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Rating Action:

Moody's affirms TSMC's Aa3 rating; outlook stable

16 Sep 2020

Hong Kong, September 16, 2020 -- Moody's Investors Service has affirmed Taiwan Semiconductor Manufacturing Co Ltd's (TSMC) Aa3 issuer rating.

The rating outlook remains stable.

"The affirmation of TSMC's rating reflects its leading position in the global foundry industry and ability to match customers' differentiated and rising technology requirements," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

"We expect that TSMC will maintain its prudent financial management with low leverage and a substantial net cash position, which provides it with ample flexibility to invest in and grow its technology leadership over the next two years," adds Lu.

RATINGS RATIONALE

TSMC's Aa3 rating is supported by its leadership in technology in the secularly growing application processor market for smart devices. As a leading foundry service provider, the company is well positioned to extend its technological edge in both advanced nodes and in its repertoire of intellectual property technologies to cater to rising performance requirements.

The rating is also supported by the company's open and independent business model, which has resulted in many long-term customer relationships and has helped it gain new customers. Its strong economies of scale have enabled TSMC to achieve the highest profit margin in the industry, minimize cash flow volatility, and preserve the ability to continue investing even through downturns.

The rating considers the company's prudent financial management with a strong net cash position and low debt leverage. These features translate into a strong capital structure with ample financial buffer for business expansion, shareholder returns, and potential M&A activity.

However, the Aa3 rating is constrained by the capital-intensive and cyclical nature of the semiconductor industry. TSMC has to incur significant levels of capital expenditure to fund continuous technological development and meet rising demand from both existing and new customers.

Moody's expects TSMC will maintain its leading market position in the foundry industry over the next three years as the company continues developing and introducing new advanced nodes, including 3-nanometer (nm) chips, and offering different versions of the same node to match the performance requirements of its different customers, leading to strong revenue growth, better margins, and expanding customer base.

Moody's estimates TSMC's revenue will grow 21% to NTD1.29 trillion ($44.0 billion) in 2020 and 7.5% in 2021. TSMC's solid revenue growth will be driven by strong demand in its smartphone, high-performance computing (HPC) and Internet of Things (IoT) segments and for its 7nm and 5nm chips, which were introduced ahead of its competitors and have gained significant market share as the most advanced nodes in the industry.

5G wireless technology-related and HPC-related applications will drive semiconductor content enrichment, increasing demand for TSMC's advanced technologies.

Moody's also estimates the company's adjusted EBITDA margin will improve to 67.0%-68.0% in 2020 and 2021 from 63.7% in 2019, as a higher gross margin from strong revenue growth will lead to a higher capacity utilization rate. However, the higher gross margin will be partially offset by the introduction of 5nm technology with a weaker gross margin at the early production stage.

Moody's forecasts that TSMC will generate solid free cash flow in the next two years, driven by strong earnings growth and a relatively stable dividend policy, partially offset by higher capital spending. Specifically, Moody's expects TSMC will generate NTD4.5 billion ($153 million) and NTD86 billion ($2.9 billion) in adjusted free cash flow in 2020 and 2021, respectively. Its capital spending meanwhile will be around $16.5 billion in 2020 and $16.0 billion in 2021, up from $14.9 billion in 2019 to support advanced technologies developments, including 7nm, 5nm and 3nm chips.

Moody's expects that the company will maintain a strong net cash position over the next two years. Its strong free cash flow generation and prudent investment strategy will allow the company to further enhance its net cash position, with its adjusted net cash position set to increase to NTD340 billion in 2021 from NTD253 billion in 2019.

Moody's also expects that adjusted debt/EBITDA will increase to 0.5x over the next two years from 0.3x in 2019, driven by higher debt to build its cash reserve, which will be used to weather the difficult economic environment and to invest in future growth. This will partially offset by higher earnings. These strong financial metrics position TSMC appropriately in the Aa3 rating category.

TSMC's liquidity is excellent. As of the end of June 2020, TSMC held around NTD615 billion in cash and marketable securities. Together with Moody's estimated NTD775 billion-NTD825 billion in operating cash flow, this is more than sufficient to cover its short-term debt of NTD191 billion, and Moody's forecast capital expenditure of around NTD485 billion and dividend payments of around NTD260 billion in the coming 12 months.

The company's liquidity is also supported by TSMC's strong access to the bank and capital markets. As one of the largest corporates in Taiwan, with a global footprint and large operating scale, TSMC has abundant onshore credit facilities.

In terms of environmental, social and governance (ESG) considerations, TSMC is a publicly listed entity and has a diversified shareholder base, with no single shareholder owning 10% or more of TSMC's total outstanding shares. The company also has a balanced board composition, featuring six independent directors out of ten board members.

Despite the capital-intensive nature of the semiconductor industry, TSMC has a long track record of a prudent investment strategy, as reflected by low leverage, strong liquidity, and a strong net cash position.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that TSMC will maintain its leading position in the pure foundry market. Moody's also expects the company to maintain its technology leadership, strong and broad product offerings, manufacturing excellence, ability to smoothly migrate to more advanced technology nodes, financial prudence, and solid net cash position.

An upgrade is unlikely in the near term because the company's rating is already at the same level as that of Taiwan, Government of (Aa3 stable). The company conducts most of its operations and activities in Taiwan.

Moody's could downgrade the rating if (1) TSMC experiences a consistent decline in market share, (2) it records a sustained erosion in profitability, (3) its balance-sheet liquidity decreases, or (4) the company adopts a more aggressive financial policy that weakens its credit profile.

The principal methodology used in these ratings was Semiconductor Industry published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Taiwan Semiconductor Manufacturing Co Ltd (TSMC) is a dedicated IC foundry business, founded in 1987. It manufactures products for various platforms, covering a variety of smartphone, high performance computing, Internet of Things, automotive, and digital consumer electronics segments. The total capacity of the manufacturing facilities managed by TSMC, including its subsidiaries and joint ventures, is around 13 million 12-inch equivalent wafers per year in January 2020.

TSMC's total sales revenue for 2019 reached a new high at $34.6 billion. The company is headquartered in the Hsinchu Science Park, Taiwan, and has account management and engineering service offices in China, Europe, India, Japan, North America, and South Korea.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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