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TSMC's Board Appropriations Point to Another Capex Raise in 2020: We See $19 to $20 Billion

Written in 2020. Charts are the originals from the time of publication. · Collected in Earnings and supply chain notes, 2019–2022

By Picaca · 2020-08-14 · Read the Chinese original

TSMC's board approved $5.27B of appropriations on August 11, 2020. The trailing four quarters total $24.29B, and we see 2020 capex near $19B to $20B.

Taiwan listing rules require TSMC to disclose the capital appropriations its board approves, which is why this data exists at all. An appropriation is a board approved spending authorization that does not have to be fully drawn, and we treat it as a leading indicator for where capital spending (capex) is heading. Reading the latest appropriation, our call is simple: there is a high probability that TSMC raises its 2020 capex guidance again at the October 2020 earnings call. This post lays out the data we watch and how we get there.

Key takeaways

  • On August 11, 2020, TSMC's board approved capital appropriations of $5.27 billion, taking the trailing four quarters to $24.29 billion. The board also approved a bond issue of up to $4.0 billion.
  • Board appropriations have tracked actual capex closely. The August 13, 2019 appropriation of $6.38 billion, up 63% from the prior quarter, was followed by a raise from $11 billion to a range of $14 billion to $15 billion at the October 2019 call.
  • First half 2020 capex was $10.63 billion. To land inside the current $16 billion to $17 billion guidance, TSMC would have to spend no more than $3.185 billion a quarter in the second half, which is why the sell side now models a sharp second half decline. The appropriations say otherwise, and Taiwan equipment makers tell us order books are still full.
  • Three ways of sizing the year get us to roughly $19.4 billion to $20 billion. We think $16 billion to $17 billion is met easily, and our own best guess is $19 billion to $20 billion.

History says board appropriations and actual capex move together

We pulled every capital appropriation TSMC's board has disclosed and lined it up against reported capex. The two series track each other closely.

TSMC board capital appropriations and actual capital spending, both on a trailing four quarter basis, in US dollar billions.
Figure 1: Figure 1: TSMC board capital appropriations and actual capex, trailing four quarters (US$ billions)

An appropriation does not have to be spent in full. But it tells you the direction of capex before the spending shows up.

Take 2019. TSMC's board announced an appropriation of $6.38 billion on August 13, 2019, up 63% from the prior quarter. Overseas brokers then published a run of notes arguing that TSMC would raise its full year capex, and at the October 2019 earnings call the company lifted capex from $11 billion to a range of $14 billion to $15 billion.

That raised capex budget then funded spending from the fourth quarter of 2019 through the first half of 2020.

So when overseas brokers warned in early June 2020 that TSMC would cut capex, our work on the electronics inventory cycle, the repeating swing in which the chain builds parts up and then works them down, argued the opposite: not only was a cut from the $15 billion to $16 billion guidance unlikely, there was room to revise higher. The reason was that board appropriations over the prior three quarters had already reached $19.0 billion.

The July 2020 call settled it. TSMC reported first half capex of $10.6 billion and raised full year capex from $15 billion to $16 billion up to $16 billion to $17 billion.

The latest board resolution signals another raise

On Tuesday, August 11, 2020, TSMC disclosed a new capital appropriation of $5.27 billion, taking the trailing four quarters of appropriations to $24.29 billion. The same board meeting approved a bond issue of no more than $4.0 billion. CLSA reads the size of the bond issue as a capex signal. Its case: from 2011 to 2014 bond issuance grew seventeen times and capex rose 63%, and TSMC's long term debt today is ten times its 2019 level. CLSA reads this as one cycle of correlation, not a rule.

The August 11, 2020 board resolution approved appropriations of about $5,271.6 million (roughly NT$152,878.1 million, with the New Taiwan dollar, NT$, then trading near 29 per US dollar), covering:

  • Building and expanding advanced process capacity
  • Building specialty process capacity
  • Building advanced packaging capacity
  • Fab construction, facility systems, and capitalized lease assets
  • Fourth quarter 2020 research and development appropriations and recurring capital appropriations

With that August appropriation on the table, we think the probability of another upward revision to 2020 capex is very high.

Here is the arithmetic the sell side is working with. First half capex was $10.63 billion. Against a full year target of $16 billion to $17 billion, the second half needs at most $3.185 billion a quarter. That is why most analysts now model second half capex falling sharply from the first half.

The board appropriations say the second half stays high. Against the very low numbers in consensus, that leaves meaningful room for upward revisions. We have also confirmed with Taiwan equipment makers that order books remain full. Second half capex should hold at a relatively high level.

Quarterly TSMC board capital appropriations plotted against analyst estimates for capital spending, in US dollar billions.
Figure 2: Figure 2: TSMC quarterly board capital appropriations versus analyst capex estimates (US$ billions)

To size how big a raise could be, look at the historical gap between appropriations and what actually got spent.

We put the past several years of board appropriations next to actual capex and research and development expense, plus the difference between them, in the table below. In any given year, the appropriation comes out close to capex plus research and development. Where the calendar split creates a gap, it usually gets made up the following year: across 2015 to 2019 the cumulative difference between the two is only about $300 million. Research and development, unlike capex, grows steadily. At the first half run rate of $1.66 billion, full year research and development lands at $3.5 billion to $4.0 billion.

Table comparing TSMC board capital appropriations with actual capital spending and research and development expense by year, in US dollar billions.
Figure 3: Table 1: TSMC board capital appropriations, capex, and research and development expense (US$ billions)

That gives us several ways to back into full year capex:

  • Start with $24.29 billion of appropriations, subtract $3.5 billion of research and development, and allow for some spending that slips into next year: full year capex lands near $20 billion.
  • Scale by the first half ratio. First half 2020 appropriations were $13.3 billion against actual spending of $10.6 billion. Apply that ratio to the $11.0 billion appropriated in the two quarters before that, and full year capex works out to about $19.4 billion.
  • Use the conversion rate. Since 2015, an average of 80% of appropriations has been spent as capex, which puts the year at about $19.4 billion. At the lowest observed rate of 71%, the year is about $17.2 billion.

Put it together and our own best guess is $19 billion to $20 billion.

Whether TSMC actually raises again will not be known until the earnings call in early October 2020.

If capex does go up, analysts will likely mark up their revenue growth assumptions with it. The market has been worried that 2021 growth would be weaker than 2020. If the October call brings a capex raise with utilization running full, earnings estimates have room to go higher too.

Either way, now that TSMC's winner take all position is confirmed, we think its long term valuation still has significant room to expand.