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22 August 2018

22 August 2018

Asian Semiconductors & Semiconductor Equipment and India Financials


TSMC: You can never be too careful - Read-across from Bitmain's
pre-IPO round

Mark Li Is Bitmain filing for an IPO to raise even more money than Facebook's IPO? What would it
+852-2918-5752 mean for the cryptocurrency industry, TSMC and other suppliers? Over the past 1-2 weeks,
Mark.Li@bernstein.com
numerous credible news sources have reported Bitmain's plans for an IPO and websites have
Gautam Chhugani posted presentations ostensibly leaked from Bitmain's recent financing run. We cross-
+65-6230-4654 checked the information with our own research and find it plausible. We provide our latest
gautam.chhugani@bernstein.com analysis on Bitmain and the implications for TSMC in this report. (Please note there has been
no IPO filing yet, so all estimates for Bitmain discussed are based on hypothetical datapoints).
Xin Sun
+852-2918-5717 Bitmain's 2017 revenue and margins appear below our estimates but nonetheless remain
xin.sun@bernstein.com
remarkably high. According to the information we collected, Bitmain recorded US$2.5B
Gaurav Jangale, ACA revenue in 2017 vs. US$5-6B estimated by us. GM was 58% vs. ~75% estimated by us.
+65-6230-4682 This is mainly because much of the wafer purchase remained in Bitmain's inventories,
gaurav.jangale@bernstein.com instead of sold to customers. The revenue contribution from mining was also much lower
(7% in 2017) than we thought, indicating the company didn't benefit from the Bitcoin price
surge last year as much, but was able to collect more fiat currencies to reduce risks.
Our other estimates about Bitmain appear correct. Bitmain dominated the mining rig market
with 77% unit share in Bitcoin and ~85% in all cryptocurrencies last year. ASIC chip was
the key differentiator and represented ~80% of COGS. GM for mining was even higher (50-
76%) but more volatile and most (60-70%) of the mining cost came from depreciation.
However, Bitmain's cash flow appears to be questionable and the company may be gradually
losing technological edge. Bitmain's cash need mainly comes from working capital
(inventory and wafer prepayment). In 2017 Bitmain had the best mining rig and was able to
fund the working capital with customer deposits and hence happily saw its operating cash
flow surge to US$1.3B, on our analysis. As coin price plummeted, customer deposits
dwindled & Bitmain was forced to draw from its operating cash flow in 1Q18. Going
forward, the competitiveness of Bitmain's chips is in question, as Bitmain failed in a 10nm
chip & possibly other projects too. Rivals now may have caught up in technologies and
Bitmain's inventory (US$1.2B as of 1Q18) may face major a write-down risk.
The large holding in Bitcoin Cash (BCH) also faces a write-down risk. Bitmain, as a central
promoter of BCH, likely has been acquiring a lot of BCH (5.7% of total supply) with
operating cash and BTC holding. These BCH holding, valued at US$890M as of 1Q18,
poses another major risk as BCH is illiquid and has depreciated nearly 20% since 1Q18.
In our view TSMC should take full prepayment from Bitmain and refrain from adding capacity
solely for crypto demand. Investors also need to be realistic about the outlook of HPC
demand. Although Bitmain should still contribute ~5-6% of TSMC's total revenue this year,
the sustainability of the business is a big question & we'd advise TSMC to take full
prepayment instead of 50% as disclosed in the presentations. The rapid growth in HPC
revenue at TSMC was also primarily pumped up by crypto mining demand and should be
taken with a grain of salt.

Analyst Page Bernstein Events Industry Page

See Disclosure Appendix of this report for important disclosures and analyst certifications www.bernsteinresearch.com
Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

TICKER TABLE
21 Aug 2018 TTM EPS Reported P/B
Closing Target Rel.
Ticker Rating Price Price Perf. 2017A 2018E 2019E 2017A 2018E 2019E
2330.TT (TSMC) M TWD 241.00 250.00 13.4% TWD 13.23 13.95 14.86 4.11 3.70 3.37
TSM M USD 40.10 42.00 (6.2)% USD 2.17 2.28 2.43 4.07 3.76 3.43
MXAPJ 526.81 40.78 45.00 49.53 12.92 11.71 10.64
SPX 2,857.05 129.37 158.37 174.25 22.08 18.04 16.40

O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated

TSM close date is 08/20/2018;.

