Taiwan Semiconductor Manufacturing (2330.TW): Q326 earnings preview: Raising 2027-28E capex for next phase of AI growth

Cloud AI mega-trend driving sales growth >40% in 2026E and 40% in 2027E. Feedback from our recent industry analysis suggests no signs of Cloud AI demand moderation (Summit Day 1, Day 2&3, CoWoS update); yet the demand outlook has further strengthened across CPUs, GPUs and ASICs in 2027-28. TSMC is on track to reach 2026 sales guidance of slightly over 40% growth in USD (UBSe 41%), and our growth analysis points to sustained 40% sales growth in 2027E, above consensus of 36%. We estimate Q3 sales at 14% QoQ in USD and GM at 67.1%, both at high-end of guidance. We forecast Q4 sales to grow 10% QoQ thanks to seasonal build of flagship phones and accelerating ramp of high performance compute (HPC), with flat GM of 67.0% considering the dilution of N2 and overseas expansion. We have been constructive about TSMC's capex and view higher capex essential in solidifying TSMC's leadership in advanced foundry. We keep 2026E capex at US$63bn, and raise 2027/28E capex to US$90bn/105bn from US$80bn/95