Morgan Stanley has flagged a potential 10 percent revenue decline for Taiwan’s tech hardware sector this year, as a sharp appreciation of the New Taiwan dollar begins to dent the earnings power of major exporters.
In what appears to be the first such warning from a major foreign brokerage, the US investment bank said the currency’s strength — fueled by foreign capital inflows and expectations of US interest rate cuts — is compressing profit margins for manufacturers with heavy exposure to US dollar-denominated revenues.
The local currency has surged about 10 percent against the greenback over the past quarter and yesterday breached the NT$29 level, closing at NT$28.828 versus the US currency, the strongest in more than three years, central bank data showed.
Photo: CNA
The rapid appreciation poses a particular threat to Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world’s largest contract chipmaker, with Morgan Stanley semiconductor analyst Charlie Chan (詹家鴻) estimating a 3 percentage point hit to its gross margin and a cut to TSMC’s gross margin forecast from a range of 58 to 59 percent to a range of 55 to 56 percent.
The brokerage revised downward TSMC’s earnings per share (EPS) forecast by 6 percent for this year and 12 percent for next year to NT$55.01 and NT$64.61 respectively.
Still, Chan reiterated an “overweight” rating and a target price of NT$1,288 for TSMC, citing a historical correlation between a stronger NT dollar and rising foreign ownership of TSMC shares.
The stock edged up 0.46 percent to close at NT$1,090 in Taipei trading yesterday.
“Investor sentiment may remain resilient,” Chan said, adding that despite near-term pressures, foreign investors tend to view NT dollar strength as a positive signal for valuation multiples.
Beyond TSMC, the impact would be more broadly felt across the hardware sector.
Sharon Shih (施曉娟), another Morgan Stanley analyst, warned that more than 90 percent of Taiwanese tech firms under Morgan Stanley’s coverage generate more than half of their sales in US dollars, while bearing cost structures largely in NT dollars due to domestic manufacturing bases.
Companies such as camera lens suppliers Largan Precision (大立光) and Genius Electronic Optical (玉晶光), as well as flat-penal makers Innolux (群創) and AU Optronics (友達), are among the most exposed, as rising local input costs collide with diminishing export revenues, Shih said.
While many firms adopt natural hedging strategies — matching revenue and cost currencies — the steep appreciation of the NT dollar leaves limited room to absorb shocks for companies heavily reliant on Taiwan-based production, she said.
Should the NT dollar stay in the range of NT$29 to NT$30 against the US dollar through the rest of this year, Morgan Stanley projects a 5 to 10 percent downside risk to full-year revenues for affected firms, Shih said.
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