Taiwan Semiconductor Manufacturing Company Limited (TSM) Q3 2012 Earnings Report, Transcript and Summary

Welcome to TSMC’s Third Quarter 2012 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC’s Director of Corporate Communications, and your host for today. Starting last quarter, we have combined the quarterly earnings conference with the conference call and the event is webcast live via TSMC’s website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen-only mode. As this conference is being viewed by the investors around the world, we will conduct the event in English only. The format for today’s event will be as follows. First, TSMC’s Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the third quarter and give you our guidance for the next quarter. Afterwards, TSMC’s Chairman and CEO, Dr. Morris Chang, will provide his general remarks and a couple of key messages. Then we will open the floor to questions. For those participants on the call, if you do not yet have a copy of the press release, you may download it now from TSMC’s website at www.tsmc.com. Please also download the summary slides in relation to today’s earnings conference presentation. Before we begin, I would like to remind everybody that today’s discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the podium to TSMC CFO, Ms. Lora Ho.

Good afternoon, good evening, and good morning, everyone. Thank you for joining us this afternoon. Today, my presentation will start with the financial highlights for the third quarter, followed by the outlook of the fourth quarter. I am pleased to report a record quarter for TSMC in both revenue and net income, thanks to customers’ strong demand from mobile computing applications and our leadership in technology. Third quarter revenue increased 33% year-over-year and 10% sequentially to reach TWD 141 billion, exceeding our guidance. The better-than-expected revenue was due to higher shipments to support China smartphone demand and higher mark in the back-end revenue. : Overall, our third quarter EPS was TWD 1.9. ROE for the single quarter was 30.3%. Let’s move to revenue by product segment. During the third quarter, wafer demand for mobile computing devices continued to be strong, leading to double-digit growth in communication and industrial-related segments, while demand for computer and consumer-related products were relatively soft during this quarter. We are happy to see the good progress of our 28-nanometer. 28-nanometer revenue and shipments more than doubled during third quarter due to solid customer demand and excellent execution. The contribution to total wafer revenue has increased from 7% in the second quarter to 13% in the third quarter. We expect 28-nanometer revenue will exceed 20% of our total wafer revenue in the fourth quarter and will be more than 10% for the whole year. Taking a look at the balance sheet, cash and marketable securities ended the quarter at TWD 148 billion, down TWD 40 billion from the second quarter. Current liability decreased by TWD 93 billion, mainly due to the payment of TWD 78 billion cash dividend in July. Taking advantage of the low-interest environment, we raised TWD 40.6 billion in corporate bonds at an average…

Good afternoon, ladies and gentlemen. For the third quarter, we had a record quarter in both revenue and net income, as Lora has already reported. Fourth quarter, as guided, is going to be a modest dip, about 8% in revenue. We also think that this will be followed by another modest dip in the first quarter and we expect a rebound in the second quarter. All this we actually predicted three months ago. The fourth quarter dip and the first quarter dip is caused by supply chain inventory adjustment. Right now, the days of inventory, DOI, is about 13 days above seasonal. We expect that it will be adjusted to seven days above seasonal at the end of the year. And then, it will become normal in the second quarter of next year. That is consistent with our prediction of two dips caused by supply chain inventory adjustment. Now, both our third quarter and our fourth quarter are better than our expectations three months ago. Third quarter, we did exceed guidance. And even though fourth quarter will have a dip as we forecast now, but it’s a dip from a higher level than we forecasted three months ago. Why? We think the reason is the strength of mobile product demand. First, mobile IC demand is indeed very strong, stronger than we expected even three months ago. Secondly, TSMC is foundry leader in mobile IC. And together with our partners, we are the technology leader in mobile IC. This is a leadership that we and our partners will continue, will maintain. Third, TSMC value-added increases as smartphones get smarter and feature phones gets smart. We expect mobile products to fuel TSMC growth for a number of years. A number of years. Next, I will talk about a few product segments. 28-nanometer.…

Thank you, Chairman. And this concludes our prepared statements. Before we begin the Q&A session, may I remind everybody please to limit the number of questions that you have to two at a time, so that other participants have opportunities to ask questions to the management. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our CEO or CFO answers your question. (Operator Instructions). Now, let’s begin the Q&A session.

Our first question comes from Citigroup, Roland Shu. Roland Shu – Citigroup: Would you translate into English a little bit?

