% (market expectation is 52.5%). The outstanding performance in gross profit margin is mainly due to the company's 3nm shipments exceeding expectations. With the increase in AI demand and the preparation of Apple's new phones, the company's gross profit margin is expected to get out of the temporary low.

As for the capital expenditure that the market is concerned about, the company has raised the lower limit of its previous forecast as scheduled, raising the full-year plan from 28 billion to 32 billion to 30 billion to 32 billion.Although only the lower limit of the range was raised, this operation also shows that the company's outlook is beginning to improve, and the company will enter the peak season for capital investment in the second half of the year.

Overall, with the opening of a new process node for high-performance computing in the second quarter, TSMC's 3nm is expected to achieve real volume growth. With the release of 3nm production capacity, it is expected to boost the company's performance recovery and 2nm research and development. Entering the peak season for electronic products in the second half of the year, the company's performance will see a significant improvement. As a result, the company's outlook began to improve, and the lower limit of the company's full-year capital expenditure plan was raised.

1) In the short term, although ASML's outlook was a bit bland yesterday, TSMC's financial report still brought confidence to the market. Both revenue and gross profit margin exceeded expectations, and good guidance was given, and performance in the second half of the year will be significantly improved.

2) In the medium and long term, TSMC will start preparations for a new round of process iterations. As the 3nm process begins to produce high-performance computing products, the proportion is expected to increase to more than 20% in the second half of the year. Only when the process is scaled up can it contribute to the company's profits and achieve a virtuous cycle. After the large-scale production of 3nm, the company will also focus on entering the 2nm market.

Although the company's current valuation has increased to about 25 times, the strong demand for AI has indeed brought about significant changes in performance. As long as the demand for AI and other technologies can continue to bring performance improvements to the company, this wave will continue to support market confidence.

The following is Dolphin Jun’s specific analysis of TSMC:

1. Revenue: Both volume and price increased, reaching a record high

TSMC achieved revenue of US$20.82 billion in the second quarter of 2024, a record high and exceeding the upper limit of the performance guidance range (US$19.6-20.4 billion).Revenue increased 10.3% quarter-over-quarter, primarily due to increased demand for high-performance computing.

TSMC's quarterly revenue is fully anticipated by the market due to the release of monthly operating indicators.How did prices and shipments change in TSMC’s revenue this quarter?

Dolphin Jun observes the main driving force of TSMC's second quarter revenue growth from the dimensions of quantity and price:

1) Dimension of quantity：In Q2 2024, TSMC's wafer shipments were 3,125,000 pieces, a month-on-month increase of 3.1%.Month-on-month shipments continued to grow, mainly driven by demand for high-performance computing. Although the company's shipments are increasing, it is not yet active in expanding production.TSMC's capital expenditure this quarter was US$6.36 billion, and the company's capital expenditure remained at a relatively low level.。

2) Valence Dimension：TSMC's wafer revenue per wafer (equivalent to 12-inch wafer) in Q2 2024 was US$6,662 per wafer, a 7% increase from the previous quarter.The increase in the average price of TSMC's wafer shipments was mainly due to the increase in the proportion of 3nm this quarter. This quarter, the company's revenue share of processes below 7nm further increased to 67%.

Combined with TSMC's guidance for the next quarter,The company expects to achieve revenue of US$22.4-23.2 billion in the third quarter (a 7.7%-11.5% increase from the previous quarter), with a gross profit margin of 53.5-55.5% (market expectation: 52.5%).. Revenue in the third quarter is expected to continue to hit new highs, mainly due to the growing demand for high-performance computing and the preparation of Apple's new mobile phones.

2. Gross profit and gross profit margin: gradually emerging from the trough

TSMC achieved a gross profit of US$11.07 billion in the second quarter of 2024, a month-on-month increase of 10.6%The month-on-month increase in gross profit was mainly due to the impact of revenue growth.In Q2 2024, TSMC's gross profit margin was 53.2%, an increase of 0.1pct from the previous quarter, which is better than market expectations (52.6%).

