TSMC Profit Tops Estimates as Chinese Phones Make Up for Apple

Taiwan Semiconductor Manufacturing Co. posted better-than-expected earnings as demand from Chinese smartphone brands makes up for a market slowdown and weaker sales at its largest customer Apple Inc.

The world's largest contract chipmaker reported second-quarter net income of NT$72.5 billion ($2.3 billion), surpassing the NT$68.9 billion average of analysts' estimates over the past four weeks. That beat came despite global smartphone sales growing at their slowest pace on record.

The Taiwanese company is one of the key chip suppliers to the iPhone, and may have begun to crank out chipsets for the iPhone 7 ahead of its anticipated September rollout, according to SinoPac Securities Investment Service. But even as Apple faces its second straight decline in quarterly revenue, TSMC's benefiting from the rising popularity of cheaper Android smartphones in emerging markets. Brands like Oppo and Vivo overtook Apple in China in May, pushing the iPhone maker to fifth place, according to Counterpoint Research.

"The rising popularity of Oppo and Vivo smartphones provides upside potential to our FY16-18 sales forecasts," CIMB Securities Ltd. analysts led by Eric Lin wrote before the results.

TSMC, which competes with Samsung Electronics Co. to make processors for Apple, is coming off a strong quarter for revenue. Its NT$221.8 billion of sales beat expectations and were the third-highest on record. The company now plans to erect a $3 billion wafer plant in eastern China to help it win more clients in the country.

Gross margins came to 51.5 percent in the second quarter, up from 44.9 percent in the previous three months and surpassing the roughly 50 percent average of estimates. Its first-quarter margins had fallen due in part to an earthquake that disrupted production in February.

But questions remain about when investments in more advanced 7-nanometer and 10 nanometer production processes will start to pay off. Gokul Hariharan, an analyst at JPMorgan Chase & Co., downgraded TSMC to neutral from overweight, warning that the third quarter is likely a peak for the Taiwanese giant because demand for those higher-end processes may not fully materialize till 2018.

Scale is pivotal in an industry grappling with rising production costs and intensifying competition. TSMC's targeting capital spending of $9.5 billion to $10.5 billion in 2016, up from a previous target of $9 billion to $10 billion as it continues to upgrade and expand its manufacturing capabilities to hold rivals at bay.

TSMC's shares ended Thursday up 0.3 percent. The stock has gained about 18 percent this year and is hovering near an all-time high.

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Source: TSMC Profit Tops Estimates as Chinese Phones Make Up for Apple