analyst note tm 1the esg risk rating assessment is a

Morningstar Equity Analyst Report | Report as of 15 Oct 2021 04:29, UTC | Reporting Currency: TWD | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. of 19

© Morningstar 2021. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Moat TrendTM Uncertainty Capital Allocation ESG Risk Rating Assessment1

112.56 USD14 Oct 2021

143.00 USD15 Oct 2021 04:19, UTC

0.79 USD —

Wide Stable Medium Exemplary ;;;;;6 Oct 2021 05:00, UTC

Price vs. Fair Value

0

50

100

150

200

Fair Value: 143.0015 Oct 2021 04:19, UTC

Last Close: 112.56Over ValuedUnder Valued

2016 2017 2018 2019 2020 YTD

1.20 1.42 1.15 1.45 1.15 0.79 Price/Fair Value

30.50 41.95 -3.52 62.86 90.64 4.23 Total Return %

Morningstar Rating

Total Return % as of 14 Oct 2021. Last Close as of 14 Oct 2021. Fair Value as of 15 Oct 2021 04:19, UTC.

Contents

Analyst Note (15 Oct 2021)

Business Description

Business Strategy & Outlook (15 Oct 2021)

Bulls Say / Bears Say (14 Oct 2021)

Economic Moat (14 Oct 2021)

Fair Value and Profit Drivers (14 Oct 2021)

Risk and Uncertainty (14 Oct 2021)

Capital Allocation (15 Apr 2021)

Analyst Notes Archive

Financials

Research Methodology for Valuing Companies

Important Disclosure

The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of

Conduct Policy, Personal Security Trading Policy (or an equivalent of), and

Investment Research Policy. For information regarding conflicts of interest, please

visit: http://global.morningstar.com/equitydisclosures.

The primary analyst covering this company does not own its stock.

1The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk

Rating.

TSMC Q3 Profits Top Our Expectations. Strong Long-Term

Outlook Trumps Near-Term Supply Chain Woes. Analyst Note Phelix Lee, Equity Analyst, 15 Oct 2021

We slightly raise our fair value estimate for Taiwan Semiconductor Manufacturing, or TSMC, to TWD

800 per share (USD 143 per ADR) from small increases in 2022-23 revenue, partially offset by

incremental capital expenditure from the company’s newly confirmed Japan plant. The stock continues

to be undervalued in our view, as we think there is still upside in its capital expenditure budget, a proxy

of its future revenue, and blended ASP after customers become receptive to price hikes and making

prepayments to secure capacity. We now think the chip shortage will remain for the whole of 2022, as

structural growth from the likes of data centers, computing systems, and 5G-related content prevent the

company from fully clearing backlogs from industrial applications. Short-term corrections in smartphone

and PC shipments are not enough to dampen these trends that TSMC is enjoying, in our view.

Management confirmed a fab in Japan, subject to board approval. The fab will focus on specialty

applications based on 22nm and 28nm processes, which we believe to be mainly image sensors and

high-end automotive microcontrollers. Capacity and budget have yet to be finalized, so for now, we add

USD 8 billion (TWD 220 billion) to our 2022-23 capital expenditure forecast. Construction is slated to

start in 2022 and production to begin in late 2024. The project is likely to be partly funded by customer

prepayments and subsidies from the Japanese government. With the Japan fab confirmed, we think

there is a higher chance of another fab in Europe, possibly posing another USD 8 billion upside to 2023-

25 capital expenditure, which is included in our bull-case capital expenditure assumption.



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Management treaded carefully regarding price hikes by only saying customers are willing to pay more

for the additional value that TSMC can offer in both legacy and leading-edge processes.

Business Strategy & Outlook Phelix Lee, Equity Analyst, 15 Oct 2021

Taiwan Semiconductor Manufacturing, or TSMC, is the world’s largest dedicated contract chip

manufacturer, or foundry. It makes integrated circuits, or ICs, for customers based on their proprietary IC

designs. The firm has long benefited from semiconductor firms around the globe transitioning from

integrated device manufacturers to fabless designers. TSMC, like all foundries, assumes the costs and

capital expenditures of running factories amid a highly cyclical market for its customers. Such cyclicality

stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand

that can result in underutilization during downturns that hampers profitability.

The rise of fabless semiconductor firms has been sustaining the growth of foundries, which has in turn

encouraged increased competition. However, most of these newer competitors are confined to low-end

manufacturing due to prohibitive costs and engineering know-how associated with the leading-edge

technology. To prolong the excess returns enabled by leading-edge process technology, or nodes, TSMC

initially focuses on logic products, mostly used on central processing units, or CPUs, and mobile chips,

then focuses on more cost-conscious applications. The firm's strategy is successful, illustrated by the

fact it's one of the two foundries still possessing leading-edge nodes when dozens of peers lagged.

We note two long-term growth factors for TSMC. First, the recent consolidation of semiconductor firms

is expected to create demand for integrated systems made with the most advanced nodes. For example,

major customer Nvidia is acquiring Arm to consolidate intellectual property and bolster high-end

offerings in data centers, artificial intelligence, or AI, and the "Internet of Things". Second, organic

growth of AI, Internet of Things, and high-performance computing, or HPC, applications may last for

decades. AI and HPC play a central role in quickly processing human and machine inputs to solve

complex problems like autonomous driving and language processing. Cheaper semiconductors have

made integrating sensors, controllers and motors to improve home, office and factory efficiency

possible.

Bulls Say Phelix Lee, Equity Analyst, 14 Oct 2021

u TSMC should consistently earn higher gross margins than competitors thanks to its economies of scale

and premium pricing justified by cutting-edge process technologies.

u TSMC wins when customers compete to offer the most advanced processing systems using the latest

process technologies.

u TSMC will benefit from more semiconductor firms embracing the fabless business model.

Bears Say Phelix Lee, Equity Analyst, 14 Oct 2021

Sector Industry

— —

Business Description

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Competitors— — Intel Corp INTC Samsung Electronics Co Ltd 005930 United Microelectronics Corp 2303

Fair Value143.00Uncertainty : Medium

Last Close112.56

Fair Value65.00Uncertainty : High

Last Close53.90

Fair Value79,000.00Uncertainty : High

Last Close69,400.00

Fair Value38.00Uncertainty : High

Last Close56.70

Economic Moat Wide Wide Narrow None

Moat Trend Stable Negative Stable Stable

Currency USD USD KRW TWD

Fair Value 143.00 15 Oct 2021 04:19, UTC 65.00 4 Jan 2021 17:35, UTC 79,000.00 9 Apr 2021 09:14, UTC 38.00 29 Jul 2021 03:09, UTC

1-Star Price 193.05 100.75 122,450.00 58.90

5-Star Price 100.10 39.00 47,400.00 22.80

Assessment Under Valued 14 Oct 2021 Under Valued 14 Oct 2021 Fairly Valued 14 Oct 2021 Over Valued 14 Oct 2021

Morningstar Rating QQQQ15 Oct 2021 04:24, UTC QQQQ14 Oct 2021 21:21, UTC QQQ14 Oct 2021 10:51, UTC QQ14 Oct 2021 13:26, UTC

Analyst Phelix Lee, Equity Analyst Abhinav Davuluri, Sector Strategist Kazunori Ito, Director Phelix Lee, Equity Analyst

Capital Allocation Exemplary Standard Standard Standard

Price/Fair Value 0.79 0.83 0.88 1.49

Price/Sales 11.32 2.87 1.50 3.65

Price/Book 8.25 2.57 1.72 2.91

Price/Earning 30.04 11.98 14.62 19.16

Dividend Yield 1.62% 2.55% 4.33% 2.82%

Market Cap 527.66 Bil 212.02 Bil 467,049.95 Bil 698.43 Bil

52-Week Range 83.16—142.20 43.61—68.49 56,000.00—96,800.00 29.40—72.00

Investment Style Large Core Large Value Large Value Large Core

u Although TSMC is the foundry leader, each generation of process technology matures and commoditizes

quickly, forcing the company to deal with pricing pressure.

u TSMC’s planned Arizona factory is not enough to rekindle a U.S.-based supply chain to support its

operations.

u Samsung has significantly improved its foundry offerings and is now arguably on a par with TSMC.

