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TSMC expects 5G to drive earnings, flags South Korea-Japan spat as risk

By Yimou Lee

By Yimou Lee

TAIPEI (Reuters) - Taiwan's TSMC forecast that robust demand for 5G chips will drive a stronger second-half even as it anticipates a dispute between Japan and South Korea involving chip-making materials to be a big source of uncertainty.

The world's largest contract chipmaker and supplier to Apple Inc reported on Thursday a decline in second-quarter profit. But it said demand is likely to recover during the rest of 2019, particularly from smartphone makers, hampered at present by the impact of a Sino-U.S. trade war.

Taiwan Semiconductor Manufacturing Co Ltd (TSMC) forecast third-quarter revenue to rise as much as 8.4% from a year earlier in U.S. dollar terms.

"Although our business continues to be impacted by a global slowing economy ... we have also passed the bottom of the cycle of our business and again began to see demand increasing," Chief Executive Officer and Vice Chairman C.C. Wei told analysts during an earnings briefing.

TSMC, which makes modem chips for U.S. chipmaker Qualcomm Inc, is expected to see early gains from the shift to 5G as smartphone makers including Samsung Electronics Co Ltd and Huawei [HWT.UL] race to develop phones enabled with that technology.

5G is a network technology for wireless communications that could be up to 100 times faster than current 4G networks, and modem chips connect devices like phones to these networks.

Apple is also likely to turn to Qualcomm for 5G chips after its sole chip supplier Intel said in April it would exit the modem chip business. Apple, though, is not expected to launch a 5G iPhone until September 2020.

"For 5G, if you look at next year, the biggest influencer should be smartphone, and secondly high performance computing, which includes both networking and infrastructure," said Wei, adding that demand for 5G chips from auto makers would also help.

The spread of 5G networks helped Dutch semiconductor equipment maker ASML Holding NV, a supplier to TSMC, beat analysts' second-quarter earnings estimates on Wednesday.

Even so, analysts were cautious on TSMC's outlook, citing a slower-than-expected introduction of 5G technology and still-tepid demand for smartphones.

"With a still-slow demand recovery and excessive inventory, we think wafer orders from fabless companies might remain weak," Fubon Securities analyst Sherman Shang wrote in a research note prior to TSMC's earnings announcement, referring to chipmaking factories known as fabs.


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Taiwan's supply chain manufacturers have been navigating slowing global demand for smartphones as well as market disruption stemming from tit-for-tat import tariffs between China and the United States.

Adding to risk factors, Japan last week tightened curbs on exports of high-tech materials used in smartphone displays and chips to South Korea, home to the world's biggest memory chip makers, Samsung and SK Hynix Inc.

Chairman Mark Liu said the dispute is a major uncertainty for the coming months as it is likely to impact technology supply chains, as Japan dominates the market for the materials in question.

Earlier, TSMC reported a 7.6% decline in April-June net profit at T$66.77 billion ($2.15 billion), just ahead of analyst estimates.

Revenue rose 3.3% to T$241 billion, but fell 1.4% to $7.75 billion in U.S. dollar terms - still topping the average of 23 analyst estimates compiled by Refinitiv.

Prior to TSMC's announcement, its shares closed up 0.8% versus a 0.25% fall in the wider market.

Shares in the company - which has a market value of about $210 billion and trails just Samsung and Intel by that measure among chip- and chip-equipment makers - have risen around 13% so far this year.


(Reporting by Yimou Lee and Clare Jim; Editing by Christopher Cushing, Sayantani Ghosh and Muralikumar Anantharaman)