INVESTMENT IMPLICATIONS
TSMC: will benefit from iPhone's ramp in the near term. The upside from making more AMD's server and PC processors is
relatively minor because these markets are insignificant compared with TSMC's current market exposure. The stock price
should gain support as TSMC is widely viewed as a safe haven during macro uncertainties for the mid-term. Overall TSMC
remains a solid company with balanced risk and reward. Market-Perform. TP=NT$250

DETAILS
Is Bitmain really filing for an IPO late this month? Is Bitmain's worth of as high as US$40-50B? Reportedly through the IPO,
Bitmain is planning to raise US$18B, even more than what Facebook's IPO raised (US$16B) 1. The IPO, if true, will mark a major
milestone in the cryptocurrency industry. What does it mean for the industry broadly and for the competition vs. rivals Canaan
Creative & Ebang? And what is the impact to suppliers such as TSMC?
Over the past 1-2 weeks, numerous websites have posted slides2 that reportedly were leaked from a pre-IPO financing run that
the company just completed. Some further indicated that in the past six months alone the company went through 6 rounds of
financing, including the pre-IPO one that took place most recently3. Why such a rapid-fire manner, and followed by an IPO that is
expected take place at the end of this year?
Today's report is a follow-up to our earlier deep dive into Bitmain (Asian Semiconductors: Bitmain - The mysterious king of
cryptocurrency mining) and extends it with the information we collected from our online search. We cross-checked the
information with our own research & supply chain checks and found it plausible (although we note that no IPO filing has been
made as of yet, so all Bitmain estimates discussed in this report are based on hypothetical data). Today's report hence
summarizes what we learned over the past couple of weeks. In conclusion, we suspect owing to a series of risky investments and
design failures Bitmain likely is cash strained now and is on the brink of losing its competitive edge. For TSMC and other suppliers
to Bitmain, our advice is to collect a full prepayment before any service is rendered, and to refrain from making capacity expansion
solely for crypto demand. Investors should also question the sustainability of the recent rapid growth in TSMC's HPC (High
Performance Compute) revenue as much of it was from cryptocurrency mining chips.

First of all, though we overestimated Bitmain's performance as some of wafers purchased were in inventories,
US$2.5B revenue and US$1.25B in net profits last year was nothing but a wild success.
 According to the leaked slides, Bitmain recorded US$2.5B in revenues in 2017. This is quite a bit lower than the estimates
in our earlier deep dive which sized the company's 2017 revenue at the US$5-6B range (Exhibit 1). Bitmain's margins
(58% GM, 53% OPM and 46% net margin) are also below our expectations (~75% GM and ~65% OPM) (Exhibit 2).
 The first and main explanation behind the shortfall is because our estimates omitted the role of inventories. Our estimate
for Bitmain's revenue was chiefly based on TSMC's reported wafer revenue from cryptocurrency mining ASICs last year,

1 https://www.coindesk.com/crypto-unicorn-bitmain-weighs-18-billion-ipo-one-of-worlds-largest/
2 For examples, https://awtmt.com/articles/3386950, https://www.criptalk.com/trouble-on-the-horizon-what-last-
weekends-ruckus-means-for-bitmains-ipo/
3 http://t.cj.sina.com.cn/articles/view/3243067320/c14d47b8001009vxf (Chinese only)

