 Hey everyone, this is Dan. The stock price of Taiwan semiconductor, TSM, hit the all-time high of $142 back in February. After a recent downgrade by Morgan Stanley, the stock price has been running below $120 in the last few weeks. Morgan Stanley was concerned about the capital expenditures of TSM. I studied the financial reports and found that Morgan Stanley was way too pessimistic. I am therefore still bullish about TSM. Let's get into the details. First of all, let me review my price target for TSM in my May 27 video. At the time, I set the target at $160 a share by the end of 2021. On May 27, TSM was at $115. Today is July 12, and the last trading day was last Friday, July 9, and TSM closed at $120.65, definitely the price moved in the right direction that I predicted, although it is still quite a distance from my target at $160. In light of what's been happening lately, especially with regard to capital expenditures, will we need to set a new price target? I will explain more in the next few minutes. There are three main events that have been affecting the stock price of TSM. Number one, it's a recent drought in Taiwan, and as you probably know, most of the manufacturing facilities for TSM are located on the island of Taiwan. And also, there's been a recent surge of COVID cases in Taiwan. And then there's this proverbial capital spending concerns. Let's look at them one by one. On April 20, it was reported that there's been a very severe drought on the island of Taiwan. Actually, it was the worst drought in 56 years. And the government started to restrict water usage for farmlands, residential buildings, and even businesses, although the production operations at TSM never got interrupted, even during the worst period of the drought. Recently, on June 5, it was reported that since Taiwan has been getting a lot more rainwater, the government has lifted all the water restrictions. So life is back to normal again in Taiwan. drought is no longer a problem. How about COVID? According to the BBC report, this is a collection of reports from May 16 to May 26. Because of the surge of new COVID cases, schools and public places have been shut down. Most recently, as you can see from this chart, the daily new cases have been coming down. As of today, there are only 24 cases. Now for an island with 23 million people, 24 cases a day is minimal. That's why the pandemic is no longer an issue in Taiwan. However, there's a caveat. Let me explain more. Why? Because only 0.3% of the population in Taiwan is fully vaccinated. They are running behind as far as vaccination. As compared to the US, where 48% of the people have been fully vaccinated. So Taiwan needs to catch up with vaccinating their people. Have they ordered vaccines already? Yes, they did. If you look at the vaccines they've ordered, they ordered a total of 35 million doses from AstraZeneca, Moderna, Johnson & Johnson. And then these two vaccines are produced, developed in Taiwan. They're still in phase two. But then they also have BioNTech vaccines on order. All together they should have about 35 million doses. And with the population of 23 million, that's just about enough for the total population except they have to wait for the doses to be delivered or produced. So far, they've received only 7 million doses. The government has been containing the spread of the virus by implementing very stringent quarantine procedures and also with very rigorous contact tracing. So far it's been working and the production operations at the Taiwan semiconductor plants have not been affected. And actually I'm pretty optimistic about their being able to control the COVID virus. At this point, if you like what you've seen so far, I'd like to encourage you to click the like, subscribe and notification button. That'll encourage me to produce more videos like this in the future. Let's talk about capital spending concerns. On June 20th, Morgan Stanley downgraded Taiwan semiconductor. They downgraded the stock from a target of $655 Taiwan dollars to $580 Taiwan dollars. And they downgraded the rating to neutral because the stock is traded both at the Taiwan exchange as well as new stock exchange, $580 Taiwan dollars at the Taiwan stock exchange is equivalent to $120 at the US exchange, $120 is just about a price where TSM is being traded now. And actually that's been a pretty strong resistance in the last few weeks. Also today, July 12th, the price broke above $121 and let's hope it'll stay above that line. It's a very important movement today for the price to finally break above $121. And that's a bullish sign. Also March 31st, Taiwan semiconductor announced that they decided to raise the full year 2021 capital expenditure to be around $30 billion. I've been digging into the financial reports published by TSM, especially this very important report 20F, which is the annual report they are required to file with the SEC in the United States. The 20F is equivalent to the 10K report of an American company. TSM is required to file the 20F instead of 10K because it's a foreign company, but they follow the international accounting standards, which are very similar to the US accounting standard. First of all, let's look in their revenues for 2021. The company has been very transparent about the monthly revenues. And this is from the company's monthly update that you can see January year to year that revenues increased by 22% compared to January of last year and then February and so on. So the average to six months from January through June of 2021, the revenues on the average went up by 20%. So that's an important number, 20% going forward. We got to use that as an assumption. And then in the 20F annual report, I pull out the revenue numbers for the four years plus the 12 month revenue number and then the net income and then the depreciation number. Basically, the net income is the revenue minus the expenses. And in this case, I simplified the calculation by using the actual depreciation expense. And then after I subtract from the revenue, the depreciation expense and the net income, then I get a catch-all bucket of what I call the other expenses. That's basically all the other lines in the income statement added together. So this number is real from the report, that's real and that's real and