Strategy
Strategy: Taiwan Tech: Strong Growth Outlook; Supply And Ramp Execution Remain Key
Highlights
- Our meetings with TSMC and MediaTek last week reinforced the view of a multi-year AI driven growth, supported by strong demand and longer-term customer commitments.
- TSMC’s expects N2 to bring even greater opportunities than N3, though the near-term ramp and higher overseas manufacturing costs are expected to dilute margins.
- MediaTek’s 2027 V8 revenue guidance stands at US$12b-16b. Securing supply and improving V9 packaging yields remain key, while ASIC revenue growth should support operating leverage.
What’s New
a) TSMC: Broad AI exposure with capacity discipline
Strong demand visibility supports disciplined capacity planning. TSMC has strong visibility of upcoming demand, as design collaboration with clients extends 3-5 years ahead, with customers committing engineering resources 2-3 years before production. Moreover, it is also unlikely for clients to switch to another fab as foundry-specific designs lead to high switching costs. TSMC updates operational forecasts roughly every two weeks and independently assesses sustainable demand before committing capital.
Capacity allocation reflects long-term customer commitment. Product roadmaps, engineering collaboration and volume forecasts guide allocation, with new customers initially receiving limited capacity due to limited track record. Management sees customer relationships as partnership-based rather than transactional, highlighting the importance of long-standing trust.
Leading-edge demand continues to exceed supply. Currently utilisation is above 100%, and management expects capacity to remain tight, with revenue growth slightly above 30% yoy in 2026. Advanced packaging should grow faster than overall revenue, increasing its revenue share from slightly above 10% in 2025 to the low teens in 2026. Although its gross margin is lower than wafer fabrication, lower capital intensity supports attractive returns.
N2 margin dilution should become more visible in 2H26. New nodes have historically taken seven to eight quarters to reach the corporate average gross margin, which was around 50% at the time, compared with the mid 60s% today. Management views initial dilution as a normal feature of a new node ramp and expects N2 eventually to exceed the corporate average and generate higher margins than N3 as yields and scale improve.
Technology leadership extends beyond N2. The A14 family, at roughly 1.4nm, is targeted for mass production in 2028, with A13 and A12 on the roadmap for around 2029. Management expects further technological improvements despite physical scaling constraints. Capacity conversion also provides flexibility: 5nm to 3nm conversion is underway, while 3nm to 2nm conversion is possible but costly. This flexibility helps TSMC manage utilisation and returns through semiconductor cycles.
Overseas expansion supports diversification but carries higher costs. Expansion in Arizona, Kumamoto and Dresden is in response to customer requirements. Slightly more than 10% of current capacity is outside Taiwan, and this could gradually rise toward 20-30% of total capacity in the long term, with the US accounting for most of the overseas expansion. Management plans to balance the higher costs of overseas fabs with the stronger economics of Taiwan operations to support overall corporate margins.
Highlights
- Our meetings with TSMC and MediaTek last week reinforced the view of a multi-year AI driven growth, supported by strong demand and longer-term customer commitments.
- TSMC’s expects N2 to bring even greater opportunities than N3, though the near-term ramp and higher overseas manufacturing costs are expected to dilute margins.
- MediaTek’s 2027 V8 revenue guidance stands at US$12b-16b. Securing supply and improving V9 packaging yields remain key, while ASIC revenue growth should support operating leverage.
What’s New
a) TSMC: Broad AI exposure with capacity discipline
Strong demand visibility supports disciplined capacity planning. TSMC has strong visibility of upcoming demand, as design collaboration with clients extends 3-5 years ahead, with customers committing engineering resources 2-3 years before production. Moreover, it is also unlikely for clients to switch to another fab as foundry-specific designs lead to high switching costs. TSMC updates operational forecasts roughly every two weeks and independently assesses sustainable demand before committing capital.
Capacity allocation reflects long-term customer commitment. Product roadmaps, engineering collaboration and volume forecasts guide allocation, with new customers initially receiving limited capacity due to limited track record. Management sees customer relationships as partnership-based rather than transactional, highlighting the importance of long-standing trust.
Leading-edge demand continues to exceed supply. Currently utilisation is above 100%, and management expects capacity to remain tight, with revenue growth slightly above 30% yoy in 2026. Advanced packaging should grow faster than overall revenue, increasing its revenue share from slightly above 10% in 2025 to the low teens in 2026. Although its gross margin is lower than wafer fabrication, lower capital intensity supports attractive returns.
N2 margin dilution should become more visible in 2H26. New nodes have historically taken seven to eight quarters to reach the corporate average gross margin, which was around 50% at the time, compared with the mid 60s% today. Management views initial dilution as a normal feature of a new node ramp and expects N2 eventually to exceed the corporate average and generate higher margins than N3 as yields and scale improve.
Technology leadership extends beyond N2. The A14 family, at roughly 1.4nm, is targeted for mass production in 2028, with A13 and A12 on the roadmap for around 2029. Management expects further technological improvements despite physical scaling constraints. Capacity conversion also provides flexibility: 5nm to 3nm conversion is underway, while 3nm to 2nm conversion is possible but costly. This flexibility helps TSMC manage utilisation and returns through semiconductor cycles.
Overseas expansion supports diversification but carries higher costs. Expansion in Arizona, Kumamoto and Dresden is in response to customer requirements. Slightly more than 10% of current capacity is outside Taiwan, and this could gradually rise toward 20-30% of total capacity in the long term, with the US accounting for most of the overseas expansion. Management plans to balance the higher costs of overseas fabs with the stronger economics of Taiwan operations to support overall corporate margins.
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