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 2


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

which was mostly attributable to the orders from Bitmain. These wafers would eventually end up in the mining rigs and
hence with proper assumptions on silicon's mix in COGS and GM we were able to derive Bitmain's revenue. What we failed
to consider was that Bitmain's inventory turnover is much slower than we thought (days of inventory hovered at ~120 days)
and a large portion of the purchased wafers remained in inventory, which went up by ~17x from 2016 to 2017 (Exhibit 3).
Mining rigs delivered to customers were not as high as what the wafer purchase implied and hence the actual revenue
came lower.
 Secondly, the leaked slides suggest that ~25% of the chips purchased were in fact deployed to mining rigs for other
cryptocurrencies, whereas we thought they were used in Bitmain's internal mining farm to help Bitmain mine many bitcoins
right when Bitcoin price shot up in late 2017. For the same reason, Bitmain's revenue from mining was also smaller than we
thought, contributing only 7% of the total in 2017 (vs. 10-20% from our estimates) (Exhibit 4). This is despite the better GM
(76% in 2017) achieved by mining vs. "only" 59% from selling mining rigs (Exhibit 5) and partly explains why actual margins
are below our expectations. More importantly, we find this noteworthy as this shows Bitmain likely still preferred earning
fiat currencies over cryptocurrencies and decided to deploy most of the purchased chips to mining rigs for sale to external
customers.
 Even though Bitmain's actual results fell short of expectations, we still are awed by what the company achieved in 2017.
Only four years since the company's founding, what Bitmain accomplished last year has surely left a deep mark in history
(Exhibit 6).

EXHIBIT 1: Bitmain's 2017 revenue was much below our EXHIBIT 2: Margins were also slightly below our
expectation. estimates.

Bitmain 2017 Revenue Bitmain 2017 GM OPM


6 80% ~75%
5-6
70% ~65%
5
58%
60%
53%
4 50%
US$B

40%
3
2.5
30%
2
20%

1 10%

0%
0 Reported Bernstein
Reported Bernstein
GM OPM

Source: Bernstein estimates, research and analysis. Source: Bernstein estimates, research and analysis.

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 3


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

EXHIBIT 3: Bitmain's inventory level skyrocketed by EXHIBIT 4: Revenue from mining cryptocurrencies is a
~17x in 2017. rather small part of Bitmain's overall revenue.

Bitmain Inventory Bitmain Revenue Mix


1,400 140 100% 3%
7%
90% 18%
1,200 120
80%
1,000 100

Days of Inventory
70%

800 80 60%
US$M

50% 96%
600 60 92%
40% 80%

400 40 30%
20%
200 20
10%
0 0 0%
2016 2017 1Q18 2016 2017 1Q18

Inventory Days of Inventory Mining Rigs Mining Others

Source: Bernstein research & analysis. Source: Bernstein research & analysis.

EXHIBIT 5: GM from cryptocurrency mining was EXHIBIT 6: Even though Bitmain's 2017 results fell short
significantly higher than from mining rig sales in 2017 of our estimates, we still find what the company
but soon retreated in 1Q18. achieved in 2017 a wild success.

Bitcoin GM by Segment Bitmain Revenue and Margins


80% 3,000 70%
76%
75% 60%
2,500
70% 50%

GM/Net Margin
2,000
US$M

65% 62% 40%


58% 59% 1,500
60%
60% 30%
55% 1,000
50% 20%
50%
500 10%
45%
0 0%
40% 2016 2017 1Q18
2016 2017 1Q18
Revenue GM Net Margin
Mining Rigs Mining

Source: Bernstein estimates, research & analysis. Source: Bernstein estimates, research & analysis.

