Page 11 - DIY Investor Magazine | Issue 32

‘SHAREHOLDERS HAVE BEEN REWARDED WITH A REMARKABLE COMPOUND TOTAL RETURN OF 14.8% AND 14.6% PER ANNUM RESPECTIVELY’
THE SEMICONDUCTOR LEADERS ENABLING TECHNOLOGICAL CHANGE
Over the past two decades, many technology enablers
proved to be excellent investments, particularly
semiconductor manufacturers, such as Samsung Electronics, the world’s leading memory chip manufacturer, and Taiwan Semiconductor Manufacturing Corporation (TSMC), the world’s largest contract logic chip manufacturer.
Neither Samsung nor TSMC have been immune from cyclicality in equity markets, but from March 2000 to today, shareholders have been rewarded with a remarkable compound total return of 14.8% and 14.6% per annum respectively2.
Moreover, current share prices look undemanding in our view; they value Samsung Electronics at a level 11x its forecast earnings for 2022, and TSMC at 22x its own 2022 forecasted earnings. These are valuations we’re happy to pay to access the long-term growth potential each company represents.
Both companies have net cash on their balance sheets and the financial capacity to reinvest for growth, while, at the same time, paying dividends (one of the drivers behind the impressive total return figures above).
Both Samsung and TSMC enjoy very high technological barriers to entry. SMIC, a Chinese company that listed in 2003 promising to become ‘China’s TSMC’ demonstrates that this is not an industry where competitiveness can be achieved simply by investing vast sums of cash.
From 2004 to 2020, SMIC invested US$23.6bn in a bid to close the gap, but is forecast to have generated only US$5.4bn in revenue in 2021, making it less than one tenth of TSMC’s size3.
2 Source: Bloomberg, to 21.01.2022 3 Source: Bloomberg, to 21.01.2022
TSMC’s scale and intellectual property enables it to continue pulling away from would-be contenders.
Similarly, Samsung Electronics (along with SK Hynix and Micron, which together form an effective oligopoly in DRAM semiconductor memory chips) has a manufacturing capability that would be almost impossible to replicate from scratch.
What makes these companies even more compelling as a means of investing in technological change is that they supply to such a broad range of customers that they are positioned to capture the benefits of rising spend on emerging technologies, regardless of which companies ultimately win the battle for the end user.
For example, TSMC is the principal manufacturing partner for Apple’s handset chips but also supplies to Mediatek, the world’s largest supplier of chips for Android-based handsets.
Even Intel, once the global technology leader in semiconductor production, has committed to increase its outsourcing to TSMC because it is unable to match TSMC’s pace of technology migration.
TSMC’S REVENUE BREAKDOWN BY PRODUCT SEGMENT
Source: Company 3Q2021 results presentation
11
DIY Investor Magazine · Feb 2022