that's a derived number. It's an aggregate of all the other numbers on the TSM report. And then I translate these numbers, these are in Taiwan dollars, by the way, I translate them into percentages. If the revenue is 100%, then we can factor in these three that should add up to the revenue, the expenses and the income. And that's why for the most recent 12 month period, the depreciation is 26% of the revenue and the other expense, it's 35.5% of the revenue and net income is 38% of the revenue. And this 35.5% is pertinent, we'll be using that number later on. I'll talk more about that. And finally, let's look at depreciation and amortization. This is from the quarterly report from TSM, especially the first quarter report. They reported a net revenue of $362 billion, that's Taiwan dollars. And then for 4Q, $361 billion, the first quarter, 2020 and $310 billion, Taiwan dollars. And then for depreciation and amortization, these are the numbers. And from these two lines, I can calculate depreciation as a percentage of revenue, which is 27.8% for the first quarter of 2021. And then for this quarter is 27% and this quarter 22% and not surprisingly, because they've increased their capital spending that this year, first quarter percentage wise, the depreciation is higher than 2020. So this year, we're at 27.8% of the revenue. That's an important number. We'll use that later on in our calculation. So let's carry all these pieces of information into 2021. Here we go. First of all, what will be the revenue for 2021? Since we are averaging a 20% increase, I just take the 2020 revenues, increase it by 20%. Here we go, at $1.6 trillion, Taiwan dollars for estimated total revenues for 2021. And then for depreciation, remember here, we got a 27.8% of the revenue for depreciation first quarter 2021, use that number, multiply that with this projected revenue. Here's our depreciation for 2021 for the entire year. And the other expenses, since we arrived at this 35.5%, from this calculation, again, we take this number multiplied by 35.5%, we have $570 billion of other expenses. And with these, then we can subtract these two numbers from the top, get $589 billion Taiwan dollars for net income for 2021. If you look at this number compared to 2020 number, it's a 15.5% increase from the 2020 net income. Is that number good enough? Let's compare that with the estimate from Yahoo Finance. Yahoo Finance uses an average aggregate number from the various analysts, they track. They're saying that for the next quarter, their expected increase in earning per share should be 13.3%. It's actually even lower than the 15.5% here. Although for the next five years, they project a higher number at 15.9%, which is just about the same as the 15.5%. And that's why if TSM does arrive at this net income number for the entire year of 2021, it'll be right on target. That means they're not going to create any positive or negative earnings surprise. And that that's good. Let's look at what the analysts are actually saying about TSM. Well, let's recap a little bit. The July 9th closing price, it's $120.56. My target was $160. That might be subject to change. Yahoo Business gives them a buy rating 1.9 out of 5, which is a good rating, a smaller number to better. The high target is 1.77, definitely way above the 1.20, even above my 1.60 average target 1.40, low target 1.05. Who's never really an overall B rating, which is a buy rating, pretty positive. TipRanks.com, it's a moderate buy, high target 1.50, average 1.27, low 1.05. And then CNMoney, it's a buy rating, high, 200, medium, 1.47, low 1.05. The street.com is a buy rating, target is 1.54.7. All these targets are higher than the Morgan Stanley target of about $120. And that's why I do believe that Morgan Stanley has been too pessimistic about TSM. What's my own calculation? I took all the leading semiconductor companies, lined them up, and looked at their P-E ratios and decided that an average forward P-E ratio of 27 is reasonable for a talent semiconductor. And incidentally, the current P-E ratio is 32.65. So 27 is a very reasonable assumption, actually is on a conservative side. The earning growth is 15.9%. And that's from Yahoo Finance. Remember my calculation earlier was 15.5%, 15.5%, 15.9%, it's about the same. So using these two assumptions, and I start to use the 2020 financial figures for TSM, I apply the P-E ratio and the earning growth. And I arrive at the stock prices for 2021, 2022, and 2023. And with these three numbers, I decided it's reasonable, actually very conservative, if I set the price target to $140 to be reached by the end of October 2021. It's $20 less than the 160 target, however, the 160 was aimed to be achieved by the end of 2021, but now I'm accelerating the achievement of my target to the end of October, except at only $140. And by then, we will already have the third quarter earning from TSM. And then I'll be in the position to fix a higher target, hopefully, at that time. So the new target is $140. I'd like to also encourage you to subscribe to my Twitter account, because if there's any news development, if I buy or sell TSM stock, I will definitely share that information with my subscribers by way of my Twitter account. And you're welcome to also send me your comments, questions and suggestions to my Twitter account as well as to my YouTube channel. Actually, I would very much appreciate your input, so I can make my videos even better, more informative, more interesting. Again, let me recap, my new target is $140 a share by the end of October 2021. The current price is at $120.65. That's the end of last Friday, today's Monday. Actually, today's closing price is already $122 in change. So it's definitely moving the direction that I'm predicting. Again, I'd like to encourage you to click a like, subscribe and the notification button. I'd like to remind you that I'm not a financial advisor. I share my stock trading strategies for educational purpose only. If you want to buy or sell stocks, you should make your own decisions and you should definitely consult with the financial advisors before you do so. This is about rest of my video for now. I will chat with you again in the next few days. In the meanwhile, I'd like to wish you the very best of luck with your financial investments.