Roland’s question is about the near-term outlook where chairman had once said the last quarter that second quarter next year we’ll see a rebound. So he would like to know a little bit more color in terms of the strength of that rebound for second quarter next year.

Well, this – it’s like my comment earlier, that third quarter and fourth quarter are actually better than we forecast three months ago, even though we’re still forecasting a dip in the fourth quarter, because it’s better than we forecast three months ago because we are dipping from a higher level. So to your current question, I said that I think that – your present question is – I said three months ago that second quarter will be a strong rebound and I’m – you are a very alert person. You had noticed that I did not use the word ‘strong’ this time. Is that the origin of the question? Well, my answer however is that, no, I did not use the word ‘strong’ because we are now talking about a higher level in the first quarter. So it will be rebound. In fact, in some people’s eyes, I think it will be viewed as a strong rebound, but I think that we better – I decided not to be too aggressive on these sort of things, so I say be a rebound. We’re still pointing – I mean, it’s still two quarters away, frankly. Even though I think our visibility is in general quite good, but two quarters away, we can’t be sure exactly what the strength of the rebound is. But I know I am 100% certain that there will a pretty good rebound. Roland Shu – Citigroup: Thank you. So I think (inaudible) just a rebound factor, relative to higher pay three months ago. I mean, are you (inaudible) second quarter...

The higher revenue place that we predicted three months ago? Roland Shu – Citigroup: Yes, yes.

That was my point, yes. Roland Shu – Citigroup: Okay, thank you. Then, I think my second question is regarding the 20-nanometer and the 16-nanometer. And a lot of your clients talk about the 20-nanometer cost, the cost saving of (inaudible) actually still not reached the economy or reach the and actually both also have the same comment during yesterday’s earning conference. So my question is since a lot of the customer actually, they are not aggressive to get into a 20-nanometer so far, and however, listening to your comment, you are very aggressively talking about 20-nanometer and even 16-nanometer demand. So my question is, is this a 20-nanometer or 16-nanometer? Is there customer-specific – driven by customer-specific demand or this is just for overall (inaudible)? Thank you.

Well, on 20-nanometer’s performance, I want to give you the numbers, the correct numbers that our technical people have given to me. Yes, the performance gain from 28 to 20, that’s your question, right? Roland Shu – Citigroup: Yes.

From 28 to 20, the performance gain is 15% to 20% at the same total power. And the power reduction is 20% to 25% at the same speed. You got that? 15% to 20% performance gain at the same power, and 20% to 25% power reduction at the same speed. Now, I know that some customers want even more. But one phenomenon that we faced is that our customers are consolidating. The bigger customers are bigger than the other customers, than big customers used to be bigger than other customers. All right? So incidentally I was re-reading a passage of Michael Porter’s classic ‘Competitive Strategy’ just the other night, and he said that there are five things that every company has to cope with. One of those things is customers’ bargaining power. Another thing is suppliers’ bargaining power. And I’m glad to report that after looking over those five things and thinking about each of them in relation to us, we have come out, I think, pretty good overall. But your question reminds me of customers’ bargaining power and also customers’ relative importance. So, all right. So here there may be a larger number of customers that want more performance or less power than their customers who are already satisfied with them, but it turns out that those that are already satisfied with them buy more than the ones that want more. Roland Shu – Citigroup: Thank you.

Okay, next question goes to Deutsche Bank, Michael Chou. Michael Chou – Deutsche Bank: Hi, Chairman. When do you expect the mass production for 16-nanometer FinFET? You guided before it should be second half 2015. Do you expect earlier introduction for 16-nanometer, given that you have all your risk production of 16-nanometer?

Would you repeat the question, Elizabeth?

Right. Michael’s question is, given that we begin with production of 16 FinFET at November 2013, when...

I’m sorry, stand here.

All right, risk production of 16-nanometer starts in November 2013. When will we start mass production for 16?

I think that it will be a year. I think it will be approximately a year later. Michael Chou – Deutsche Bank: My second question is, could you give any update on your (inaudible)? Do you expect a broad-base adoption for your (inaudible) in 20-nanomter platform?

Yes, will be used with the 20-nanometer part. In fact, it’s already being used toward the 28-nanometer part. But the revenue is still relatively small. And as I said, technically, it’s progressing fine. We’re trying to reduce the costs more. The revenue, well, there will not be significant revenue until 2015, 2016. Michael Chou – Deutsche Bank: Thank you.

