Special | Zhang Jingshu
Buffett and Zhang Zhongmou both advocate the focus principle and have achieved the pinnacle in their respective fields, becoming "partners", which has attracted the attention of capital market .
In the third quarter of 2022, Buffett bought more than US$4 billion in TSM, with an average payment price of about US$70-80 per share. Just as he waited for decades to buy Coca-Cola , his relationship with the field of semiconductor may be longer. Ten years ago, Berkshire briefly "connected" with Intel. Now Buffett is buying TSMC, a semiconductor chip manufacturer. Has the logic of betting on the semiconductor industry changed? In addition, although TSMC is both profitable and growth-oriented, it is still worth discussing whether it is worth 15 times the valuation.
Buffett's relationship with semiconductors
1967, Buffett's partnership with investment company has outperformed Dow Jones Index for ten years, completed active intervention in Sanborn maps, and realized the liquidation and release value of Dempster Mill. At the same time, he has earned $30 million in capital gains on the event arbitrage of salad oil for American Express , and also won 5% of Disney, gaining fame in the industry, and is planning to organize the first graham super investors' California party.
After a friend introduced him, he met Rosenfield, the top American liberal arts college - Glinnell College investment fund, and took his wife Suzy to attend an passionate speech by Martin Luther King , which was shocked. He became one of the trustees of Grinnell College and also met the founder of Intel through Rosenfield, Mr. Robert Noyce (Robert Noyce). It was an era when the semiconductor industry was in its infancy, and Buffett also watched Intel (originally called NM Electronics) more than 10,000 times from its listing.
In 1993, he met Bill Gates . Gates recommended two stocks : Microsoft and Intel, one soft and one hard. From now on, including dividend , Intel has increased by 13 times and Microsoft has increased by 100 times.
In the 18th year after he met Gates, Berkshire bought Intel's stock for the first time: in the third quarter of 2011, Berkshire bought Intel at $20 per share, and sold all at $24 per share in the fourth quarter; in the first quarter of 2012, Berkshire bought Intel at $24 per share, and sold again at $28 per share in the second quarter. It was obvious that Berkshire had no "faith" about Intel at that time.
It has been another ten years since Berkshire last invested in Intel in the semiconductor field to now buying TSMC, a semiconductor chip maker.
Zhang Zhongmou's business empire ambition
As of the close of November 23, TSMC's market value was US$425.1 billion and Intel was US$123.1 billion. One TSMC is equal to 3.45 times Intel. Intel is now not as high as 1/3 of TSMC's rising stars, and its market value has been repeatedly surpassed by the "thousand-year-old second" AMD (American Chaowei Semiconductor Corporation). Why? Where is the excellence of TSMC?
Speaking of TSMC, we must talk about its founder Zhang Zhongmou. In order to avoid war, Zhang Zhongmou traveled to mainland China and Hong Kong since he was a child. Under the introduction of his uncle, he was able to study for undergraduate degree at Harvard . He then transferred to MIT to study mechanical engineering. After getting a master's degree, he wanted to study for a doctorate, but failed the doctoral qualification exam twice in a row, so he had to go to work. Because of a dollar dispute (it's really for a dollar!), he went to a semiconductor company, gave up Ford, and then found that the semiconductor company's technology was not good, and then switched to Texas Instruments (TI). He works during the day and teaches himself for several hours at night. At TI, he spent 4 months to achieve a yield of about 0% through process optimization to 20%, which is twice the yield rate of IBM at that time.As a result, Zhang Zhongmou became a star manager, managing a team of more than 20 people, and was sent by Texas Instruments to study for a doctorate at Stanford, and he obtained his doctorate in 2.5 years.
Someone once asked him how he got his doctorate in such a short period of time. He said one word, and this word is the secret of their respective success - "Focus" written on paper when Buffett and Gates first met. He basically did nothing else when he was studying for a doctorate.
After graduating from doctoral degree, he returned to TI. At that time, these manufacturers would generally require a relatively high operating profit to help customers produce, and he believed that economies of scale are more important, so he directly lowered the profit of and was even willing to bear the losses at the beginning to ensure that demand became larger and larger. Then, using learning curve to lower costs and start making profits, increase output, obtain market share , and form a virtuous cycle. He used this method to turn Texas Instruments into one of the largest semiconductor players.
Many people think that he will become CEO (CEO), but unfortunately he did not get what he wanted for various reasons. In 1978, he was transferred to the consumer group. After five years of use, he could not turn a profit. He was directly "refrigerated" by the management of Texas Instruments. He knew that he was not suitable to analyze customer preferences because the changes were too fast, and the work in the manufacturing industry was as long as it was low-cost and high-quality, which was in line with his mechanical engineering background and circle of competence. He knew that there was no hope at TI, so he went to General Instruments as COO (COO) and gave up the position within 18 months.
