Strategy Note /

Semiconductors split by US-China de-coupling

  • New US restrictions on global semiconductor and semi equipment sales to China

  • TSMC, the largest outsourced semiconductor supplier, alone is over 5% of MSCI EM

  • The silver lining is that TSMC PE's valuation is already at a 40% discount to its five-year median

Semiconductors split by US-China de-coupling
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
14 October 2022
Published byTellimer Research

New US regulations, which came into force on 7 October, will make it tougher for global semiconductor suppliers and semi equipment manufacturers to sell advanced products into China. The damage from this may already be reflected in the valuation of the largest stock in emerging markets, TSMC.

Global semiconductors split

The US Department of Commerce’s Bureau of Industry and Security semiconductor-related export control is the latest instance of the:

For global investors, the repercussions of all of these trends are generally negative – less global coordination and leadership, slower global growth, and more costly innovation.

Particular problem for EM equities

For emerging market equity investors, the negative impact is particularly painful because of the size of the semiconductor and related Tech hardware sector, and, in turn, their Chinese customer base, in the investable universe.

  • TSMC is the leading outsourced semiconductor supplier globally and is the largest company in the MSCI EM index, with a 5.4% index weight.

  • Advanced products, 7nm and 5nm chips, accounted for 54% of global TSMC revenues in Q3 22 and have tripled in absolute value since the start of 2020. They represent the next phase of growth. Older generation 16nm chips, which also may be snared by these regulations, accounted for 12%.

  • China accounted for 8% of TSMC revenues in Q3 22 and have averaged 11% over the past year and 15% over the past five years.

  • Samsung Electronics is 3.3% of the MSCI EM index and Taiwan and Korea, with both dominated by Tech hardware, are, respectively, 13.3% and 11.1%.

China share of TSMC quarterly global revenues

EM investor silver linings

There are two silver linings for EM investors:

  1. The valuation of TSMC is already cheap versus its historical average: forward PE is at a 40% discount to the five-year median. Global growth concerns, US-China friction and anticipation of these regulatory restrictions have already taken their toll; and

  2. The beneficiaries of US-China de-coupling are alternative low-cost manufacturing locations in countries that are geopolitically aligned with and enjoy low tariff access to the US, ie Mexico and Vietnam.

TSMC PE valuation is at a 40% discount to 5-year median

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