The two data that the market is most concerned about for TSMC are revenue and gross profit margin. Due to the release of monthly operating data, quarterly revenue has basically been expected by the market. Gross profit margin is one of the focuses of market attention in this quarterly report. Dolphin will analyze the main driving forces for the increase in gross profit margin this quarter:

“Gross profit = single wafer revenue - fixed costs - variable costs”

1) Single wafer revenue (equivalent to 12 inches)：In Q2 2024, TSMC's single wafer revenue was approximately US$6,662 per piece, an increase of US$435 per piece from the previous quarter.With the shipment in the high-performance computing field, the proportion of 3nm has increased significantly this quarter, thereby driving up the average price of products;

2) Fixed costs (depreciation and amortization)：In Q2 2024, TSMC's average fixed cost was approximately US$1,634 per wafer, a decrease of US$37 per wafer from the previous quarter.Although the total amount of depreciation and amortization has increased, the increased production volume has led to a decrease in unit fixed costs;

3) Variable costs (other manufacturing costs)：In Q2 2024, TSMC's average variable cost was approximately US$1,486 per wafer, an increase of US$234 per wafer from the previous quarter.The increase in the proportion of 3nm wafers has increased the company's manufacturing costs;

Based on the above breakdown, TSMC's single-wafer gross profit in 2024Q2 was US$3,543 per piece, an increase of US$238 from the previous quarter.Per-wafer gross profit improved this quarter, with unit price increasing by $435 to cover increased cost items.

The market had expected TSMC's revenue performance, and gross profit margin was the main focus. As the mass production of 3nm continues to drive the increase in the company's product average price, it will have a positive effect on the company's gross profit margin.Combined with the company's guidance of 53.5-55.5% for the next quarter, TSMC's gross profit margin has begun to come out of the periodic trough. Currently, 3nm accounts for about 15%. Dolphin Jun believes that driven by AI and Apple's new phones, the company's 3nm share is expected to continue to increase in the next quarter.

3. Wafer structure: HPC opens 3nm node

3.1 Wafer Revenue Share (by Application Type)

Smartphones and HPC are TSMC's largest revenue sources, accounting for 85% of the company's downstream revenue.。

Looking at downstream application segments, the proportion of smartphone business fell again to one-third this quarter, mainly because although the demand in the mobile phone market has improved, it has not yet shown clear sustainability.The company's share of high-performance computing hit a new high, reaching 52%From the perspective of downstream, the company's current business still presents structural characteristics, and revenue growth is mainly driven by demand for AI and other products.

Dolphin believes that as high-performance computing begins to enter the 3nm node, related revenue is expected to continue to increase. The second half of the year will also enter the release period of Apple's new phones, and mobile phone revenue will also see a seasonal rebound. Overall, the company's revenue in the second half of the year will be significantly better than in the first half of the year.

3.2 Wafer Revenue Share (by Process Node)

This quarter, the proportion of revenue below 7nm continued to increase to 67%, and revenue from advanced processes has become the company's main source of revenue.Specifically, this quarter the company's 3nm revenue share rebounded to 15%, while 5nm revenue share remained at around 35%.

Dolphin believes that the increase in 3nm production this quarter is mainly due to the purchase of large customers of high-performance computing, which has pushed the company's new products to the 3nm node. Looking at 5nm, the company's production capacity is still relatively full.

Judging from the company's guidance for the next quarter, the company's performance in Q3 2024 will benefit from the growth in demand in the high-performance computing field and the stocking of Apple's new phones. Driven by both, the company's 3nm node share is expected to continue to increase. Judging from the historical changes in the company's process nodes, the 3nm share is expected to increase to more than 20%. The 3nm volume is expected to drive the company's profitability to recover.

3.3 Wafer Revenue Share (by Region)

In terms of revenue by region, North America is still TSMC's largest source of revenue, accounting for 65% of revenue. This is because North America has Apple,Qualcomm、Nvidia, AMD and other major customers have created a strong business ties between TSMC and the United States.In addition to North America, China and Asia Pacific are the other two major revenue sources, accounting for 16% and 9% respectively this quarter.Revenue in China has rebounded significantly this quarter, and some companies have increased their wafer production at TSMC.

Combining the situation of various companies and the industrial chain, Dolphin believes that the current demand in the semiconductor market still presents structural characteristics. Among the company's customers, it mainly benefits from the purchase of high-performance computing customers such as NVIDIA and AMD. The second half of the year will also enter the peak season for mobile phones and other electronic products, and related revenue is expected to recover, but the sustainability of demand still needs to be paid attention to.

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