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Tech bellwether TSMC sees light ahead despite stormy geopolitics

Chipmaker says bottom has passed, while Japan-Korea spat emerges as new risk

TSMC helps Huawei, Apple, Qualcomm and other companies put advanced chip designs into production. (Nikkei montage/Reuters)

TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker, on Thursday said the trade uncertainties surrounding the industry have obscured prospects for even modest earnings growth later this year.

CEO C.C. Wei declined to say whether the company stands by its earlier forecast of zero-to-3% growth for the second half.

"But I can assure you that the fourth quarter will be better than the third quarter," the CEO added after the company reported a 7.6% drop in net profit for the three months to June -- the fourth straight quarterly decline.

The company signaled better-than-expected revenue ahead and raised its full-year capital spending outlook, encouraged by trends including 5G networks.

The results from TSMC -- a barometer of global electronics demand thanks to its wide range of customers such as Apple, Huawei Technologies and Qualcomm -- come as a new dispute over chip materials between Japan and South Korea adds to the uncertainties of the U.S.-China trade war.

TSMC's foundry business model -- manufacturing chips for others -- allows companies from Asia to Europe to North America to put their advanced designs into production without expensive equipment or large plants.

The Japan-South Korea feud makes it hard for TSMC to have a clear view of the fourth quarter, Chairman Mark Liu said. The company must also contend with U.S. restrictions on technology exports to Huawei, one of its biggest customers.

"There are still a lot of uncertainties due to geopolitics and trade policies," Liu said. "The uncertainties prevail in all sectors, in industrial and consumer [electronics]. We still see the momentum is not coming back."

Japan's decision to require chipmaking material suppliers to receive prior approval before exporting certain products to South Korea shows how geopolitics now looms over business decisions in semiconductors, as it has for decades in oil.

The move has driven Samsung Electronics -- TSMC's biggest contract chipmaking rival, with an 18% global market share versus the Taiwanese company's 49% -- to test materials made by non-Japanese suppliers.

But TSMC gave a glimpse of a recovery on Thursday by forecasting revenue of between $9.1 billion and $9.2 billion for the July-September period, up 18% at the midpoint from the previous quarter. The company cited support from factors such as premium smartphone launches and the acceleration of 5G demand in the second half of 2019.

The forecast beat the market consensus of around 15%, as most analysts had been wary of the global economic outlook. Apple's iPhone core processors and Huawei's mobile processors are produced by TSMC.

"We have passed the bottom of the cycle of our business and are beginning to see demand increase," the CEO said.

Based on TSMC's estimates for the July-September quarter, the company would have to generate about $10.2 billion in revenue in the October-December period -- an increase of 8.5% on the year and 11% on the quarter -- in order to maintain a flattish sales performance for all of 2019.

The company also said it expects its capital expenditures for 2019 will exceed $11 billion, higher than the previous budget of $10 billion to $11 billion, to capture the strong demand for 5G for 2020 onward.

"If you look at 5G next year, the biggest business influencer should be in the smartphone [segment] and secondly in high-performance computing, including infrastructure and networking," said Liu. "As far as automotive, [internet of things] and other consumer devices, we have high expectations. But it will take some time before the usage models to get implemented."

Mark Li, a veteran analyst at Bernstein Research, said: "Huawei's order cut may not be as severe as previously expected, while the Chinese company continues to boost its high-end chip demand for premium smartphone launches in autumn."

"Also, cryptocurrency mining chips, as well as game console and server chips, and demand from Advanced Micro Devices all help a bit," Li added.

The price of bitcoin, the leading digital currency, has tripled to over $10,000 from less than $3,200, its recent low at the end of last year, boosting demand for cryptocurrency mining capacity. China-based Bitmain Technologies, the world's top bitcoin mining chip designer, also relies on TSMC for production.

Morgan Stanley analyst Charlie Chen said that some in the industry expect a recovery in orders for Huawei smartphone components. But whether the Chinese company can regain access to Google's Android mobile operating system "remains the key risk to Huawei's overseas smartphone demand," Chen said in a research note.

For the April-June quarter, TSMC saw net profit drop 7.6% on the year to 66.77 billion New Taiwan dollars ($2.15 billion), owing to low factory utilization. The company booked a 3.3% increase in revenue to NT$241 billion, which beat its forecast from April.

Nikkei staff writer Kensaku Ihara in Taipei contributed to this report.

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