SMIC and other state-supported Chinese foundries also lurk as potential threats.

Economic Moat Phelix Lee, Equity Analyst, 14 Oct 2021

We believe TSMC's wide moat stems from its cost advantage and intangible assets, which are realized

from its leading position in process technology, or nodes. TSMC's long-standing leadership in process

advancement comes from its ability to correctly and consistently prioritize the right areas in which to

innovate for nodes, while maintain fiscal discipline. Process technology leadership not only enables

TSMC to improve power, (faster) performance and (smaller) area, or PPA, and the cost of each chip,

which are critical for the performance of computing devices, but also justifies higher prices than its



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peers. As such, we believe that its leading position in the advanced processes will contribute to 1)

attracting and retaining more customers, 2) more stable utilization of ever-expanding production

capacities and lower production costs, 3) generating a higher return than its peers because of the cost

advantage, and as a result, 4) ensuring sufficient profits to fund research and development, or R&D, and

capital expenditures on subsequent nodes. This virtuous cycle of intangible assets brought by heavy R&

D and cost advantages brought by better PPA reinforce each other, preventing smaller peers catching

up, in our view. In fact, we acknowledge TSMC has been leading nodes' advancement and maintaining

over 50% market share since the early 2000s, and its gross and operating margins have been at least

twice as much as that of its closest peers for years.

We upgrade TSMC's economic moat rating to wide from narrow as we believe the gap between TSMC

and smaller peers has widened. Because of technical hurdles, node advancement has been growing

more costly, prompting some smaller players to give up catching up with the industry leaders and other

firms to divest. While there were six companies with cutting-edge nodes when the industry introduced

16/14nm fabs around 2015, there are currently only two, TSMC and Samsung Electronics, selling 5nm

chips, as smaller peers, such as Globalfoundries and UMC decided not to introduce sub-14nm

processes. TSMC's historical and projected return on invested capital, or ROIC, stable market share, and

superior margins all support our wide moat rating.

Multiple technical barriers and high capital requirements form TSMC's wide moat. Semiconductor

manufacturing is inherently capital-intensive. While for every foundry each successive node requires

exponentially more R&D and capital expenditures; customers are only willing to pay a premium to first

movers. Though node advancements are viewed as evolutionary, manufacturing methods may change

drastically in every few generations of process technology. In CPUs and mobile system-on-chips, or

SoCs, where adoption of new nodes first occurs, planar processes are only used up to the 22/20nm

process. Fin field-effect transistor, or FinFET, is used from 16/14nm onward, and is expected to be

employed on TSMC's 2nm and Samsung's 3nm processes. Gate all-around, or GAA, is expected to

succeed FinFET. Successive technologies improve electrical performance and miniaturization to fit as

many transistors as possible onto chips; thus improving performance relative to costs. In a nutshell,

breakthroughs in semiconductor manufacturing aim to improve PPA.

FinFET is a recent technology that eliminated most foundries from advancing further. Only the largest

foundries--TSMC, Samsung, GlobalFoundries, UMC, SMIC, and more recently Intel as a new entrant to

the space--possess FinFET-related intangible assets. Yet only TSMC, Intel, Samsung and

GlobalFoundries can meet customers' stringent constraints in mass production. UMC has suspended

expansion of 14nm capacity while SMIC is still ramping up. Manufacturers that decide to halt FinFET R&

D have little choice other than divesting, like Panasonic did in 2019, Fujitsu's 12-inch operations in 2019

and IBM in 2014.



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GAA is the upcoming technology hurdle and major potential intangible asset that foundries must

overcome to master 3nm and later nodes. TSMC is reported to have implemented GAA from 2nm, with

mass production projected in late 2024. We do not expect foundries apart from Samsung to

commercialize GAA-derived products owing to prohibitive costs, with R&D alone estimated to exceed

USD 1 billion. The adoption of GAA should lead to better and more stable electrical performance even as

circuitries become more intricate. Currently, only TSMC, Intel, and Samsung have unveiled timetables to

introduce GAA-derived products. We think TSMC's dominant market share and strategy to focus on

high-end products put it in the best position to outspend competitors in terms of R&D to advance

through GAA and beyond.

Close relationships with industry giants help justify investments in process advancement. One of

TSMC's intangible assets is its strong relationships with leaders in multiple subsectors, like Apple in

mobile chips, Nvidia in graphic processors and Xilinx in reprogrammable chips. Combined with its

leadership in process technology, TSMC can readily justify hefty investments in new process nodes by

convincing customers to share detailed roadmaps, while smaller foundries have to build facilities first

and wait for orders that TSMC cannot fill. Over the decades, TSMC has helped AMD to maintain

competitiveness in PCs, Apple and Qualcomm to advance smartphone technology, and now also with

Nvidia, Marvell, Xilinx among others to develop AI, HPC and automotive electronics for the next decade

and beyond. TSMC's technological independence ensures its R&D efforts are customer-agnostic and

readily expanded to legacy applications as cost and reliability improve. An example would be Apple pays

a premium for being the first in 5nm chips in 2020, then the technology is projected to trickle down to

AMD's CPUs and NXP's automotive platform in 2021, followed by data center-, server-, AI processors

and so on. In contrast, without advance process technology, it is difficult for smaller foundries like SMIC

and UMC to convince customers to risk their own roadmap.

Open Innovation Platform nudges customers closer to TSMC. TSMC's OIP bridges intellectual property

owners with potential licensees. These licensees are typically TSMC's 400-plus customers outside the

top 10, comprising of about 30% revenue. OIP becomes more valuable for all users when intellectual

property owners join in search of potential licensees, and potential licensees look for solutions to

optimize their products. In 2019 alone, we estimate more than 10,000 products are manufactured with

intellectual property featured on the OIP. While other foundries have similar platforms, TSMC's

dominant market share and technical leadership would naturally gravitate users to its OIP. Even though

TSMC offers OIP for free, it indirectly benefits from licensees eventually placing foundry orders. In order

to keep licensees inside the ecosystem, the company releases some of its technical data--including

FinFET and GAA data--to intellectual property owners to entice them to base their future designs on it. It

also cooperates with top electronic design automation tool vendors like Cadence and Synopsys to

manage intellectual property libraries and generic product modules. This way, licensees would not use



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other foundries as the latter have different production parameters.

Fair Value and Profit Drivers Phelix Lee, Equity Analyst, 14 Oct 2021

Our base-case fair value estimate for TSMC is USD 143 per ADR, at which TSMC would be trading on a

forward price/book ratio of 9 times per 2022 estimates. We use a weighted average cost of capital of

8.9% to discount our forecast cash flow for TSMC.