Then, he returned to Taiwan, China and took the lead in establishing TSMC. At that time, TSMC's 50% equity was government-owned, and 50% of the equity required Zhang Zhongmou to find investors, and the final investor was Philips . At that time, Zhang Zhongmou had no equity, but now his net worth is US$2.1 billion, thanks to his subsequent purchase of TSMC stocks. At that time, Zhang Zhongmou was already 56 years old. If he failed, he would never have the chance to make a comeback.
At this time, the gross profit margin of wafer production is only 5%. Everyone uses the IDM (integrated integrated production) model. The design and manufacturing of chip are integrated. At that time, the AMD boss even said that it was not the man who had no ability to create. IDM will only order companies that simply do wafer manufacturing (also known as Fab) when the capacity of is insufficient, and once the capacity is returned, it will immediately take the order back to its own production. Relying on his experience at Texas Instruments, Zhang Zhongmou knew that many IC designers wanted to go out to start businesses, but they were helpless because they didn’t have Fab to help with production, and they didn’t have the ability to build factories by themselves.
So he did not do venture capital for these design companies, but became their enabler, taking all the orders of these small companies for production, hoping for a virtuous cycle - more money comes in, better production and manufacturing capabilities, better product quality, attracting more small companies, having more money to produce better equipment and improve process flow, and so on.
Their core philosophy is to always empower consumers, never use their own brand, and all brand names are used by customers. They accompanied a group of Fables' giants to grow, including Qualcomm , Broadcom , Nvidia, etc., which greatly reduced the capital expenditure needs of these companies. For example, Nvidia's entire life cycle only demanded $20 million from the market.
The first rule of Moore's Law is to double the chip size every two years; the second rule of Moore's Law is to double the manufacturing cost every four years, so a sentence from Zhang Zhongmou classically summarizes the business model of this industry - you are like running on a treadmill, and once you stop, you will fall behind. This principle breaks Intel's "Tita Law" (Tita Law refers to the interlocking design and production, overlapping and upgrading, firmly holding on to the commanding heights of technology, leaving opponents with no way out), and let Intel fall from a high place.
Before and after the financial crisis, Zhang Zhongmou saw the huge opportunity brought by mobile Internet and wanted to seize it.He did do it - he won the competition and secured the big customer of Apple (it was said that Intel rejected Apple at that time), which made Intel, the boss of many years, gradually show signs of fatigue.
15 times P-earnings ratio
worth "copying homework"?
In this quarter, both Buffett and Zhang Zhongmou, who both advocate Focus and have achieved the pinnacle of their respective fields, became "partners", which attracted market attention.
We might as well look at TSMC as an investment target from two perspectives: profitability and growth.
From Figure 1, we can see that in the past 16 years, TSMC has been catching up from 1/3 of Intel's scale, and now it has tied its revenue scale and will definitely surpass Intel in the future. After all, TSMC, as a platform-like existence, has gathered the power of the entire semiconductor industry to compete with Intel in the last pride of the IDM model. In fact, since Pat Kissinger became the top leader of Intel, he has also been exploring the separation of design and manufacturing and letting manufacturing go to third parties. After all, dragging on the process again and again means giving up the market - AMD seized this miracle and achieved a counterattack against Intel.
At the same time, we can see from Figure 2 that the gap in operating profit margins between Intel and TSMC has also been widening in the past few years. From the perspective of profitability, TSMC's operating profit margin is 40%+, and the free cash flow rate ( free cash flow /revenue) is about 25%. Moreover, this free cash flow is achieved while the company has been vigorously expanding its production capacity. If capital expenditure is reduced, it will be even more amazing. Correspondingly, AMD's highest operating profit margin in history (realized in 2021) is only 19%, and TSMC's peer Global Foundries (Global Foundries, which was originally AMD's manufacturing end, operated independently after spin-off and went public) has a free cash flow return of only 20%. Therefore, in a sense, the best choice for betting on the semiconductor industry is TSMC.
The remaining question is, is such a company worth a 15-fold price-to-earnings ratio? Considering that the current semiconductor cycle is still in a downward stage, as a former practitioner in the industry, the author would like to remind all investors who look at semiconductors that when this industry is in a big downward cycle, the stock price of can fall to a completely desperate situation.
(Disclosure of interests: I and my investment company do not hold TSMC shares. This article has been published in "Red Weekly" on November 26. The views in the article only represent the author's personal opinion and do not represent the position of "Red Weekly". The mention of individual stocks is only for example analysis and no recommendations are made.)
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