Home / Money / Personal Finance /  ‘Taiwan’s semiconductor making industry still has the upper hand’

Nippon India Asset Management Company has teamed up with Cathay SITE, a Taiwanese asset manager, to launch a Taiwan-specific mutual fund for Indian investors, the Nippon India Taiwan Equity Fund. The new fund offer (NFO) for the scheme will run from 22 November to 6 December. Being an open-ended fund, it will also be available to investors thereafter. Sundeep Sikka, chief executive officer (CEO), Nippon India AMC, and Andy Chang, president and CEO, Cathay SITE, speak with Mint on the offering. Edited excerpts:


Why is Taiwan a good market to invest in?

Chang: Taiwan is a silicon icon, powering technology across the world. From smartphones invented several years ago to newer advances such as AI, cloud computing or autonomous driving or even the AR-VR of Metaverse, all technologies are powered by semiconductors. Taiwan is the largest semiconductor manufacturer in the world.

A large part of the underlying fund is invested in semiconductor makers, and that leads to industry concentration. At present, there is a shortage of chips, but that need not last. How do you mitigate this risk?

Chang: Semiconductors form a cyclical industry. There are both good and bad times through the cycle; but, so far, we do not see any risk of oversupply until 2023, as there are many new players that want to jump on the bandwagon, and want to join the semiconductor foundry, including leading companies such as Intel and Samsung. But I don’t think their chances of success are very high. Intel has, over the last 10 years, announced twice that it would join the semiconductor foundry, but failed. The reason is that Intel has its own chips. Every company has its own circuit design, which is its intellectual property. Companies such as Apple and Google have their own circuit designs for chips, and when they deliver this to their competitor such as Intel for manufacture of chips, there is a risk. Intel even wanted to sacrifice their price to induce clients, but failed.

The second reason is that the foundry business model is very different from the idea-integrated design manufacturing model that Intel is using. A foundry model has to serve thousands of customers, and every customer has their own circuit design. So, that is a small-batch manufacturing model, instead of the big-batch manufacturing model that needs more flexibility during the manufacturing process. Even Samsung has its own brand and chips, which may concern clients in terms of risk to their intellectual property. So, we’re still confident that the Taiwan semiconductor manufacturing industry still has the upper hand.

There has been a considerable run up in the Taiwanese stock market over the last couple of years, particularly the last 12 months. What is the position with valuations?

Chang: The Taiwanese stock market valuation in terms of P/E (price-to-earnings) ratio is 13.5 times the 2021 earnings. That is lower than Taiwan’s long-term average P/E ratio, which is 15 times. The valuation is 13.5 times because this year Taiwanese companies saw their earnings grow by 16%, in turn, causing the market to perform well. However, the P/E ratio is still 13.5.

Looking forward to next year, even if Taiwan’s corporate earnings do not grow, the valuation is very low. Plus Taiwanese companies generously pay high cash dividends to shareholders; so in the Taiwanese markets, the dividend yield is 3%, and the highest in the region.

What impact do you see of the choppy relations between the People’s Republic of China and Taiwan?

Chang: The China-Taiwan relationship keeps varying with time, ranging from good to bad, and we have gotten used to this. However, we have not seen any sort of real military action in the last 15 years. Because China and Taiwan have a lot of cross-trade, with a lot of travel activity—1 million Taiwanese work in China—the interaction between China and Taiwan is frequent and close, and any war is just a war of the tongue between the governments. Foreign investors in Taiwanese equity markets are already aware of the situation, but for new investors, we explain the history of the relationship between the nations, and that if ever any tension occurs, or the market panics, it’s a very good buying (dip) opportunity because at the end of the day nothing happens, and everything goes back to normal, with the market rebounding strongly. So, anyone with the knowledge and calm to buy in, are big winners.

Sikka: The reason we launched this fund was that Indian investors, who till now have been investing mostly into Indian markets, [are] changing.

Two years back, their total investments outside India was only 3,000 crore. That number has grown to 6,000 crore, and 1 million investors (from 100,000). However, the majority of investments have only happened in the US, and to an extent, in China. We saw the strengths of Taiwan and while the semiconductor shortage got them into limelight, we believe that the inherent advantage will always be with Taiwan.

Over the last 10 years, Taiwanese markets have had a (low) correlation of 0.59 with India. Meanwhile, with China, the Taiwanese market has a correlation of 0.15. Many a time, we also see Taiwan as just a market for semiconductors. But we are offering investors an opportunity to invest in a market that is bigger than India, has low correlation with India compared with the US, and has a high dividend yield. So, while we have US funds, we are trying to give unique opportunities in the form of Japan and Taiwan, instead of just the regular funds such as Nasdaq.

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