Taiwan semiconductor

Sector outlook

Jason Tsang Marketing feedback

jason.tsang@cl-sec.com Investors seeking new targets due to limitations on AI portfolio positions
+886 2 2326 8145
We met with over 50 investors during our roadshow in Europe to discuss the tech
Cathy Hsu industry, specifically focusing on the semiconductor and upstream markets. Most
+886 2 2326 8142 of their positions in AI and semiconductor names have reached their portfolio
limits, so they are divesting from stocks like Nvidia and TSMC and seeking new
investment opportunities instead. Many are particularly interested in the potential
of edge AI development, as well as the prospects of larger players such as UMC
and ASE. We prefer MediaTek as we see high-end smartphone opportunities for it,
and ASMedia, M31 and Gudeng due to migration to new specifications.
25 June 2024
Seeking new investments
q We noted that many investor positions in AI and semiconductor names have reached
Taiwan the 10% limit of their portfolios after the recent stock price rallies.
Technology q We observed that investors are divesting from stocks like Nvidia and TSMC and are
seeking new investment opportunities instead.
Eyeing edge AI
Stocks in focus q Investors in general are particularly interested in the potential of edge AI development
such as AI PCs.
ASMedia 5269 TT
Rec BUY q They anticipate that Qualcomm and MediaTek will be pure beneficiaries of the AI PC
Market cap US$4.4bn theme, and are likely to gain market share from Intel.
3M ADV US$67.4m q We maintain our view that MediaTek's CPU-related product, developed in collaboration
Price NT$2,090 with Nvidia, will be released in 2025, and Qualcomm will be the initial player in the
Target NT$2,800
Up/downside +34% Windows on ARM platform.
q However, we believe that the current market share expectations for Windows on ARM
M31 6643 TT in 2025-26 may be overly optimistic as the software support available for the new
Rec BUY systems is still limited at present.
Market cap US$1.3bn
3M ADV US$51.4m q Investors are also focusing on the prospects of larger players in edge AI such as UMC
Price NT$1,085 and ASE, but we reiterate our bearish view on UMC (SELL) given increasing competition
Target NT$1,342 from China players and ASE (SELL) given limited revenue contribution from advanced
Up/downside +24%
packaging.
Gudeng 3680 TT
Rec BUY Software and Capex sustainability remain key watch points
Market cap US$1.2bn q Investors are questioning the outlook and demand for AI in the near future, and we
3M ADV US$19.7m expect the availability of software support for new CPU platforms to be a crucial factor
Price NT$429
Target NT$509
in the long-term development of edge AI devices.
Up/downside +19% q We anticipate that software support for edge AI devices will become standardised within
the next three to five years, with a dominant supplier emerging in the market.
q We maintain our belief that major CSPs will continue to increase their investment in AI
infrastructure as CSPs are guiding Capex to increase YoY, reflecting their confidence in
AI-related business.
q Therefore, we think that concerns about demand for AI hardware should be limited.

We like ASMedia, M31 and Gudeng

q We prefer companies such as ASMedia, M31 and Gudeng given their migration to new
specifications, which we believe will contribute positively to their prospects.
q We like ASMedia (BUY) as AI PC demand should support its business momentum for
new higher-ASP products, like the AM5 platform and USB4.
q We like M31 (BUY) given its royalty business is starting to migrate to advanced nodes,
and the company is moving into the AI/HPC-related market with more design wins from
CSPs.
q We like Gudeng (BUY) on increasing demand for EUV mask pods driven by migration to
advanced process nodes as we see more projects upgrading to 5nm and 3nm.

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 Marketing feedback Taiwan semiconductor

Investment thesis - ASMedia Technology Inc 5269 TT

AMD expects sales in 2Q24 to be flattish or slightly higher QoQ, and the guidance
in dollar amount is in line with our expectations. It holds a positive view on the
upgrade trend related to AMD's AM5 platform and USB4. In addition, the company
plans to enter the server market with significantly higher ASPs compared to the PC
market. The company’s outlook is largely in line with our forecast. Reiterate BUY.

Catalysts - ASMedia Technology Inc 5269 TT

1) Stronger-than-expected PC demand, 2) AMD not losing more market share to
Intel in the PC market, and 3) migration from USB 3.0 to 4.0.

Valuation details - ASMedia Technology Inc 5269 TT

Our TP is based on a target multiple of 45x ASMedia PE and 11x WT Micro PE,
leading to a blended SOTP PE valuation of 32x. We value ASMedia using PE given
its IC design business nature, which has low fixed assets and a Capex-light model,
similar to fabless companies under our coverage. We believe PE better captures the
earnings growth momentum of IC design firms.

Investment risks - ASMedia Technology Inc 5269 TT

Key downside risks to our call are: 1) weaker than expected PC demand, 2) AMD
losing more market share to Intel in the PC market, and 3) limited migration from
USB 3.0 to 4.0.

Investment thesis - Gudeng Precision Industrial 3680 TT

Gudeng’s 1Q24 results were weaker than we expected, primarily due to lower GPM
and higher Opex. We believe GPM will improve in coming quarters as EUV mask
pod shipments ramp up from 2Q24 and demand for new products, including
diffuser FOUP and stocker equipment, stabilises. The higher 1Q24 Opex was mainly
due to mass production of new production lines in China. Despite the challenges,
we remain positive on Gudeng's potential to gain more share in the China FOUP
market from Entegris, and migration to advance nodes with higher EUV mask pod
demand. Maintain BUY.

