ôIt means we have abundant resources to fund our business but the question is how do you use it effectively,ö she says.
This is a question that is key to the profitability of the worldÆs largest dedicated semiconductor foundry, which makes semiconductor chips for third-party designers and invests some $2 billion a year in its business. TSMC is TaiwanÆs largest listed company and accounts for about 9% of the benchmark TAIEX index.
TSMC was set up in 1987 by its visionary founder Morris Chang to make chips at a time of restricted capacity for design companies that either could not or did not want to invest the huge sums required to build their own capacity. Not everyone was convinced the model would work. Integrated device makers such as Intel and Texas Instruments turned Chang down when he approached them for start-up capital, telling him the model was not viable.
Nothing could be further from the truth. ItÆs a model that has been hugely successful, growing into a $10 billion dollar business. Other foundries have sprung up but TSMC has a commanding 50% of the market.
Debate over the future of the model continues with technology research group Gartner predicting that almost half of the fabless chip design companies that make up 75% of TSMC customers will disappear by 2010. Meanwhile the Fabless Semiconductor Association believes that most chip manufacturers save for the very big ones like Intel and AMD will go fabless.
Ho says that the model will continue to be successful because she believes it is the best allocation of resources. ôWe take the capacity risk û the huge asset burden, while they take the product and marketing risk û thatÆs our business model.ö The key to success she says is to be able to judge the time in the cycle when to invest to ensure maximum capacity utilisation.
ôHow we manage our investment is very critical to the success of both ourselves and our customers. There is a very high correlation between our companyÆs profitability and utilisation rates û if you donÆt utilise your capacity your margin declines.ö
While the question of timing is largely taken by the business managers and the CEO backed up by the companyÆs research teams, HoÆs contribution is to ensure that key performance indicators are met in terms of guaranteeing that the right amount is invested û not too much or too little û and to make sure the return on investment meets the companyÆs long-term financial goal of a return on equity (ROE) of 20% across the cycle. Why 20%? ôWe believe that any company that can sustain an ROE of 20% over the long term in this industry will be viewed as a very good company,ö says Ho.
She says the most important role of the CFO is to create shareholder value. ôYou need to ensure that the companyÆs strategy fits shareholder interests. The CFO should act as a bridge between investors and the company. You need to understand what investors are looking at and to communicate this to the management team and to make sure they are doing the right things to create shareholder value.ö
Ho says that she differs from CFOs in the US who tend to spend at least 20% of their time on the road meeting investors. Although she sees investors when they come to Taiwan, Ho only makes two trips a year to the US and Europe. ôMy CEO wants me to focus on driving company performance, making sure we have good transparent financial reporting, good compliance and corporate governance and deliver shareholder value.ö
Investors seem to approve of this approach. TSMCÆs American depositary receipts (ADRs) are listed on the New York stock exchange and are the most heavily traded of the Asian ADRs, and among the top 10 most heavily traded ADRs on the exchange. About 70% of TSMC shares are held by foreign institutions and corporations while the remaining 30% is held by Taiwanese retail and institutional investors. ôSince raising our dividend yield to 5% we have attracted more local institutional investors.ö According to Ho, one fund manger told her that TSMC was a core holding in its value funds for its dividend yield and also in the growth funds for its rapid growth.
Over the past 10 to 15 years prior to 2005 TSMC had been growing at a compound annual growth rate of 25% û both above and below the line. More recently growth has slowed to 10%-15%. ôBut 10%-15% growth for a $10 billion company û thatÆs quite nice growth,ö she says.
TSMC has expanded largely through organic growth and only flirted briefly with M&A in 2000. It bought two semiconductor makers and increased capacity for its clients only to see demand fall away dramatically the following year when the dotcom bubble exploded. TSMCÆs revenues fell 25 % that year but were still better than the industry average, which underwent a decline of 35%.
In the past few years Ho says TSMC has been looking for ways to boost top line and bottom line growth. ôA lot of new initiatives are being considered by the company û so we have spent a lot of time assessing them and looking at how to drive financial returns and utilise our cash better.ö
Ho has spent much of her time recently working with one of the companyÆs founding shareholders, the Dutch electronics giant Philips, to buy back the remaining 16% of TSMC shares it holds and cancelling them.
ôThis enables us to get rid of the overhang caused by the PhilipsÆs shares and helps us better utilise our cash,ö she says.
TSMC has already bought half of its remaining 16% holding and is committed to spending another $1.5 billion on buying back shares from Philips this year. This leaves shares worth $2.7 billion remaining, which Ho said TSMC will either buy back or find an institutional buyer. In recent weeks TSMC has bought back 182.23 million shares or 0.69% of the companyÆs shares.
As to other ways of using cash, Ho says the company will gradually increase its dividend payout from its present level of 5%. At the same time the company has taken pains over the past two years to improve the way it invests its cash. ôWe have a very rigid policy as to what we can and cannot invest in.ö
TSMC uses three professional investment banks as investment advisers and only invests in investment-grade fixed income instruments. ôAs our business is very cyclical we do not want to take risks with financial investments. We never invest in equity,ö she says.
Despite the companyÆs considerable success, Ho vividly remembers her darkest moment. ôIt was when our chairman asked me in 2001 [when the dotcom bubble burst] what is our breakeven point ûat what level do we start losing money? Fortunately I havenÆt heard that (question) for a long time.ö
This story first appeared in the November issue of FinanceAsia magazine.
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