Next question goes to Credit Suisse, Randy Abrams. Randy Abrams – Credit Suisse: Yes. The question, a follow-up on the 20-nanometer and the 16-nanometer. If you could talk about how customers are weighing, choosing one versus the other, if you could talk about the benefits? And also, do you expect customers to choose one versus the other, or a number of customers to migrate to both?

We do – we talk to every one of them. We talk to every one of them, every major one, painstakingly, explain it to them painstakingly and exhaustedly. Now, the smaller customers, we of course do it in the technical symposium that we hold three or four of every year. Randy Abrams – Credit Suisse: Yes.

Yes. So, is that your question? Do we explain to them the pros and cons of 20 and the 16? Randy Abrams – Credit Suisse: More just a view. Usually it’s two years between each node.

Yes. Randy Abrams – Credit Suisse: And now it’s one year. Are customers choosing one versus the other or do you expect customers to actually do designs year after year for both, and would that add cost?

I think that there will be customers that will go light on one and heavy on the other. And there may even be customers that will skip one, skip 20 to get to 16. So, right now, we’re still in the discussion stage with a number of customers, with a pretty large number of customers. But again, going back to my earlier point, we would not be making this kind of investment if we didn’t have some very big customers already in view. Randy Abrams – Credit Suisse: My follow-up question, you mentioned CapEx in the same ballpark for next year. Could you talk about the financial – how we should factor in if CapEx is in that ballpark, just appreciation and expenses into next year, in your view, and structural profitability in light of that?

Lora, would you answer that?

We have now finalized the next year’s CapEx, although Chairman talked about we’ll be in the range of the ballpark. You can see this year the depreciation has increased by about 20%, maybe a little bit more than 20%. With the ballpark Chairman was just describing, I believe the depreciation will also increase at a maybe 20% level for next year. But I don’t want you to be scared by those depreciation increase, because depreciation increase is not a problem as long as the capacity that we invest are getting utilized. And those products either very similar or better structure profitability, so it will not be a deterioration factor to the overall margin.

It is our strategy to have 100% utilization at the leading edge. Randy Abrams – Credit Suisse: Thank you.

All right. And we will now take our next question from the call. Operator, please proceed with the first caller on the line.

Your next question is from Mehdi Hosseini from Susquehanna International. Mehdi Hosseini – Susquehanna International: Thanks for taking my question. First one has to do with your commentary on Q1. You referred to it as a dip. Is the dip similar to Q4 level?

Whether or not the magnitude of the dip in Q1 will be similar to the dip in Q4.

It will be in the same ball park. The magnitude of the dip will be – look, I mean, I would really hate to – I mean, normally, we don’t really guide two quarters ahead of us. But last time, I did give a rough indication of Q1. Now – so I really would hate to make a habit of it, but since you asked, now I will honestly – I’ll try to answer you as honestly I can. I think it’s about the same ballpark. We have what we forecast to be an 8% dip in the fourth quarter, and Q1, I think will be in the same ballpark. But it’s really a bit early for us to tell. I certainly... Mehdi Hosseini – Susquehanna International: And then the second question has to do with the 20-nanometer and the tape-out. How should we think the number of tape-outs or the level of customer interest as you are installing the pilot line?

The question is how many tape-outs on 20-nanometer that we have already received. Tape-outs.

On 20? Do we have a number, Lora?

I think currently the 20-nanometer tape-out is roughly maybe around 50, 50 tape-outs, which is maybe 1/5 of our 28-nanometer tape-outs. Mehdi Hosseini – Susquehanna International: And the pilot line, should I assume that pilot line will be constructed and ready by summer of next year?

I can’t hear you very clearly. Can you repeat that again, please, Mehdi? Mehdi Hosseini – Susquehanna International: Sorry about that. Just to be clear, the 20-nanometer pilot line should be constructed and ready to go by the summer of next year, is that correct?

The 20-nanometer pilot line it’s – yes, Lora?

We have started to spend money on 20 since this year. However, the real production will not start until 2014. But we do have an engineering line, per se, being built up this year and next year. Mehdi Hosseini – Susquehanna International: Great. Thank you.