We project the company’s top-line CAGR at 14.3% over the next five years. Even with its dominant

market share, we believe the company can deliver above-industry growth through a higher proportion of

more valuable 10nm to 2nm logic and 28nm to 12nm specialty products, which are currently only

produced by Samsung and itself at scale. We expect IoT and automotive applications are sources of

incremental demand in newer specialty products. In terms of node advancement, mass production of

3nm and 2nm are expected to begin in late 2022 and late 2024 respectively.

Gross and operating margins are expected to remain at about 50% and 40% respectively for the next five

years. While quarterly margins may fluctuate while the company ramps up production of a new node,

long-run margins should be stable, as we expect TSMC’s moat to support its pricing power for years to

come.

One recurring threat to TSMC's long-term growth is the loss of key personnel to competitors. In the past,

TSMC has managed the issue by offering above-average salaries to employees. But to counter Chinese

semiconductor companies that are poaching talent, TSMC rolled out a performance share scheme in

2021, which links financial performance and environmental, social, and governance, or ESG, initiatives

to staff remuneration. We think this better aligns employees' interest with more stakeholders. TSMC's

scheme is also one of Taiwan's first to include ESG goals.

Risk and Uncertainty Phelix Lee, Equity Analyst, 14 Oct 2021

TSMC operates in the semiconductor industry, which is one of the most cyclical ones. TSMC derives

about half of its revenue from the smartphone market. The industry alternates between shortages and

oversupply. Foundries cannot always raise prices during shortages yet have to deal with high fixed costs

in all downturns. Compared with its peers, TSMC’s earnings volatility was smaller with no EPS decline

larger than 20% in the past 10 years. We expect this to continue as a result of TSMC’s dominant share

in high-end products, and customers’ preference for TSMC as their primary (sometimes sole) foundry.

TSMC has client concentration risk, with the largest customer contributing 25% of revenue in 2020. We

believe Apple has been TSMC’s largest customer for the last five years, owing to consistent wins of A

series processors on multiple devices. Due to short product lifecycles, the possibility of Apple choosing

Samsung as the foundry for an upcoming chip will also linger.



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Currency risk is limited as most transactions are made in U.S. dollars. Intellectual property theft is a

major risk. The most high-profile incident was TSMC’s settlement with SMIC, in which the firm received

shares and cash from SMIC after a series of legal disputes from 2003 to 2009, as reported by Reuters.

Managing political risks has become integral to TSMC. It's susceptible to pressure from China and the

U.S. as it derives most of its revenue and operates factories in both countries. Barring a physical attack

on TSMC’s factories, we think the financial impact on TSMC is limited.

TSMC's expansion requires a lot of land, electricity and water. TSMC's land acquisition may be slowed

by objections from locals. The company works with government agencies to ensure supply of electricity

and water, and with suppliers to enhance its waste and water treatment systems.

TSMC has not publicized succession plans, despite both the chairman and CEO being over 65 years old.

Capital Allocation Phelix Lee, Equity Analyst, 15 Apr 2021

We rate TSMC's Capital Allocation as Exemplary, given its consistent excess ROIC and return on equity,

or ROE, figures, both averaging over 20% for the past decade. TSMC’s ROIC and ROE are far higher than

peers UMC and SMIC, with the latter averaging less than 10% over the last 10 years. TSMC’s earnings

are also more stable than peers, with 2009-19 EPS CAGR at 14.8% without major decreases (more than

20%) year on year, in contrast, UMC had four major decreases and SMIC had three in the same period.

We believe such impressive financial performance is evidence of management’s ability to expand

capacity without being distracted by short-term supply demand imbalances; and focus on cementing

long-term technological leadership instead of pursuing short-term opportunistic pricing during

shortages. Moreover, TSMC is more disciplined in expansion than peers. The company tends to spend

30%-50% of revenue on capital expenditures each year. In contrast, UMC and SMIC’s Capital

expenditures appear to be more arbitrary, with historical capital expenditures/sales ratios fluctuating

between 9% and 62% and between 31 and 150% respectively. TSMC also appears to match capital

expenditures with future demand better than its peers, with a more stable depreciation/sales ratio in

the mid-20s.

TSMC’s more stable earnings lead to more consistent dividends. The company has never stopped paying

dividends since its first distribution in 2004 (for 2003 earnings) and has never reduced dividends. In fact,

TSMC’s annual dividend per share has increased for six consecutive years with a payout ratio at around

50%, which is a feat given the industry’s cyclicality and heavy investments needed. The company has

two main shareholder return policies. The first is to at least maintain, if not increase, dividend per share

every year. The second is to prioritize dividends over share repurchases. Dividends have been paid

quarterly since 2019. We forecast dividends to increase to TWD 12 per share by full-year 2024. In

contrast, SMIC has never declared dividends since its IPO in 2004. UMC’s dividend history is marked



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with ups and downs in line with its earnings.

TSMC has not made material acquisitions in recent years. This is reasonable considering other foundries

look unattractive in the face of TSMC’s unparalleled manufacturing capabilities and it has no plans to

compete with customers in IC design or replace downstream packaging, assembly and testing firms.

Analyst Notes Archive

TSMC’s Possible New Fabs Affirm Our View It Is a Key Beneficiary in Electronics Upgrades Phelix

Lee, Equity Analyst, 15 Jul 2021

We maintain our fair value estimate for TSMC at TWD 760 per share with our forecasts unchanged. On

the chip shortage, TSMC affirms auto-related shortages should ease in third-quarter 2021, but it doesn't

change our view that broader semiconductor supply, especially industrial microcontrollers will remain

tight in 2022. To us, TSMC remains an attractive buy for being the main long-term beneficiary of

increasingly intricate semiconductors and computing systems. We think once TSMC shows it can

maintain gross margins above 50% after equipment in new capacity begins to incur depreciation

expenses when production starts, the stock would converge with our fair value.

TSMC kept its 2021 capex budget at USD 30 billion, and 2021 to 2023 aggregate budget at USD 100

billion. The USD 100 billion capex budget doesn't include two possible fabs. TSMC admits it's

performing due diligence on a potential Japan fab. The other possible site, reported by Digitimes, is

Dresden, Germany. We expect the proposed Japan fab will be responsible for specialty processes like

image sensors and memory products. A Japan fab should work well in our view, as it's close to TSMC’s

3DIC research and development center, which is working with TSMC’s raw materials suppliers. No

details were given regarding the Dresden site, but we think the location makes sense due to proximity

to TSMC’s auto customers and a major site of Siltronic, one of its silicon suppliers. Meanwhile,

equipment is scheduled to arrive at the Arizona fab in second-half 2022 and begin mass production in

first-quarter 2024. TSMC said it doesn't rule out Phase 2 in Arizona, but one prerequisite is whether

customers are willing to share costs associated with a global manufacturing footprint.

For third-quarter 2021, TSMC expects revenue to range between USD 14.6 and 14.9 billion, or 9.9% and

12.1% sequential growth. This is in line with our expectations and on track to meet our full-year revenue

estimate of TWD 1.6 trillion (USD 57 billion).