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 4


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

Otherwise, our other estimates appear to be mostly correct. Leveraging the best chip in the market, Bitmain
commanded a dominant share last year. Further riding on the frenzy seen in late 2017, the two young founders
quickly accumulated their wealth at a pace that few can match.
 According to the leaked slides, the size of Bitcoin mining rig market was ~1.4M units in 2017. Bitmain accounted for 77%
of the shipment of mining rigs, towering the second largest vendors Canaan Creative, which only had 14% share in 2017
(Exhibit 7). In addition, Bitmain was also the dominant supplier for non-Bitcoin cryptocurrency mining rigs (mainly Litecoins
and Dashcoins), and shipped ~500K units in 2017, while Canaan focused entirely on Bitcoin. Including these non-Bitcoin
miner rigs, Bitmain's share in the entire cryptocurrency mining rig market rose to ~85% (Exhibit 8). Bitmain is also a more
diversified company than its competitors, with about 35% of Bitmain's 2017 revenue related to non-Bitcoin
cryptocurrencies (Exhibit 9).
 As expected, Bitmain's mining rig was very lucrative. Bitmain was able to consistently deliver ~60% GM from mining rig
sales in 2016, 2017 and 1Q18 (Exhibit 5). Though this is not as high as the ~75% GM that we thought earlier, it is still
impressive and a notch above Canaan Creative's GM which was at 46% in 2017. The ASIC chips inside are the most
important differentiating factor for the mining rigs and also account for the majority of the cost of these rigs. For example,
80% of the COGS for Bitmain's S9 miner, which contributed over 50% of the company's revenue in 2017, came from chips
(Exhibit 10).
 The profitability of Bitmain's mining operation was even higher but much more volatile. GM was at 50% in 2016, jumped to
76% in 2017 but soon retreated to 60% in 1Q18 (Exhibit 5). This however is not unreasonable given the wild upswing in
Bitcoin prices in late 2017. Cost associated with mining mainly consisted of electricity cost and mining rig depreciation.
Depreciation cost have become the larger contributor of cost (60-70%) since 2017 as Bitmain sourced cheaper electricity
and newer miner models were more power efficient (Exhibit 11).
 The remarkable success of Bitmain made the two young founders incredibly rich. The leaked slides show that as of July
2018, the two founders of Bitmain, Jihan Wu and Micree Zhan held 21% and 37% of the company, respectively (Exhibit
12). As the company was valued at US$14B at the round of financing in July 2018, the wealth of Jihan Wu & Micree Zhan
should be around US$3B & US$5.2B, respectively, then.

EXHIBIT 7: Bitmain dominated the Bitcoin mining rigs EXHIBIT 8: Including other cryptocurrency mining rigs,
market with 77% unit share in 2017. Bitcoin's market share would rise to ~85% last year.

Bitcoin ASIC Miner Market Share by Cryptocurrency ASIC Miner Market


Unit (2017) Share by Unit (2017)

Others,
Others, ~5%
9%
Canaan,
10%
Canaan,
14%

Bitmain,
Bitmain,
77%
~85%

Source: Bernstein research & analysis. Source: Bernstein research & analysis.

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 5


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

EXHIBIT 9: About 35% of Bitmain's revenue was related EXHIBIT 10: Semiconductors typically takes up ~80% of
to non-Bitcoin cryptocurrencies. the cost of a mining rig.

Bitmain Revenue Exposure by S9 Antminer BoM Assembly,


Labor and
Cryptocurrencies (2017) BB Board, Packaging
6.2% Cost,
Others, Control 0.5%
1% Panel,
5.2%
Dashcoin, Operating
17% Panel,
8.2%

Litecoin,
18% Bitcoin,
64% Chip,
79.9%

Source: Bernstein research & analysis. Source: Bernstein research & analysis.

EXHIBIT 11: The part of electricity spend in Bitmain's cost of mining dropped meaningfully as the company sourced
cheaper electricity and upgraded to new miner models that are more power efficient.

Bitmain Cryptocurrency Mining


Cost Breakdown
45 70%
40
60%
35
Mix of Electricity

50%
30
25 40%
US$M

20 30%
15
20%
10
10%
5
0 0%
2016 2017 1Q18

Electricity Depreciation
Mix of Electricity

Source: Bernstein research & analysis.

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 6


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

EXHIBIT 12: The two main founders, Jihan Wu and Micree Zhan together control over 50% of Bitmain and hence
are incredibly rich, considering the US$140B valuation for the company in the latest round of financing.

Bitmain Ownership Structure

Other co- ESOP Institutional


Micree Zhan Jihan Wu
founders (reserved) Investors

36.58% 20.56% 15.57% 18.71% 8.57%

Bitmain Technologies Holdings Company (Cayman 17 overseas


Island) subsidiaries

100%

Bitmain Technologies Holdings Limited (Hong Kong)

Overseas
Domestic
100%

26 domestic
Bitmain Technologies Limited (Beijing)
subsidiaries

Source: Bernstein research & analysis.