Okay. Now, we are coming back to the floor. The next question goes to Bank of America Merrill Lynch, Dan Heyler. Dan Heyler – Bank of America Merrill Lynch: Thank you, Elizabeth. Thank you, Chairman and Lora, for the great introduction, comments and color on your products. I wanted to follow up on a question I had last quarter, a bit on the idea of perhaps building kind of more of a focused fab approach for some of your larger customers versus the very diversified fabs that you currently run. I guess, as you look at some of the largest mobile chip users in the world, you look at their product cycles, can be quite volatile with some huge swings on your product cycles back and forth. I’m wondering, as you manage those fabs, should we anticipate, perhaps, more volatility in those fabs versus your very diversified tabs? Granted you’re getting new business, so perhaps it’s good that you’re generating more revenue, albeit, perhaps, with more volatility? Or do you think you can achieve kind of the same level of returns on a focused fab versus a broad-based diversified tab? Thank you.

Well, to summarize Dan’s very long question, is the comment Chairman made last quarter about dedicated fab for customers, Chairman made the dedicated fab comments. And so Dan’s question is, given single product life cycle, product life cycle could be more volatile than a diversified pool of products. So if we have fabs that are dedicated to one or two single products, we have to able to manage higher volatility, or Chairman thinks that the volatility will be about the same? Volatility. More volatile. Dan Heyler – Bank of America Merrill Lynch: Specifically big new product cycles that...

Right. Dan Heyler – Bank of America Merrill Lynch: ...that could take two quarters to ramp and then go away. Thank you.

Well, all right, let me try to figure out what you really want to ask. You appear to be concerned that if dedicate fabs to a certain customer, then that customer may leave the fabs because he migrates to a more advanced technology, is that right? Dan Heyler – Bank of America Merrill Lynch: Yes. Or a group of products that are dedicated to the fabs, indeed. Thanks.

Yes. Well, then I think it’s very important for us to be able to convert to a new technology, to convert the fab to a new technology with as little loss as possible. And I think that’s an art that the DRAM companies actually have learned, and we have also done some of that, but we are going to do the same thing to the DRAM companies had done in the past. We’re trying to make the product, the (inaudible) as commonly usable as possible. I think that now, of course, we do have additional advantage because we do have a very large second wave of users. We have always had that. We have always had that. And so in the past, the second wave users have always begun to take over the fabs that the first wave users leave behind, and we will continue to have that. Now, I do want to clarify this business of dedicating fabs. Well, I don’t think that one should take that literally, in many cases. There may be or there will be very rare cases when we will dedicate something to a customer, but that’s not going to be a very common practice. Dan Heyler – Bank of America Merrill Lynch: And I guess I’ll take a follow-up to that. I guess the distinction being that your second wave adopters in the past were quite mainstream and quite broad-based, so if you’re pushing the (inaudible) technology quite a bit ahead, I’m wondering if there’s a concern that that maybe – and minus one group may come later and hence perhaps the returns on the most advanced...

You’re asking how many second wave customers... Dan Heyler – Bank of America Merrill Lynch: Whether the second wave adoption is sufficient, as in the past, to generate the higher returns.

Generate a higher return? Well, yes, we generate a lot of returns, from second wave and third wave and fourth wave. And I mean it. Fourth and fifth wave, yes – look, we’re still running Fab-2 and it’s full more frequently than it’s not. Dan Heyler – Bank of America Merrill Lynch: Okay.

By the way, Fab-2, in case you have forgotten, is a 6-inch half-micron. Dan Heyler – Bank of America Merrill Lynch: Okay. So you anticipate no change in timeline between the early adopters and the second wave adoption even though you’re putting your technology very, very leading edge, that, that second wave will continue to be quite strong even with concentrated customer base and even with a very mobile focus? Okay. Thank you very much.

All right, next question goes to Goldman Sachs’ Donald Lu. Don Lu – Goldman Sachs: Chairman, I have two questions. The first is on the structural profitability. Chairman, you commented earlier that 28-nanometer margin would improve in the maybe first half next year. And so could we assume the structural profitability, i.e., the gross margin will reach 50% at 100% utilization early next year?

Well, we hope that it will be 50%, but 50% is something that we have very rarely done, frankly. So to assume that corporate average is – I think the 100% utilization is – we do get 50%, yes, right. But we’re talking about corporate average next year, and next year, as I already said, we’re going to start off with a not very good quarter. So next year’s corporate average utilization is not going to be 100%. Don Lu – Goldman Sachs: Sure. I meant in assuming the utilization as 50%. In Q3, I think, utilization is a little bit over 100%, gross margin was 49%, 48.8%. So next year would be improving from this nine months. I guess that’s my question.