TSMC’s Capital Expenditure Hike Shows High Conviction in High-Performance Computing; FVE

Maintained Phelix Lee, Equity Analyst, 15 Apr 2021

We maintain our fair value estimate of TSMC at TWD 760 per share. The upside from a higher five-year

revenue CAGR forecast of 14% from 13.7% is largely offset by higher capital expenditures from 2021 to

2023 of USD 100 billion from our previous forecast of USD 80 billion. On the chip shortage, TSMC



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expects it to persist into most of 2022, but automotive-specific backlogs should ease in third-quarter

2021. We believe TSMC is well-positioned to enjoy favorable pricing as chip supplies won't fulfill

demand until second-half 2022 when TSMC and peers’ new facilities ramp up. Overall, we think TSMC

remains an attractive buy as it's the main beneficiary of devices and computing systems adopting

increasingly intricate semiconductor technologies in the long run. Rumors of Samsung encountering

production problems reinforce our view TSMC will continue to widen its lead compared with other

foundries, supporting our wide moat rating.

TSMC revised its 2021 capital expenditure budget to USD 30 billion, up from USD 25 billion-28 billion

three months ago, and days after it said total capital expenditures from 2021 to 2023 is set at USD 100

billion. The increase is justified by two factors. The first is the firm is seeing longer-term customer

commitments, especially in 3nm and 5nm nodes. We expect this may reflect: 1) Qualcomm’s decision to

return to TSMC for 2022’s high-end Snapdragon chips, after encountering supply issues after needing to

rehash older chips at TSMC, and 2) computing customers like NVIDIA, AMD leveraging new

architectures with newer process technologies. The second is a higher investment in specialty

technology, an example is 12nm or 16nm technologies used in communications and the "Internet of

Things". About USD 3 billion is allocated to this, which is comparable with total capital expenditures

incurred by small foundries like UMC and SMIC.

TSMC also revised its full-year top-line growth guidance to 20%, or TWD 1.61 trillion in 2021 versus

“midteens” in January.

TSMC Q4 2020 Profit Beats Expectations; Gives Upbeat Capital Expenditure, Long-Term Revenue

Outlook Phelix Lee, Equity Analyst, 15 Jan 2021

We raise our fair value estimate on TSMC to TWD 760 per share, or USD 136 per ADR due to better

prospects in high-performance computing, or HPC, and automotive markets, underpinned by the firm's

aggressive capital expenditure plans. Our fair value estimate corresponds to 33.6 times 2021 P/E. We

think the multiple is justified by a stronger EPS outlook by capturing potential cutting-edge HPC orders

from Intel, higher confidence in widening technology leadership through 3nm and later process nodes,

and leveraging the current shortage to migrate automotive customers to less-tight 12-inch capacity.

Spending was budgeted at USD 25 billion-USD 28 billion for 2021, over 50% higher than 2020, 80% of

which is spent on cutting-edge nodes like 3nm and 5nm process technologies. We think this lends

credence to market talk regarding Intel outsourcing cutting-edge processors to TSMC; in addition to

organic growth in artificial intelligence, data analysis and other HPC applications.

Growth does not stop at HPC systems. Smartphones and automotives are also multi-year drivers that

sustain the firm's growth. While the 5G smartphone upgrade cycle is priced in by the market, it may not

be the case. IPOs of lidar system providers Velodyne and Luminar in the U.S. have sparked hopes that

lidar systems can be as cheap as USD 300 by 2026, with Chinese lidar players like Hesai and Vanjee



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closely behind. TSMC is likely a manufacturer of the chips responsible for controlling autonomous

vehicles using data captured by lidar systems.

The high spending budget prompted concerns of TSMC’s balance sheet and dividends. Both do not

trouble us, as TSMC has over TWD 32 billion (USD 1.1 billion) net cash, enough to sustain two years of

dividends at current levels. Even if the company needs to raise debt, it can do so cheaply, evidenced by

its 2020 bonds issued at under 1.5% yield. The TWD is trading at a record high against the USD, which

only increases the attraction to raise debt.

Taiwan Semiconductor Extends Lead as King of Foundries; Upgrade Moat to Wide and FVE to TWD

540 Phelix Lee, Equity Analyst, 30 Nov 2020

We upgrade Taiwan Semiconductor Manufacturing's, or TSMC’s, moat rating to wide from narrow. The

moat change, accompanied by cost-of-capital assumption changes have led to a 38% increase in our fair

value estimate, now at TWD 540 per share, or USD 95 per ADR. We have changed our moat rating, as

the tech gap has widened between TSMC and small peers. Because of technical hurdles, node

advancement has been growing more costly, prompting smaller firms to give up. While there were six

companies offering cutting-edge process technology, or nodes, in 2015, there are currently only two,

TSMC and Samsung Electronics. We expect only the duo has the financial and technical resources to

continue introducing new nodes, and Chinese challengers like SMIC will take over 10 years to catch up

with node advancement, let alone replicate TSMC’s scale amid an unfavorable political climate. Our FVE

corresponds to 6.5 times the 2021 price/book ratio, close to the five-year high, which we still think is

justified by TSMC’s unprecedentedly large gap and strong pricing power against the competition. After

the stock rallied 45% year to date on 5nm prospects, Intel orders and an increase in remote work and

play, it appears moderately undervalued. We see heightening expectations of a near-term correction as

a main downward catalyst once customers are less worried about supply chain risk and coronavirus-

induced demand is mostly fulfilled. Any relief from the Huawei bans would be an upward catalyst.

We note two long-term growth factors for TSMC. First, the recent consolidation of semiconductor firms

is expected to create demand for integrated systems made with the most advanced nodes. For example,

major customer Nvidia is acquiring Arm to consolidate intellectual property and bolster high-end

offerings in data centers, artificial intelligence, or AI, and the "Internet of Things," or IoT. Second,

organic growth of AI, IoT and high-performance computing, or HPC, applications may last decades.

Taiwan Semiconductor’s Q3 Results Boosted by 5G and High-Performance Computing; Raising FVE

Abhinav Davuluri, CFA, Sector Strategist, 15 Oct 2020

Taiwan Semiconductor reported third-quarter results ahead of management’s guidance thanks to strong

demand for high performance computing, or HPC, chips and the ongoing ramp of 5G smartphones. This

was the first quarter the firm recorded 5-nanometer revenue, which we assume was primarily for A14



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processors for Apple’s latest iPad and iPhone 12. In HPC, we believe AMD server CPUs and Nvidia data

center GPUs are the primary growth drivers. Management reiterated its expectation for 5G penetration

in the high-teens and its 2020 capital expenditures guidance of $17 billion. With Intel’s latest 7-nm

delay, we suspect there could be more business for TSMC to capture at leading-edge nodes, with some

of Intel’s discrete GPUs likely to be outsourced to TSMC. We are raising our fair value estimate to $68

(TWD 391) per share from $51 (TWD 306) as we incorporate a superior near-term outlook, stronger

growth assumptions for TSMC’s HPC segment, and an updated USD to NTD exchange rate.

Third-quarter sales were $12.1 billion, up 29% in USD terms and 22% in NTD terms year over year.

Advanced process technologies (16-nm and below) accounted for 61% of wafer revenue, led by 7-nm

products such as Nvidia’s latest data center GPUs and AMD’s server and PC chips. By segment,

smartphone and HPC were up about 12% and 25% sequentially, respectively. Gross margins rose 40

basis points sequentially to 53.4% due to higher capacity utilization, partially offset by margin dilution

from the 5-nm ramp. Fourth-quarter sales are expected to be in the range of $12.4 billion to $12.7

billion. The 5-nm process is slated to account for 8% of total wafer revenue in 2020, and we expect the

process to cross the 20% threshold in 2021. This latest process remains margin dilutive and will take

around seven or eight quarters to reach the corporate average.

