TSMC is the largest semi-conductor foundry in the world with ~54% market share. Importantly, at the leading edge, its market share is ~80%, providing the company with pricing power.  

The overall industry has also consolidated over time as semiconductor manufacturing has become more complex, especially at the leading edge. As such, there only remains three players that can manufacture leading-edge chips – TSMC, Intel and Samsung. 

The foundry business is also extremely capital intensive which creates a barrier to entry, and TSMC is currently spending >$40bn a year in capex. But thanks to management’s excellent execution, the ROEs generated are 28%. This has been consistent for over a decade, notwithstanding the perceived cyclicality of the industry. 

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