Your question is about 28-nanometer, right? Is that right? Don Lu – Goldman Sachs: Yes. I mean, 28 would be the key...

Yes. Yes. Don Lu – Goldman Sachs: ... factor...

Yes. Don Lu – Goldman Sachs: ... affecting this.

Well, actually, I mean, I really have a simple answer for you. If you’re asking about our total, the whole company’s structural profitability, my simple answer is, it is a challenge every year, but we have, so far, managed to at least maintain it. And we actually have eked out a little progress in the last few years. Now, you can tell from the results we have eked out a little progress, but it’s a challenge every year. But we consider it to be our major challenge, a major task, and we are going to at least maintain this structural profitability. It cannot be allowed to deteriorate. Don Lu – Goldman Sachs: The follow-up question on this is, after 20-nanometer, presumably, will do double patterning the cost of the increase. Is that why the 14-nanometer probably even more, et cetera. Who is going to pay the bill going forward, if TSM obviously wants to maintain the structural profitability, will someone else…?

We will reduce cost. We reduce the cost. I don’t think it’s a question of who pays. It’s never a zero-sum game. We reduce the cost. And you may or may not have noticed that our average rate of decline of price has slowed down in the last three years. It has not – it’s still going down, but the rate of decline has slowed down. I can’t – I really don’t want to tell you anymore. Don Lu – Goldman Sachs: Okay. Thank you.

Okay. I think we will go back to the call and have the next question come from the call. Operator, please proceed.

The next question is from Brett Simpson from Arete. Please go ahead. Brett Simpson – Arete: Yes, thanks very much. I had a question for Lora just on the gross margin guidance for Q4. Can you maybe talk a little bit about how you see depreciation moving q-on-q and whether there’s any changes ahead in other manufacturing costs for wafer? The guidance seems to imply there’s some savings in cost of sales, so I just wanted to understand that more. And then the second question for Dr. Chang, regarding the trend towards (inaudible) and TSV, when you think about your wireless customers moving to these new packaging technologies, how do you engage with memory as part of this roadmap? And is there a need for a more strategic partnership with DRAM makers? And given there are so few mobile DRAM makers out there, how do you really manage this with your leading-edge wireless customers going forward? Thanks very much.

Brett, I think your first question is for Lora and your question is with respect to depreciation, quarter-over-quarter increase and how that is impacting the costs, is that correct? Brett Simpson – Arete: Yes, and also whether there’s any changes in other manufacturing cost per wafer.

All right. How we can change the other manufacturing cost for the wafer manufacturing cost.

Other manufacturing cost?

Right. Okay, second question, Brett, I think you need to clarify. You asked Chairman about TSV. And you are talking about our 3D IC packaging solution, using TSV and with a memory partner, right? Brett Simpson – Arete: (Inaudible).

Okay. We’ll have Lora answer your question first.

Your first question asking about quarter-over-quarter change of depreciation. Now, we’re in the third quarter now. Brett Simpson – Arete: Yes.

The third quarter depreciation for the whole quarter is around TWD 35 billion. And we estimate the next quarter, fourth quarter depreciation, will be a little bit more than TWD 36 billion. So each quarter will increase slightly. You also asked about how do we reduce the (inaudible) depreciation costs. To be frank with you, we have to take a significant effort in the past two months trying to reduce all other costs, including the material purchase price, the indirect material used for the wafer, productivity and so on and so forth. I have seen actually one of the continual effort in TSMC, especially when we see there’s a continual two quarter in the downturn and the management team has put a lot of effort trying to reduce that. And so far we have been quite successful in doing that. Brett Simpson – Arete: Great. Thank you.

So, Brett, could you please repeat your second question a little bit slow? Brett Simpson – Arete: Okay. So when we think about the move to 3D packaging, particularly from a wireless perspective, how do you engage – how does TSMC engage with memory as part of this roadmap? So is there a need for a more strategic partnership with mobile DRAM makers and how do you manage this with the leading-edge wireless customers?

Okay. Your question is when we move to 3D IC packaging, how do we engage with memory makers to form a strategic alliance and how we manage that, is that right? Brett Simpson – Arete: Yes.

Okay. Brett Simpson – Arete: That’s right. Yes.