TSMC Taking Huawei Ban in Stride as Apple, AMD, and Nvidia to Drive 2H 2020 Growth; Raising

FVE Abhinav Davuluri, CFA, Sector Strategist, 17 Jul 2020

TSMC reported second-quarter results consistent with management’s guidance as strong demand for

high performance computing, or HPC, chips and the ongoing ramp of 5G smartphones helped the firm

overcome coronavirus-driven headwinds. We remind investors that the firm enjoyed an easier

comparison from the same period in 2019, which was negatively impacted by elevated inventories

related to the cryptocurrency crash and softer smartphone demand. Management was upbeat about the

remainder of 2020 and called for greater than 20% revenue growth for the full year, which we attribute

to strong demand from Apple, AMD, and Nvidia. Concerning 5G, management anticipates penetration in

the high teens (from mid-teens previously) while global smartphone unit growth will be down in the low

teens for 2020 (versus down in the high single digits as disclosed last quarter). Taken together we

believe these trends will offset each other, though management was adamant that its 5G unit forecast

is higher. We are raising our fair value estimate to USD 51 (TWD 306) per share from USD 46 (TWD 276)

as we incorporate a superior near-term outlook. Nonetheless, given the bevy of uncertainties with

potential supply chain disruption and end-market demand associated with the COVID-19 recovery, we

recommend prospective investors wait for a wider margin of safety, especially as shares of narrow-moat

TSMC are up over 50% from mid-March lows.

Second-quarter sales were USD 10.4 billion, up 34% in USD terms and 29% in TWD terms year over

year. Advanced process technologies (16-nm and below) accounted for 54% of wafer revenue, led by 7-



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nm products such as Nvidia’s latest data center GPUs and AMD’s server and PC chips. By segment,

smartphone and HPC were both up about 35% year over year. Gross margins rose 120 basis points

sequentially to 53% due to higher capacity utilization. Third-quarter sales are expected to be at a

midpoint of USD 11.35 billion. K



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Competitors Price vs. Fair Value

Intel Corp INTC

0

50

100

150

200

Fair Value: 65.004 Jan 2021 17:35, UTC

Last Close: 53.90Over ValuedUnder Valued

2016 2017 2018 2019 2020 YTD

1.17 1.28 0.72 0.92 0.71 0.83 Price/Fair Value

8.30 30.24 4.27 30.22 -14.55 10.28 Total Return %

Morningstar Rating

Total Return % as of 14 Oct 2021. Last Close as of 14 Oct 2021. Fair Value as of 4 Jan 2021 17:35, UTC.

Samsung Electronics Co Ltd 005930

0

17K

33K

50K

66K

Fair Value: 79,000.009 Apr 2021 09:14, UTC

Last Close: 69,400.00Over ValuedUnder Valued

2016 2017 2018 2019 2020 YTD

60.07 50.96 0.70 1.09 1.17 0.88 Price/Fair Value

45.28 43.76 -21.28 47.84 50.04 -13.56 Total Return %

Morningstar Rating

Total Return % as of 14 Oct 2021. Last Close as of 14 Oct 2021. Fair Value as of 9 Apr 2021 09:14, UTC.



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United Microelectronics Corp 2303

0

50

100

150

200

Last Close: 56.70

Fair Value: 38.0029 Jul 2021 03:09, UTC

Over ValuedUnder Valued

2016 2017 2018 2019 2020 YTD

— — — — — 1.49 Price/Fair Value

-1.12 28.95 -15.76 51.47 191.51 23.65 Total Return %

Morningstar Rating

Total Return % as of 14 Oct 2021. Last Close as of 14 Oct 2021. Fair Value as of 29 Jul 2021 03:09, UTC.



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Morningstar Historical Summary

Financials as of 30 Jun 2021

Fiscal Year, ends 31 Dec 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD TTM

Revenue (TWD Bil) 427 507 597 763 844 948 977 1,031 1,070 1,339 735 1,453

Revenue Growth % 1.8 18.7 17.8 27.8 10.6 12.4 3.1 5.5 3.8 25.2 18.2 18.0

EBITDA (TWD Bil) 253 314 375 506 576 613 660 693 680 919 511 1,021

EBITDA Margin % 59.4 62.0 62.8 66.3 68.3 64.7 67.5 67.2 63.6 68.6 69.6 70.3

Operating Income (TWD Bil) 142 182 210 297 322 378 387 384 373 567 296 603

Operating Margin % 33.2 35.8 35.2 38.9 38.1 39.9 39.6 37.2 34.8 42.3 40.3 41.5

Net Income (TWD Bil) 134 159 184 254 303 332 345 363 354 511 274 547

Net Margin % 31.4 31.5 30.8 33.3 35.9 35.0 35.3 35.2 33.1 38.1 37.3 37.7

Diluted Shares Outstanding (Mil) 5,185 5,186 5,186 5,186 5,186 5,186 5,186 5,186 5,186 5,186 5,186 5,186

Diluted Earnings Per Share (TWD) 25.90 30.75 35.50 49.05 58.40 63.95 66.50 70.00 68.25 98.50 52.85 105.50

Dividends Per Share (TWD) 14.94 14.75 15.18 14.98 0.00 30.38 35.23 41.17 61.87 50.02 24.96 49.98

Valuation as of 30 Sep 20212011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Recent Qtr TTM

Price/Sales 4.7 5.1 4.6 5.4 4.6 5.4 6.4 5.7 8.7 12.2 11.1 11.1Price/Earnings 14.0 15.5 14.6 16.4 13.1 15.9 18.0 16.6 26.5 31.5 29.5 29.5Price/Cash Flow 8.2 8.9 8.1 9.9 7.4 9.6 10.8 9.9 15.0 20.6 18.7 18.7Dividend Yield % 4.01 2.9 2.88 2.23 — 3.27 2.92 3.64 3.46 1.58 1.64 1.64Price/Book 3.4 3.6 3.4 3.8 3.5 3.8 4.3 3.7 5.7 8.8 8.1 8.1EV/EBITDA 250.2 272.7 244.7 225.1 174.8 220.9 283.8 252.9 398.0 522.5 0.0 0.0

Operating Performance / Profitability as of 30 Jun 2021

Fiscal Year, ends 31 Dec 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD TTM

ROA % 17.9 18.3 16.5 18.4 19.2 18.7 17.8 17.8 16.3 20.3 9.4 19.7ROE % 22.4 23.9 23.8 27.4 27.3 26.0 24.2 23.0 21.6 29.6 14.3 29.5ROIC % 20.7 21.1 19.6 21.8 22.4 22.0 20.7 19.9 18.8 25.2 11.5 23.8Asset Turnover 0.6 0.6 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.3 0.5

Financial LeverageFiscal Year, ends 31 Dec 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Recent Qtr TTM

Debt/Capital % 3.2 10.4 20.2 17.3 13.9 10.1 5.8 3.3 2.4 13.1 17.9 —Equity/Assets % 80.2 74.0 66.0 68.4 72.0 72.0 75.0 79.4 71.3 66.5 64.4 —Total Debt/EBITDA 0.2 0.4 0.6 0.5 0.4 0.3 0.3 0.3 0.3 0.4 1.1 —EBITDA/Interest Expense 404.4 307.8 141.6 156.2 180.6 185.4 198.1 227.2 209.2 441.3 268.0 334.8