The wealth of the founders however is contingent on Bitmain's uninterrupted cash flow which unfortunately is
now in question as competitors may catch up in technologies.
 Similar to most other hardware OEMs, Bitmain likely relies on EMS companies for the assembly of its mining rigs. Because
of the outsourcing model, there is little need for capex and working capital requirement represents nearly all of the cash
needs for Bitmain to scale up its business. Bitmain's working capital mainly consists of inventory, prepayment for wafers to
TSMC and is partially offset by advanced deposits from pre-orders of customers (Exhibit 13). We find that notwithstanding
the nearly 10x growth in revenue from 2016 to 2017, working capital increase was kept at bay, amounting to only
US$330M and 11% of total assets. This is largely because Bitmain was able to collect substantial customer deposits
(US$1.6B by EOY2017), as Bitcoin price skyrocketed then, to finance the wafer prepayment and other working capital
needs. This largely relieved Bitmain from the need to draw from its own cash and hence its 2017 EBITDA and operating
cash flow both came very high at US$1.5B and US$1.3B, respectively (Exhibit 14).
 However when Bitcoin price was on a downward trajectory, Bitmain began to see more troubles. We note that Bitmain's
customer deposit dwindled from US$1.6B at the end of 2017 to only US$0.8B at the end of 1Q18, presumably due to
lackluster demand (Exhibit 13). Inventories also crept up from US$1B to US$1.2B in the same period. Though the
prepayment to suppliers lowered from US$870M to US$670M at the same time, Bitmain's working capital ballooned to
US$1.2B, from US$330M in merely three months. Fortunately, 1Q18's EBITDA was very high at US$1.2B and was
sufficient to buttress such a rapid increase of working capital but consequently cash from operations soon tumbled to only
US$25M (Exhibit 14). At the end of 1Q18, 1/3 of Bitmain's assets were tied in working capital, much higher than 15% at
the end of 2016 and 11% at the end of 2017 (Exhibit 15).
 To bring the working capital to a reasonable level, Bitmain would have to turn the inventories into revenue and profits,
which in turn hinges on the competitiveness of its mining rig and mining ASIC. It was how Bitmain surged to prominence
last year and it is also what it takes now to maintain the company's leadership. However, after burning several hundred
million US dollars in buying 10nm wafers from TSMC in 1Q18, Bitmain, we believe, found the 10nm ASIC a failure.

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 7


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

Reportedly another two projects, 16nm BM1X89 & 12nm BM1X90, also failed4 and the company very possibly wasted
several hundred million US dollars in addition. On the other hand, competitors are rolling out more advanced ASICs and
miners. GMO is now taking orders for its 7nm miner5 and Canaan Creative unveiled its 7nm miner a few days ago6. The
latest miners of ASICMiner & INNOSILICON also tout 8nm and 10nm, respectively. Though there are still execution risks at
these rivals, at least according to specifications all these miners are faster and more power efficient than Bitmain's S9
which was announced 2.5 years ago and is still stuck with 16nm currently (Exhibit 16). In fact, according to the price listed
on Amazon, the price of S9 has fallen more than 50% from ~US$1,300 at the end of 1Q18 to only US$600 now 7. In
summary, lacking competitive products not only makes it difficult to convert the bloated inventory into revenue and profits,
it also poses a significant write-down risk to the inventory which we believe was mostly based on uncompetitive16nm
ASICs (and likely unsuccessful 12nm and 10nm ones) at the end of 1Q18.

EXHIBIT 13: Bitmain financed its working capital needs EXHIBIT 14: Bitmain's EBITDA was close to its operating
largely with customer deposit in 2017. However the net cash flow but the gap increased substantially in 1Q18
working capital rose significantly but customer as most of the earned cash was deployed to fund
deposits declined in 1Q18. working capital.