We have been in active collaboration with two memory makers, well, Hynix and Mipro. So actually we started discussions with Elpida, but then they went bankrupt. But we have been in active collaboration and discussion with Hynix and Mipro.

Okay, now we are coming back to the floor. And the next question goes to – you’re in Daiwa now, right? Daiwa’s Eric Chen. Eric Chen – Daiwa Capital: (Inaudible) Daiwa. Actually my first question will probably go to Lora. Once you talked about the depreciation expenses for next year, probably jump by 20% year-on-year. What kind of CapEx you assume? Is there – CapEx trend or up the CapEx? How many percent?

You’re asking a question that I cannot answer. It’s in the ballpark of – Chairman just mentioned. Eric Chen – Daiwa Capital: Okay.

Well, of course, this is very preliminary because we are still in 2012. The number may change, so I just give you a range of – based on a range of ballpark, is in the 20% range. I can only say that. It can be a little bit higher; it can be a little bit less. Eric Chen – Daiwa Capital: Okay. Let’s talk about a consensus in the CapEx and the (inaudible) advancing next year, probably around 10 billion. If that’s the case, let’s talk about all the EBITDA for next year and I guess probably around 11 billion to 12 billion. And we look at – and then we look at the cash dividend, and we probably have to give like $2.6 billion. So, if that’s the case, can I assume you are going to borrow like $2 billion as a corporate bond?

Chairman just mentioned we borrow to pay dividend. Every year, we pay $2.6 billion. So three years is 2.6 times 3, so we are planning to do that much borrowing in a three-year timeframe. Eric Chen – Daiwa Capital: Okay. Are you talking about the borrowing for the coming three years?

Yes. Including this year, of course. Eric Chen – Daiwa Capital: Okay. Thank you. And my second question, probably I need the answer from the Chairman. If I am right and I remember you talk about year 2013 to year 2016 will be very strong, and strong for the semiconductors, strong for the...

These are strong. Those four years will be either growth or strong growth. Eric Chen – Daiwa Capital: Okay. What kind of strong growth are you talking about? The more – the better than...

Well, you tell me, you tell me. Eric Chen – Daiwa Capital: Okay. I worked at 20%.

20% is strong, yes. Okay. Eric Chen – Daiwa Capital: Okay.

I more or less agree with that. Eric Chen – Daiwa Capital: Okay.

But those four years will be either growth or strong growth. Yes. Eric Chen – Daiwa Capital: Okay. I see. Actually, I would like to get an idea what’s your logic behind. What kind of product, what kind of a trend you’ve seen the TSMC on a very good position and to catch up this kind of high growth?

From our mobile products. Eric Chen – Daiwa Capital: Okay.

And basically I think it should be clear by now that we are – our emphasis is on mobile product market segment and also leading-edge technology. And whatever goes with leading-edge technology like 3D IC and whatnot. Eric Chen – Daiwa Capital: Okay, I see. Okay, thank you.

Next question goes to JPMorgan, Rick Hsu. Rick Hsu – JPMorgan: Yes, hi, thank you. Hi, Chairman. Just one question from me. Can you talk a little bit about next year’s outlook on a macro basis? For example, your macro-economy forecast and the global semiconductor industry forecast, global foundry forecast and also how TSMC will perform relative to the global foundry average?

This year, the semiconductor actually is a negative growth, about 2%. Based on what we have seen, next year forecast, semiconductor will grow about 3% for next year. What’s your other questions? Rick Hsu – JPMorgan: The foundry growth and also how TSMC would perform relative to the foundry average.

Okay. We currently expect foundry will grow around 7% in 2013 and TSMC will all grow foundry in 2013 as well.

Well, semiconductor growth, I know that you are interested in it and we also keep track of it. But frankly, the total semiconductor growth is becoming less and less relevant to our growth plan. And actually, the total foundry growth are still relevant, but also is becoming less and less so. We feel that we are on a level in foundries by ourselves. Rick Hsu – JPMorgan: Thank you.

Next question goes to Barclay’s Andrew Lu. Andrew Lu – Barclays: Dr. Chang, Lora, special congratulations to Dr. Chang and TSMC to get the most important order from your competitor. And (inaudible) question I have. Well, the first one...

I’m sorry. I didn’t hear your compliments. Andrew Lu – Barclays: I said congratulations to Dr. Chang and TSMC to get the most important order from your competitor.