Morningstar Analyst Historical/Forecast Summary as of 14 Oct 2021

Financials Estimates

Fiscal Year, ends 31 Dec 2019 2020 2021 2022 2023

Revenue (TWD Bil) 1,070 1,339 1,607 1,834 1,991

Revenue Growth % 3.7 25.2 20.0 14.1 8.6

EBITDA (TWD Bil) 660 898 1,114 1,316 1,507

EBITDA Margin % 61.7 67.0 69.3 71.8 75.7

Operating Income (TWD Bil) 373 566 651 734 804

Operating Margin % 34.9 42.3 40.5 40.0 40.4

Net Income (TWD Bil) 342 507 575 646 710

Net Margin % 32.0 37.9 35.8 35.2 35.7

Diluted Shares Outstanding (Bil) 26 26 26 26 26

Diluted Earnings Per Share(TWD) 13.19 19.57 22.17 24.92 27.38

Dividends Per Share(TWD) 9.50 10.00 10.00 10.50 11.00

Forward Valuation Estimates2019 2020 2021 2022 2023

Price/Sales 8.0 10.3 9.2 8.1 7.4Price/Earnings 26.4 31.3 28.5 25.4 23.1Price/Cash Flow 40.8 37.7 141.6 119.7 56.4Dividend Yield % 2.73 1.63 1.58 1.66 1.74Price/Book — — — — —EV/EBITDA 12.3 15.0 13.0 11.0 9.6



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Morningstar Equity Research Star Rating Methodology

Overview

At the heart of our valuation system is a detailed projec-tion of a company’s future cash flows, resulting from our analysts’ research. Analysts create custom industry and company assumptions to feed income statement, balance sheet, and capital investment assumptions into our glob-ally standardized, proprietary discounted cash flow, or DCF, modeling templates. We use scenario analysis, inde-pth competitive advantage analysis, and a variety of other analytical tools to augment this process. Moreover, we think analyzing valuation through discounted cash flows presents a better lens for viewing cyclical companies, high-growth firms, businesses with finite lives (e.g., mines), or companies expected to generate negative earnings over the next few years. That said, we don’t dis-miss multiples altogether but rather use them as support-ing cross-checks for our DCF-based fair value estimates. We also acknowledge that DCF models offer their own challenges (including a potential proliferation of estim-ated inputs and the possibility that the method may miss shortterm market-price movements), but we believe these negatives are mitigated by deep analysis and our longterm approach.

Morningstar’s equity research group (”we,” “our”) be-lieves that a company’s intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premi-um to their intrinsic worth—or fair value estimate, in Morningstar terminology. Five-star stocks sell for the biggest risk adjusted discount to their fair values, where-as 1-star stocks trade at premiums to their intrinsic worth.

Four key components drive the Morningstar rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process ultimately culminates in our singlepoint star rat-ing.

1. Economic Moat

The concept of an economic moat plays a vital role not only in our qualitative assessment of a firm’s long-term investment potential, but also in the actual calculation of our fair value estimates. An economic moat is a structural feature that allows a firm to sustain excess profits over a long period of time. We define economic profits as re-turns on invested capital (or ROIC) over and above our es-

timate of a firm’s cost of capital, or weighted average cost of capital (or WACC). Without a moat, profits are more susceptible to competition. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale.

Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the next 10 years. Wide-moat companies are those in which we have very high confidence that excess returns will remain for 10 years, with excess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe low-quality, no-moat companies will see their normalized returns gravitate toward the firm’s cost of capital more quickly than companies with moats.

When considering a company's moat, we also assess whether there is a substantial threat of value destruction, stemming from risks related to ESG, industry disruption, financial health, or other idiosyncratic issues. In this con-text, a risk is considered potentially value destructive if its occurrence would eliminate a firm’s economic profit on a cumulative or midcycle basis. If we deem the probability of occurrence sufficiently high, we would not characterize the company as possessing an economic moat.

To assess the sustainability of excess profits, analysts per-form ongoing assessments of the moat trend. A firm’s moat trend is positive in cases where we think its sources of competitive advantage are growing stronger; stable where we don’t anticipate changes to competitive ad-vantages over the next several years; or negative when we see signs of deterioration.

2. Estimated Fair Value

Combining our analysts’ financial forecasts with the firm’s economic moat helps us assess how long returns on invested capital are likely to exceed the firm’s cost of capital. Returns of firms with a wide economic moat rat-ing are assumed to fade to the perpetuity period over a longer period of time than the returns of narrow-moat firms, and both will fade slower than no-moat firms, in-creasing our estimate of their intrinsic value.

Our model is divided into three distinct stages:

Stage I: Explicit Forecast

In this stage, which can last five to 10 years, analysts make full financial statement forecasts, including items such as revenue, profit margins, tax rates, changes in workingcapital accounts, and capital spending. Based on these projections, we calculate earnings before interest, after taxes (EBI) and the net new investment (NNI) to de-rive our annual free cash flow forecast.

Stage II: FadeThe second stage of our model is the period it will take the company’s return on new invested capital—the re-turn on capital of the next dollar invested (“RONIC”)—to decline (or rise) to its cost of capital. During the Stage II period, we use a formula to approximate cash flows in lieu of explicitly modeling the income statement, balance sheet, and cash flow statement as we do in Stage I. The length of the second stage depends on the strength of the company’s economic moat. We forecast this period to last anywhere from one year (for companies with no eco-nomic moat) to 10–15 years or more (for wide-moat com-panies). During this period, cash flows are forecast using four assumptions: an average growth rate for EBI over the period, a normalized investment rate, average return on new invested capital (RONIC), and the number of years until perpetuity, when excess returns cease. The invest-ment rate and return on new invested capital decline un-til a perpetuity value is calculated. In the case of firms that do not earn their cost of capital, we assume marginal ROICs rise to the firm’s cost of capital (usually attribut-able to less reinvestment), and we may truncate the second stage.

Stage III: Perpetuity

Once a company’s marginal ROIC hits its cost of capital, we calculate a continuing value, using a standard per-petuity formula. At perpetuity, we assume that any growth or decline or investment in the business neither creates nor destroys value and that any new investment provides a return in line with estimated WACC.

Because a dollar earned today is worth more than a dollar earned tomorrow, we discount our projections of cash flows in stages I, II, and III to arrive at a total present value of expected future cash flows. Because we are modeling free cash flow to the firm—representing cash available to provide a return to all capital providers—we discount future cash flows using the WACC, which is a weighted average of the costs of equity, debt, and pre-ferred stock (and any other funding sources), using ex-pected future proportionate long-term, market-value weights.

3. Uncertainty Around That Fair Value Estimate

Morningstar's Uncertainty Rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating represents the analysts' ability to



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Morningstar Equity Research Star Rating Methodologybound the estimated value of the shares in a company around the Fair Value Estimate, based on the character-istics of the business underlying the stock, including oper-ating and financial leverage, sales sensitivity to the over-all economy, product concentration, pricing power, expos-ure to material ESG risks, and other company-specific factors.