Bitmain Working Capital Breakdown Bitmain EBITDA and Operating


Cashflow
2,500 1,600
2,000 Difference is
1,400
1,500 due to
1,000 1,200 change in
working
US$M

500 1,000
capital
0
US$M

800
-500
-1,000 600
-1,500 Customer deposits
dropped sharply in 1Q18 400
-2,000
2016 2017 1Q18 200
Customer Deposit
Others 0
Prepayment to Suppliers 2016 2017 1Q18
Inventory
Net Working Capital EBITDA Operating Cashflow

Source: Bernstein research & analysis. Source: Bernstein research & analysis.

4 https://medium.com/@btcWolves/a-bch-update-bitmain-bch-the-ipo-what-it-all-actually-means-354220b86ac3
5 https://gmominer.z.com/en/order/
6 https://news.bitcoin.com/canaan-unveils-7nm-chip-equipped-miner/& https://zhuanlan.zhihu.com/p/41679843 (Chinese

only)
7 Please see the price trend of S9 on Amazon at https://camelcamelcamel.com/Bitmain-Antminer-S9-Bitcoin-

Efficiency/product/B01MCZVPFE

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 8


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

EXHIBIT 15: Bitmain's net working capital as % of revenue and of total assets both shot up in 1Q18.

Bitmain Working Capital to


Revenue/Total Assets
1,400 70%

WC to Revenue/Total Assets
1,200 60%

1,000 50%
US$M

800 40%

600 30%

400 20%

200 10%

0 0%
2016 2017 1Q18

Net Working Capital WC/Revenue


WC/Total Assets

Source: Bernstein research & analysis.

EXHIBIT 16: Many Bitmain's competitors have announced miner models that have higher hash rate & better
efficiency because of more advanced semiconductor manufacturing processes.
Power Power
Company Hash Rate
Miner Name Consumption Efficiency Node Foundry
Name (TH/s)
(W) (W/(TH/s))
Bitmain Antminer S9 13.5 1323 ~100 16nm TSMC
Canaan A9 26.5-30 1720 60-70 7nm TSMC
GMO B2 & B3 24-33 2000-3400 81-103 7nm TSMC
ASICMiner 8 Nano 40+-10% 2100+-10% 50+-10%? 8nm Samsung
INNOSILICON T2 Turbo 24 1800-2000 75-83 10nm Samsung
Halong DragonMing 16T 16 1480 ~92 10nm Samsung

Source: Company data8, and Bernstein analysis.

Additionally, another large sum of Bitmain's assets is in Bitcoin Cash. As Bitcoin Cash price plummeted recently,
these coins are illiquid & may suffer a severe write-down too.
 Bitcoin Cash is a "hard fork" from Bitcoin. The coin increased the size of blocks in order to speed up transactions but in
doing so made it incompatible with Bitcoin9. Bitmain has been long known as an avid Bitcoin Cash supporter and
according to the leaked slides the company actually put its money at what its mouth is and had more than 1 million Bitcoin
Cash coins at the end of 1Q18. Bitcoin Cash as a result accounted for ~3/4 (~US$890M) of Bitmain's total cryptocurrency
assets which together amounted to US$1.2B then. It does not appear Bitmain inherited the Bitcoin Cash position from the

8 Canaan: https://i2.wp.com/www.cryptominando.it/wp-content/uploads/2018/08/Canaan-Avalon-A9-Miner.jpg; GMO:


https://gmominer.z.com/en/; ASICMiner: https://asicminer.co/shop/asicminer-compact; INNOSILICON:
http://www.sohu.com/a/246099590_100197170
9 More details at https://en.bitcoinwiki.org/wiki/Bitcoin_Cash