Yes. The most important. Andrew Lu – Barclays: My first question, in the past 25 years, TSMC keep its value proposition to keep most of the time ROE over 20%, and maintain the margin. While you take a lower-margin order to below the corporate average ROIs in the next one or two years, but I actually think that TSMC’s strategic position in the next five to 10 years, which means some of these order we may consider short-term and we are giving out some margin, but for five or 10-year position, we are willing to take this kind of low-margin order in the beginning of time? That’s my first question.

I’m sorry. I didn’t really hear it. I didn’t understand it anyway.

Right. Andrew’s comments was that we, in the past, said that we want to keep above 20% ROE. And his question is, will we be willing to take lower-margin business for a short time, like two to three years, in order to improve our strategic position in the five to 10 years.

Do we take low-margin products in the first few years in order to improve our later position? Are you asking a philosophical question, my own philosophy? No, I do not do it, because I have to live the next few years first. I do not. That’s a personal philosophical answer. All right. Andrew Lu – Barclays: Thank you. And the second question I have, if your mobile customers are not adopting in year 2014, because earlier, Dr. Chang mentioned (inaudible) 2015 or 2016 will have a revenue contribution. So are you really in-house packaging on packaging, or you need to partner with some other packaging house to do the POP? Thank you.

I think that we are going to be partnering, we are going to look at both possibilities, of course. We prefer to do it ourselves, but I think that we have become more flexible in partnering with the OSETs. Is it OSETs? Yes.

I think Dan will have a follow-up question, Dan Heyler from Bank of America, Merrill Lynch. Dan Heyler – Bank of America Merrill Lynch: Just very few...

I thought you asked this question.

This is a follow-up... Dan Heyler – Bank of America Merrill Lynch: Very short housekeeping question for Elizabeth. You can take a break and I’ll keep it short. So could you walk through your industrial products, what’s in that category? I think I heard you say earlier communications look strong and I think I kind of heard some of the communications or mobile-related strength was also helping drive industrial. So I wanted to understand, what’s in industrial that’s growing so strongly? Thanks.

Lora, will you answer what is included in industrial or you... Dan Heyler – Bank of America Merrill Lynch: That’s growing strongly.

When you say including industrial, such as Power IC, MCU, data converters, flash controller, VRD, MEMS, and smartcards. Dan Heyler – Bank of America Merrill Lynch: I guess you’re not putting the power management and communications?

Yes. Dan Heyler – Bank of America Merrill Lynch: Okay.

Because this is generic. It’s standard. Dan Heyler – Bank of America Merrill Lynch: Okay, got it. And the second classification I think perhaps I wanted to ask, on your definition of foundry, obviously the lines are getting blurred now. I think most of the capital equipment companies include Samsung and their concept of foundry. I know that it’s both on IDM as well as a foundry as well as an equipment company. So perhaps in your definition going forward, whether or not you could talk about foundry growth, incorporating your largest competitor, Samsung, when you’re talking about forecast, is that something that you would entertain? Thanks. You’re frequently talking about the semiconductor forecast, which, in fact, is not relevant to your forecast. What is important is your perception of the foundry growth industry. But your forecasts are excluding Samsung. I’m wondering, going forward, if we could have your forecast of the foundry growth, including Samsung? Thank you.

I don’t think our forecast excludes Samsung. I think for Samsung’s semiconductor part – well, for semiconductor, we even include Samsung’s memory. And for the semiconductor X memory, we include Samsung’s system LSI in our forecast. Yes. Dan Heyler – Bank of America Merrill Lynch: Thank you.

Is his question whether our foundry forecast includes Samsung?

Yes.

I think it does.

Yes, we do. Yes, we do. We do.

Yes, it does. Dan Heyler – Bank of America Merrill Lynch: Just Samsung’s foundry business or their Logic business overall?

Their what? Their Logic business. Dan Heyler – Bank of America Merrill Lynch: Overall? Okay.

Their Logic business. Well, I don’t think they do any memory foundry, do they? Dan Heyler – Bank of America Merrill Lynch: They have their own products in Logic. They also sell products into the merchant market and they also have a dedicated foundry business.

I think our numbers include, their, Samsung’s – our foundry numbers include Samsung’s foundry numbers. Now, if they make the products for themselves, then we don’t include that.

That’s right. Dan Heyler – Bank of America Merrill Lynch: Perfect. Thank you.