Analysts consider at least two scenarios in addition to their base case: a bull case and a bear case. Assumptions are chosen such that the analyst believes there is a 25% probability that the company will perform better than the bull case, and a 25% probability that the company will perform worse than the bear case. The distance between the bull and bear cases is an important indicator of the uncertainty underlying the fair value estimate. In cases where there is less than a 25% probability of an event, but where the event could result in a material decline in value, analysts may adjust the uncertainty rating to re-flect the increased risk. Analysts may also make a fair value adjustment to reflect the impact of this event.

Our recommended margin of safety widens as our uncer-tainty of the estimated value of the equity increases. The more uncertain we are about the estimated value of the equity, the greater the discount we require relative to our estimate of the value of the firm before we would recom-mend the purchase of the shares. In addition, the uncer-tainty rating provides guidance in portfolio construction based on risk tolerance.

Our uncertainty ratings for our qualitative analysis are low, medium, high, very high, and extreme.

Margin of Safety

Qualitative Analysis Uncertainty Ratings QQQQQRating QRating

Low 20% Discount 25% PremiumMedium 30% Discount 35% PremiumHigh 40% Discount 55% PremiumVery High 50% Discount 75% PremiumExtreme 75% Discount 300% Premium

4. Market Price

The market prices used in this analysis and noted in the report come from exchange on which the stock is listed which we believe is a reliable source.

For more details about our methodology, please go to https://shareholders.morningstar.com.

Morningstar Star Rating for Stocks

Once we determine the fair value estimate of a stock, we compare it with the stock’s current market price on a daily basis, and the star rating is automatically re-calcu-lated at the market close on every day the market on which the stock is listed is open. Our analysts keep close

tabs on the companies they follow, and, based on thorough and ongoing analysis, raise or lower their fair value estimates as warranted.

Please note, there is no predefined distribution of stars. That is, the percentage of stocks that earn 5 stars can fluctuate daily, so the star ratings, in the aggregate, can serve as a gauge of the broader market’s valuation. When there are many 5-star stocks, the stock market as a whole is more undervalued, in our opinion, than when very few companies garner our highest rating.

We expect that if our base-case assumptions are true the market price will converge on our fair value estimate over time generally within three years (although it is im-possible to predict the exact time frame in which market prices may adjust).

Our star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, tax situation, time horizon, income needs, and complete investment portfolio, among other factors.

The Morningstar Star Ratings for stocks are defined be-low:QQQQQ We believe appreciation beyond a fair risk ad-justed return is highly likely over a multiyear time frame. Scenario analysis developed by our analysts indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximiz-ing upside potential.

QQQQ We believe appreciation beyond a fair risk-ad-justed return is likely.

QQQ Indicates our belief that investors are likely to re-ceive a fair risk-adjusted return (approximately cost of equity).

QQ We believe investors are likely to receive a less than fair risk-adjusted return.

Q Indicates a high probability of undesirable risk-adjus-ted returns from the current market price over a multiyear time frame, based on our analysis. Scenario analysis by our analysts indicates that the market is pricing in an ex-cessively optimistic outlook, limiting upside potential and leaving the investor exposed to Capital loss.

Other Definitions

Last Price: Price of the stock as of the close of the mar-ket of the last trading day before date of the report.

Capital Allocation Rating: Our Capital Allocation (or Stewardship) Rating represents our assessment of the quality of management’s capital allocation, with particu-lar emphasis on the firm’s balance sheet, investments, and shareholder distributions. Analysts consider compan-ies’ investment strategy and valuation, balance sheet management, and dividend and share buyback policies. Corporate governance factors are only considered if they are likely to materially impact shareholder value, though either the balance sheet, investment, or shareholder dis-tributions. Analysts assign one of three ratings: "Exem-

https://shareholders.morningstar.com.



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plary", "Standard", or "Poor". Analysts judge Capital Alloc-ation from an equity holder’s perspective. Ratings are de-termined on a forward looking and absolute basis. The Standard rating is most common as most managers will exhibit neither exceptionally strong nor poor capital alloc-ation.

Capital Allocation (or Stewardship) analysis published pri-or to Dec. 9, 2020, was determined using a different pro-cess. Beyond investment strategy, financial leverage, and dividend and share buyback policies, analysts also con-sidered execution, compensation, related party transac-tions, and accounting practices in the rating.

Capital Allocation Rating: Our Capital Allocation (or Stewardship) Rating represents our assessment of the quality of management’s capital allocation, with particu-lar emphasis on the firm’s balance sheet, investments, and shareholder distributions. Analysts consider compan-ies’ investment strategy and valuation, balance sheet management, and dividend and share buyback policies. Corporate governance factors are only considered if they are likely to materially impact shareholder value, though either the balance sheet, investment, or shareholder dis-tributions. Analysts assign one of three ratings: "Exem-plary", "Standard", or "Poor". Analysts judge Capital Alloc-ation from an equity holder’s perspective. Ratings are de-termined on a forward looking and absolute basis. The Standard rating is most common as most managers will exhibit neither exceptionally strong nor poor capital alloc-ation.

Capital Allocation (or Stewardship) analysis published pri-or to Dec. 9, 2020, was determined using a different pro-cess. Beyond investment strategy, financial leverage, and dividend and share buyback policies, analysts also con-sidered execution, compensation, related party transac-tions, and accounting practices in the rating.

Sustainalytics ESG Risk Rating Assessment:The ESG Risk Rating Assessment is provided by Sustainalytics; a Morningstar company.

Sustainalytics’ ESG Risk Ratings measure the degree to which company’s economic value at risk is driven by en-vironment, social and governance (ESG) factors.

Sustainalytics analyzes over 1,300 data points to assess a company’s exposure to and management of ESG risks. In other words, ESG Risk Ratings measures a company’s un-managed ESG Risks represented as a quantitative score. Unmanaged Risk is measured on an open-ended scale starting at zero (no risk) with lower scores representing less unmanaged risk and, for 95% of cases, the unman-aged ESG Risk score is below 50.

Based on their quantitative scores, companies are grouped into one of five Risk Categories (negligible, low,

medium, high, severe). These risk categories are absolute, meaning that a ‘high risk’ assessment reflects a compar-able degree of unmanaged ESG risk across all subindus-tries covered.

The ESG Risk Rating Assessment is a visual representa-tion of Sustainalytics ESG Risk Categories on a 1 to 5 scale. Companies with Negligible Risk = 5 Globes, Low Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes, Severe Risk = 1 Globe. For more information, please visit sustainalytics.com/esg-ratings/

Ratings should not be used as the sole basis in evaluating a company or security. Ratings involve unknown risks and uncertainties which may cause our expectations not to occur or to differ significantly from what was expected and should not be considered an offer or solicitation to buy or sell a security.

Risk Warning

Please note that investments in securities are subject to market and other risks and there is no assurance or guar-antee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indication of future per-formance. A security investment return and an investor’s principal value will fluctuate so that, when redeemed, an investor’s shares may be worth more or less than their original cost. A security’s current investment performance may be lower or higher than the investment performance noted within the report. Morningstar’s Uncertainty Rating serves as a useful data point with respect to sensitivity analysis of the assumptions used in our determining a fair value price.

General Disclosure

Unless otherwise provided in a separate agreement, re-cipients accessing this report may only use it in the coun-try in which the Morningstar distributor is based. Unless stated otherwise, the original distributor of the report is Morningstar Research Services LLC, a U.S.A. domiciled financial institution.

