Taiwan’s TSMC reported quarterly profit that exceeded analysts’ estimates, using its clout to boost earnings even as the chip industry braces for a potential recession and tighter US trade controls.

The company is betting on its technology and scale advantages to weather a global slowdown in technology demand. The US has tightened China chip trade controls, while rising interest rates, soaring inflation and concerns of a potential global recession are causing consumers to curb spending.

Net income climbed 78% to NT$295.9-billion (US$9.7-billion) for the quarter ended December, TSMC said on Thursday. Analysts estimated NT$287.8-billion on average. Revenue advanced 43% to NT$625.5-billion as previously reported — the first miss in two years.

The world’s biggest contract manufacturer of chips last year reduced its capital expenditure plans by about 10%, spending $36.3-billion, and some analysts have warned it may further delay outlay on expansion in 2023. TSMC, which is the exclusive supplier of Apple Silicon chips for iPhones and Macs, may also have been affected by problems at the US tech giant’s assembly operations in China. Apple was forced to trim output estimates after Covid-related chaos at a plant in Zhengzhou exposed vulnerabilities in the company’s supply chain.

Some of the biggest Wall Street banks have turned cautious on TSMC. Last week, Goldman Sachs Group and UBS Group said they expect its sales to be little changed in 2023, with the latter cutting its price target on the stock. Analysts have cut their average target by 39% over the past 10 months to the lowest in two years.

‘Pessimistic’

“The market is quite pessimistic about TSMC’s outlook,” Venson Tsai, an analyst at Cathay Securities and Futures, said ahead of the results. “It’s key to see when inventory will return to normal level, which will affect market sentiment. Another key thing to watch is its 2023 capex. If its capex grows at least 10% from last year, investors will see it as a positive signal.”

The company and its customers still expect the long-term trend in electronics demand to keep going up. Last month, TSMC kicked off mass production of next generation chips and increased its investment in the US state of Arizona to $40-billion.

TSMC’s technology leadership gives it an advantage in pricing even as the broader industry languishes. Its gross margin — a measure of profitability — expanded to a record 62.2% last quarter from 52.7% a year earlier, also helped by favourable foreign exchange rates and efforts to curb costs.

Read: TSMC starts mass production of 3nm chips

Shares of Hsinchu-based TSMC, Taiwan’s most valuable company, fell 27% last year — after doubling during the pandemic — and are up about 8% this year.

Read: Taiwan president says TSMC’s overseas expansion reflects prowess

TSMC is under pressure to diversify the geographic distribution of its advanced chip making and is working with governments like the US and Japan on developing a more international footprint. Global policymakers and customers are increasingly leery of their technological reliance on Taiwan, an island Beijing has threatened to invade, and have pushed TSMC to shift some production abroad. — (c) 2023 Bloomberg LP