Relative valuation of Taiwan semiconductor manufacturing company limited

Abstract

Taiwan Semiconductor Manufacturing Company (TSMC), founded in 1987, has established itself as a leader in semiconductor manufacturing. The company is publicly traded on both the Taiwan Stock Exchange (TWSE) and the New York Stock Exchange (NYSE). This thematic paper conducts a relative valuation analysis of TSMC, using key financial metrics such as price-to-earnings (P/E) ratio, price-to-book value (P/BV) ratio, and enterprise value to EBITDA (EV/EBITDA) multiple. These metrics are analysed using a five-year data period to assess TSMC’s valuation in comparison to historical trends and peer 5 companies in the semiconductor foundry industry (UMC, SMIC, GFS, TSEM, and VIS). The analysis reveals that while TSMC’s P/E ratios are lower than peer averages, its P/BV and EV/EBITDA multiples are the highest, indicating market recognition of its strong asset base and profitability. However, the target price analysis suggests a potential downside of around 35-39% compared to the current trading price at $NT 1,040 (as of 12 July 2024), implying that TSMC might be overvalued. This assessment is based on both historical multiple bands and peer group multiples, which point to a more realistic valuation if future performance aligns with historical or industry. Consequently, a Sell recommendation is proposed, as the stock's current price appears to reflect overly optimistic growth expectations.