Morgan Stanley: Taiwan Semiconductor's Earnings Face 10% Downside Risk from 5% USD Appreciation

Morgan Stanley has released a research report stating that the recent significant appreciation of the New Taiwan Dollar may have limited negative impact on Taiwan Semiconductor Manufacturing Company (TSM.US). The firm has maintained its "Overweight" rating for the company, with a target price of 1288 New Taiwan Dollars.

According to the report, most of Taiwan Semiconductor's costs are denominated in New Taiwan Dollars, including depreciation, employee salaries, and electricity expenses in the region. The report estimates that for every 1% appreciation of the US Dollar against the New Taiwan Dollar, the company's gross profit margin may decrease by 0.4 percentage points, and the operating profit margin may be affected by approximately 0.4-0.5 percentage points. This could result in a 2% downside risk to earnings per share (EPS). If the US Dollar appreciates by 5% against the New Taiwan Dollar, the EPS could face a 10% downside risk. Previously, the US Dollar had breached the 30 mark against the New Taiwan Dollar, exceeding Taiwan Semiconductor's revenue expectations for the second quarter of 2025.

Despite these potential impacts, Morgan Stanley does not view the currency fluctuations as a significant threat to the company's earnings. The firm believes that these fluctuations will not impair the company's structural profitability. Additionally, some unfavorable factors affecting the stock price are expected to dissipate.

It is worth noting that if some of the funds flowing into the New Taiwan Dollar enter the local stock market, it could drive up the price-to-earnings ratio of Taiwan Semiconductor. Currently, the company's expected price-to-earnings ratio for 2026 is 12.6 times, with a dividend yield of 2.7%, making it an attractive investment option that could draw in more funds.