Next question goes to Citigroup’s Roland Shu. Roland Shu – Citigroup: Thank you. I think my question is for Lora. Lora, can you talk about the Potomac business since that was one of the strengths in your 3Q? How about the momentum in 4Q? And what’s the application for this new Potomac in 3Q? Thank you.

I think this question coming from the – we have said third quarter revenue was exceeding guidance partly because we have higher mask revenue, right? Looking to fourth quarter, mask revenue overall will be less than third quarter. There will be a decline in mask. However, the new tape-out mask will not decrease. It’s the rapidity tape-out will reduce a little bit. Mask business has been a very good business for TSMC and it has very good margin as well.

Another follow-up question coming from the floor that goes to Goldman Sachs’ Donald Lu. Don Lu – Goldman Sachs: Chairman, I’ll take the opportunity to be asking more a long-term question. As Moore’s Law going forward to 26-nanometer, from your discussion with your customers, do you think that the absolute growth of the high-end revenue, that the leading-edge revenue will continue to grow at the same pace because of mobile computing? Or we are going to see us, like people are more hesitant to migrate after 20-nanometer, which seems to be having an inflection point?

I think, yes, the leading-edge revenue for each generation of leading edge will continue to grow as Moore’s Law progresses. For instance, our 28-nanometer revenue is – well, while it’s leading edge, is now ahead of our 40-nanometer at the same stage. So I anticipate that 20-nanometer will be the same way. So I think that will continue. Now, of course, you didn’t ask about – nobody asked about how important EUV is, how important 450-millimeter is. They are very important. I mean, EUV I think is the only economic way of doing – I won’t say 10, but surely it will be the only economic way of doing seven. Even a 10, if we have a good EUV, high-throughput EUV, I think that our costs will be in good shape, will be in better shape. Of course, we can use double patterning, triple patterning, quadruple patterning, but those we would like to avoid. And to avoid them depends on getting ASML to succeed with their high-throughput EUV. Now likewise, 450-millimeters, that’s going to be another impulse on cost reduction, I think. And I think that will cut in at – 450-millimeter will cut in at 7-nanometer. It may cut in earlier. I think that Intel is talking about cutting in at 10-nanometer, but my feeling is that it will cut in at seven.

Okay, in the interest of time, I think we will just allow one last caller and we will give the venue to the call. Operator, please proceed.

The next question is from Steven Pelayo from HSBC. Steven Pelayo – HSBC: Great, thank you. Just a question on 28-nanometer. TSMC is much larger than its competitors. It’s going to have 20% of revenues in the fourth quarter from 28-nanometer when many of your smaller competitors are still struggling to get their first 5%. So for now, you’re just dominating this space. The competition is trying to get more aggressive there. I’m curious what you think about the total capacity out there and if the competitive environment is going to be more intense maybe by mid next year at 28-nanometer. Do you have any thoughts on that?

The total industry, foundry industry capacity on 28? Well, I think it’s quite large. But frankly, I think that in – well, I know that in oxynitride, which is equivalent to our 28LP, our 28LP is oxynitride, I think that our competitors have produced pretty good yields. Not nearly as good as ours, but good enough for them to sell. I think so. But on the high-K metal gate, which is our 28HP and our 28HPM, I think that we will be the only one that has effective capacity. Effective capacity, I mean, capacity that you can sell, that customers will accept. I think that there will be the only one on 28-nanometer high-K metal gate for quite a long time. And by that, I mean two years maybe. Steven Pelayo – HSBC: Well, okay. And then one follow-up question, which is I’m curious about your customer discussions going on now. The perception is that Samsung’s probably going to have some free capacity available maybe second half of 2013, 2014, and maybe they’re starting to engage more of your traditional customer base. Are you hearing that back from your customers, the potential that they may be being offered capacity elsewhere?

Question is, Samsung may have extra or free capacity at 28-nanometer starting 2013 and 2014. Have we heard anything from our customers that Samsung has approached them and want to engage them?

So they will use the excess capacity to invade our customers? Is that your question? Steven Pelayo – HSBC: That’s my concern, yes.

I mean, if I were Samsung, I would certainly do it. So it’s a question of whether we can prevent them from successfully doing it. Well, then certainly if you want me to predict the outcome, I will predict to you, but you have to wait for a while to see the final outcome. I have no doubt what the final outcome will be.

Steven, this is very cheerful answer to your question and thus a very good ending for our – today’s conference and conference call. Steven Pelayo – HSBC: Thank you.