This report is for informational purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This publication is intended to provide information to assist in-stitutional investors in making their own investment de-cisions, not to provide investment advice to any specific investor. Therefore, investments discussed and recom-mendations made herein may not be suitable for all in-vestors: recipients must exercise their own independent judgment as to the suitability of such investments and re-commendations in the light of their own investment ob-jectives, experience, taxation status and financial posi-tion.

The information, data, analyses and opinions presented herein are not warranted to be accurate, correct, com-plete or timely. Unless otherwise provided in a separate agreement, neither Morningstar, Inc. or the Equity Re-search Group represents that the report contents meet all of the presentation and/or disclosure standards applic-able in the jurisdiction the recipient is located.

Except as otherwise required by law or provided for in a separate agreement, the analyst, Morningstar, Inc. and the Equity Research Group and their officers, directors and employees shall not be responsible or liable for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions within the report. The Equity Research Group encourages recipients recipients of this report to read all relevant is-sue documents (e.g., prospectus) pertaining to the secur-ity concerned, including without limitation, information relevant to its investment objectives, risks, and costs be-fore making an in vestment decision and when deemed necessary, to seek the advice of a legal, tax, and/or ac-counting professional.

The Report and its contents are not directed to, or inten-ded for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, pub-lication, availability or use would be contrary to law or regulation or which would subject Morningstar, Inc. or its affiliates to any registration or licensing requirements in such jurisdiction.

Where this report is made available in a language other than English and in the case of inconsistencies between the English and translated versions of the report, the Eng-lish version will control and supersede any ambiguities associated with any part or section of a report that has been issued in a foreign language. Neither the analyst, Morningstar, Inc., or the Equity Research Group guaran-tees the accuracy of the translations.

This report may be distributed in certain localities, coun-tries and/or jurisdictions (“Territories”) by independent third parties or independent intermediaries and/or distrib-utors (“Distributors”). Such Distributors are not acting as agents or representatives of the analyst, Morningstar, Inc. or the Equity Research Group. In Territories where a Distributor distributes our report, the Distributor is solely responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or regional regulatory bodies, including laws in connection with the distribution third-party research re-ports.

Conflicts of Interestu No interests are held by the analyst with respect to the

security subject of this investment research report.



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u Morningstar, Inc. may hold a long position in the se-curity subject of this investment research report that exceeds 0.5% of the total issued share capital of the security. To determine if such is the case, please click http://msi.morningstar.com and http://mdi.morningstar.com.

u Analysts’ compensation is derived from Morningstar, Inc.’s overall earnings and consists of salary, bonus and in some cases restricted stock.

u Neither Morningstar, Inc. or the Equity Research Group receives commissions for providing research nor do they charge companies to be rated.

u Neither Morningstar, Inc. or the Equity Research Group is a market maker or a liquidity provider of the security noted within this report.

u Neither Morningstar, Inc. or the Equity Research Group has been a lead manager or co-lead manager over the previous 12-months of any publicly disclosed offer of financial instruments of the issuer.

u Morningstar, Inc.’s investment management group does have arrangements with financial institutions to provide portfolio management/investment advice some of which an analyst may issue investment research re-ports on. However, analysts do not have authority over Morningstar’s investment management group’s busi-ness arrangements nor allow employees from the in-vestment management group to participate or influ-ence the analysis or opinion prepared by them.

u Morningstar, Inc. is a publicly traded company (Ticker Symbol: MORN) and thus a financial institution the se-curity of which is the subject of this report may own more than 5% of Morningstar, Inc.’s total outstanding shares. Please access Morningstar, Inc.’s proxy state-ment, “Security Ownership of Certain Beneficial Own-e r s a n d M a n a g e m e n t ” s e c t i o n h t t p s : / /shareholders.morningstar.com/investor-relations/fin-ancials/sec-filings/default.aspx

u Morningstar, Inc. may provide the product issuer or its related entities with services or products for a fee and on an arms’ length basis including software products and licenses, research and consulting services, data services, licenses to republish our ratings and research in their promotional material, event sponsorship and website advertising.

Further information on Morningstar, Inc.’s conflict of in-t e r e s t p o l i c i e s i s a v a i l a b l e f r o m h t t p s : / /shareholders.morningstar.com. Also, please note analysts are subject to the CFA Institute’s Code of Ethics and Standards of Professional Conduct.

For a list of securities which the Equity Research Group currently covers and provides written analysis on please contact your local Morningstar office. In addition, for his-torical analysis of securities covered, including their fair value estimate, please contact your local office.

For Recipients in Australia: This Report has been issued

and distributed in Australia by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544; ASFL: 240892). Morning-star Australasia Pty Ltd is the provider of the general ad-vice (‘the Service’) and takes responsibility for the produc-tion of this report. The Service is provided through the re-search of investment products.

To the extent the Report contains general advice it has been prepared without reference to an investor’s object-ives, financial situation or needs. Investors should con-sider the advice in light of these matters and, if applic-able, the relevant Product Disclosure Statement before making any decision to invest. Refer to our Financial Ser-vices Guide (FSG) for more information at http://www.morningstar.com.au/fsg.pdf.

For Recipients in Hong Kong: The Report is distributed by Morningstar Investment Management Asia Limited, which is regulated by the Hong Kong Securities and Fu-tures Commission to provide services to professional in-vestors only. Neither Morningstar Investment Manage-ment Asia Limited, nor its representatives, are acting or will be deemed to be acting as an investment profession-al to any recipients of this information unless expressly agreed to by Morningstar Investment Management Asia Limited. For enquiries regarding this research, please con-tact a Morningstar Investment Management Asia Limited Licensed Representative at https://shareholders.morning-star.com.

For recipients in India: This Investment Research is is-sued by Morningstar Investment Adviser India Private Limited. Morningstar Investment Adviser India Private Limited is registered with the Securities and Exchange Board of India (Registration number INA000001357) and provides investment advice and research. Morningstar In-vestment Adviser India Private Limited has not been the subject of any disciplinary action by SEBI or any other leg-al/regulatory body. Morningstar Investment Adviser India Private Limited is a wholly owned subsidiary of Morning-star Investment Management LLC. In India, Morningstar Investment Adviser India Private Limited has one asso-ciate, Morningstar India Private Limited, which provides data related services, financial data analysis and software development. The Research Analyst has not served as an officer, director or employee of the fund company within the last 12 months, nor has it or its associates engaged in market making activity for the fund company.

*The Conflicts of Interest disclosure above also applies to relatives and associates of Manager Research Analysts in India # The Conflicts of Interest disclosure above also ap-plies to associates of Manager Research Analysts in In-dia. The terms and conditions on which Morningstar In-vestment Adviser India Private Limited offers Investment Research to clients, varies from client to client, and are detailed in the respective client agreement.

For recipients in Japan: The Report is distributed by Ib-botson Associates Japan, Inc., which is regulated by Fin-ancial Services Agency. Neither Ibbotson Associates Ja-pan, Inc., nor its representatives, are acting or will be deemed to be acting as an investment professional to any recipients of this information.

For recipients in Singapore: For Institutional Investor audiences only. Recipients of this report should contact their financial professional in Singapore in relation to this report. Morningstar, Inc., and its affiliates, relies on cer-tain exemptions (Financial Advisers Regulations, Section 32B and 32C) to provide its investment research to recipi-ents in Singapore.

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