Catalysts - Gudeng Precision Industrial 3680 TT

1) Faster process node migration from N7 to N5 and N5 to N3; 2) milder market
competition from Entegris; 3) improving demand driven by new capacity expansion
for advanced process nodes; 4) intensifying geopolitical tensions leading to Chinese
customers using more products from non-US suppliers.

Valuation details - Gudeng Precision Industrial 3680 TT

We use a PE-based valuation methodology as we believe the market will primarily
focus on the profitability growth outlook, which is better reflected with PE metrics.
We assign a target PE multiple of 25x 2025CT EPS, near the five-year average of
its most similar and relatively stable overseas peer, Entegris, given 1) Gudeng’s OPM
in 2021/2022 improved to the mid-teens to mid-twenties level, close to Entegris’
OPM in the past five years, and 2) we forecast Gudeng’s OPM to rise YoY.

Investment risks - Gudeng Precision Industrial 3680 TT

Downside risks include: 1) slower process node migration from N7 to N5 and N5 to
N3; 2) increased market competition from Entegris; 3) slower demand capping new
capacity expansion for advanced process nodes; 4) easing geopolitical tensions
leading to Chinese customers using more products from US suppliers.
Find CLSA research on Bloomberg, Thomson Reuters, FactSet and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

25 June 2024 jason.tsang@cl-sec.com 2

      
 Marketing feedback Taiwan semiconductor

Investment thesis - M31 Technology Corporation 6643 TT

The company raised its Opex guidance due to R&D preparations, leading to lower
earnings in 2024. However, we view this as a positive step for M31's long-term
development. We maintain a positive view on M31's long-term prospects given that
1) royalty business starts to migrate into advanced nodes, 2) it focuses on advanced
nodes, which is expected to contribute to 50% of total revenue in 2024, 3) CSPs
start to use M31’s IP, and 4) it will benefit from TSMC’s new fab in Japan. Reiterate
BUY.

Catalysts - M31 Technology Corporation 6643 TT

1) Increasing business from Chinese fabless and foundry customers, 2) a booming
high-speed interface IP market, and 3) migration to higher specs and more advanced
process nodes.

Valuation details - M31 Technology Corporation 6643 TT

We use a PE-based valuation methodology as we believe it better reflects the
company’s profitability growth outlook, which the market will primarily focus on.
Our target PE multiple of 55x 2025CT EPS, which is the average 2025 consensus
PE of its closest Taiwanese peers, eMemory (65x) and Andes (44x), after taking into
account the ranking of its earnings growth, OPM, and ROE with peers. Our target
multiple of 55x appears stretched compared to the historical average, but we
believe it is justified as Taiwanese pure IP peers have recently all rerated, driven by
booming IP demand from IC design houses and foundry players.

Investment risks - M31 Technology Corporation 6643 TT

Downside risks include 1) easing geopolitical tensions; 2) clients' slower migration
to advanced nodes and higher specs; 3) slower growth of the silicon IP market.

25 June 2024 jason.tsang@cl-sec.com 3

      
 Important disclosures Taiwan semiconductor

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Companies mentioned
ARM (N-R)
ASE (3711 TT - NT$169.0 - SELL)
ASMedia (5269 TT - NT$2,090.0 - BUY)
Gudeng (3680 TT - NT$429.0 - BUY)
Intel (N-R)
M31 (6643 TT - NT$1,085.0 - BUY)
MediaTek (2454 TT - NT$1,385.0 - BUY)
Nvidia (N-R)
Qualcomm (N-R)
TSMC (N-R)
UMC (2303 TT - NT$56.4 - SELL)

Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures
Recommendation history of Gudeng Precision Industrial 3680 TT

Date Rec Target Date Rec Target

03 May 2024 BUY 509.00 31 Aug 2023 BUY 498.88*
07 Mar 2024 BUY 540.00 23 Aug 2023 BUY 544.41*
08 Nov 2023 BUY 470.00
Source: CLST; * Adjusted for corporate action

25 June 2024 jason.tsang@cl-sec.com 4

      

 Important disclosures Taiwan semiconductor

Recommendation history of ASMedia Technology Inc 5269 TT

Date Rec Target Date Rec Target

10 May 2024 BUY 2,800.00 30 Aug 2022 SELL 699.63
04 Apr 2024 BUY 3,030.00 12 Aug 2022 SELL 700.22
26 Feb 2024 BUY 2,875.00 13 Jun 2022 SELL 1,050.40
08 Nov 2023 BUY 1,610.00 12 May 2022 SELL 1,240.00
09 Aug 2023 BUY 1,150.00 04 Jan 2022 SELL 1,550.00
11 May 2023 BUY 1,300.00 09 Aug 2021 BUY 2,300.00
08 Mar 2023 O-PF 1,000.00 19 Jul 2021 BUY 2,275.00
10 Nov 2022 SELL 500.00
Source: CLST

Recommendation history of M31 Technology Corporation 6643 TT

Date Rec Target Date Rec Target

10 May 2024 BUY 1,342.00 05 Mar 2024 O-PF 2,050.00
10 Apr 2024 BUY 1,980.00 14 Jan 2024 BUY 1,540.00
Source: CLST

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 Important disclosures Taiwan semiconductor

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25 June 2024 jason.tsang@cl-sec.com 8