ASIAN SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 9


Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

prior holding of Bitcoin (all Bitcoin owners automatically became Bitcoin Cash owners on August 1st, 2017 when the fork
took place). Instead, reading between lines, we find that Bitmain possibly spent a large chunk of its operating cash, and
traded in much of its Bitcoin position, in order to build up such a large hoard of Bitcoin Cash in 8 months.
 Not only did the accumulation of Bitcoin Cash divert much of Bitmain's valuable operating cash flow away from working
capital, it also turned the US$1.2B cryptocurrency assets into another major red flag in Bitmain's balance sheet. These
coins are susceptible to coin price volatility, and the poor liquidity of Bitcoin Cash can make that US$890M particularly
risky. For example, since the end of 1Q18, Bitcoin price has lost 6% but Bitcoin Cash dropped nearly 20% (Exhibits 17-
18). It would've slashed 1Q18's earnings by 15% should all this take place in that quarter & Bitmain write down the asset
value accordingly.

EXHIBIT 17: Bitcoin price lost 6% from the end of 1Q18 to EXHIBIT 18: Bitcoin Cash performed worse and tanked
now. by nearly 20% in the same period.

Bitcoin Price Bitcoin Cash Price


25,000 4,000

3,500
20,000
3,000
Down 6.1%
since end of 2,500 Down 18.5%
15,000
1Q18 since end of
US$

US$

2,000 1Q18
10,000
1,500

1,000
5,000
500

0 0
May-18
Jan-18

Jun-18
Feb-18
Mar-18
Jul-17

Jul-18
Oct-17

Apr-18

May-18
Jan-18

Jun-18
Feb-18
Aug-17
Sep-17

Aug-18

Mar-18
Nov-17
Dec-17

Jul-18
Oct-17

Apr-18
Sep-17
Aug-17

Aug-18
Nov-17
Dec-17

Source: coingecko.com and Bernstein analysis. Source: coingecko.com and Bernstein analysis.

Bitmain's promotion of Bitcoin Cash could put the company's valuable operating cash flow in further risk.
 Bitmain’s treasury holdings of crypto currency makes its operating cash flows vulnerable to idiosyncratic decisions it takes
to promote one crypto currency versus other. In the particular case, they swapped Bitcoin for Bitcoin Cash (Exhibit 19).
Bitcoin Cash also draws significant criticism from the Bitcoin community for its lack of decentralization and strong
association with Bitmain as the central promoter. Further, given it held 5.7% of the Bitcoin cash circulating supply, Bitmain
may be forced to fund the marketing and promotion of Bitcoin Cash going forward again drawing from its valuable
operating cash flows.
 In the scenario in which Bitcoin 2nd layer scaling adoption improves, it could negatively impact Bitmain’s Bitcoin transaction
fees and the value proposition and growth of Bitcoin Cash itself. While this is probabilistic as of now, but is a potential risk
scenario to consider for Bitmain.

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EXHIBIT 19: According to the changes to Bitmain's cryptocurrency holding in the leaked slides, the company
possibly swapped its Bitcoin for Bitcoin Cash in 2017 and 1Q18.
Bitmain Cryptocurrency Holding (Quantity)
Column1 End of 2016 End of 2017 End of 1Q18
Bitcoin Cash 0 841,866 1,021,316 Holding of Bitcoin
Bitcoin 71,560 36,877 22,082 declined while
Litecoin 554,821 925,084 930,932 holding of Bitcoin
Dashcoin 0 312,066 312,424 Cash increased
Ethereum 0 747 1,097

Source: Bernstein research & analysis.

As for TSMC, we advise the company to collect prepayment in full and continue to resist the temptation of adding
capacity for crypto chips. Investors should also be realistic about the outlook of TSMC's "HPC" (High Performance
Compute) demand.
 Last year crypto ASICs brought ~US$0.9-1.1B additional revenue to TSMC and the far majority of that was from Bitmain.
This year, we forecast the revenue will increase to ~US$2.3-2.5B in which Bitmain alone will still contribute US$1.8-2B, or
75-80%. That is equivalent to ~5-6% of TSMC's total revenue and will make Bitmain one of TSMC's top 5 customers.
However, after the analysis above, we can't help but wonder how sustainable the business is. Cryptocurrency mining and
mining rig is a risky business to start with, and Bitmain's speculative and aggressive approach makes the company's
business even riskier.
 Fortunately for TSMC, the risk from Bitmain's share loss will be mitigated by TSMC's exposure to the share gains of other
customers such as Canaan Creative, but that also depends on the successful execution of these customers, as well as
Bitcoin price. Further, the leaked slides show Bitmain only prepays half of the services provided by TSMC. If this is true,
then we'll advise TSMC to collect full payment in advance, considering the risks identified above.
 As for the IPO, if true, it will give Bitmain more money to burn and, ironically, may help TSMC. TSMC nonetheless should
stay firm on the policy of not expanding capacity for crypto demand, even when Bitmain or other players boast more money
(cash or coins) on hand and threaten to work with Samsung or other foundries instead.
 Similarly, investors should not be carried away by the rapid growth of the HPC demand at TSMC as the bulk of the recent
growth, we believe, is from crypto customers. We hence will also approach this cautiously, and don't forecast the rapid
growth will sustain in the future.

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Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

DISCLOSURE APPENDIX

VALUATION METHODOLOGY
Taiwan Semiconductor Manufacturing Co Ltd
Given the cyclical nature of the financials and high incidence of low or negative net income periods, we follow industry practice
and value these companies on a trailing P/BV basis, intangible assets and goodwill excluded.
To reflect the structural profitability challenges and mounting competition in next few years, we value TSMC at 3.6x NTM BV
excluding intangible assets and goodwill.
India Financials
India is a growth market and investors generally seek growth-based returns in India. We believe all banks in India trade on what
market believes as the sustainable earnings growth momentum. Banks that have sustained cross-cycle earnings growth
despite sector asset quality concerns trade at a premium. On the other hand, banks that have been inconsistent in earnings
growth get penalized by the market until they build investor confidence again. We value our coverage on a target P/E multiple
based on one year forward earnings calibrated by trading history and our expectation of three-year sustainable earnings
growth. We use a one-year forward multiple based on FY'20 earnings to arrive at FY'19 end target price. We corroborate our
target price earnings multiples with a P/BV based multiple as a secondary check. We also believe the market can be brutal with
growth stocks if the growth story shows any structural weakness and thus we constantly stress-test for structural growth
weakness across our industry and company investment thesis. This methodology works for banks under NPL stress too as we
expect earnings to largely normalize by FY'19

RISKS
Taiwan Semiconductor Manufacturing Co Ltd
There are a number of risks to our TSMC target price:
(1) Unexpected innovations that significantly change the capex requirements of leading technologies;
(2) Unexpected penetration into new market segments;
(3) Share gain at major customers like Apple and Qualcomm, against Samsung;
(4) Delays of leading edge nodes development at competitors;
(5) Competition, especially any accelerated capacity expansion or price competition, will lead to spare capacity & weak price;
(6) Macroeconomic risk would change end market demand and eventually impacts the upstream players such as TSMC;
(7) Exchange rate fluctuation poses substantial risk to TSMC's revenue and profit;
(8) Disruption and imbalance in the electronics supply chain - either on TSMC, on its suppliers/distributors, or on its customers -
will create a chain effect and impact the company's ability to fully utilize its capacity.

India Financials
Key risks to our sector thesis
 Asset quality risks in consumer lending
 Excessive competition in retail lending due to margin pressures
 Banks counter net interest margin pressures by going up the risk curve sharply that boosts earnings in the near term

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Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

SRO REQUIRED DISCLOSURES


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12-Month Rating History as of 08/20/2018


Ticker Rating Changes
2330.TT M (RC) 01/30/12
TSM M (RC) 01/30/12

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated


Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

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Mark Li +852-2918-5752 mark.li@bernstein.com 22 August 2018

OTHER DISCLOSURES
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CERTIFICATIONS
 I/(we), Gautam Chhugani, Mark Li, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect
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Approved By: RP

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ASIAN
guide to, indicator of, SEMICONDUCTORS
or assurance of, future &performance.
SEMICONDUCTOR EQUIPMENT AND INDIA FINANCIALS BERNSTEIN 16
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