Taiwan Semi's in the Sweet Spot

02/03/2011 11:34 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Soaring tablet demand and Taiwan’s improving relations with China point to a big year for the contract chip maker, writes Yiannis G. Mostrous, editor of Global Investment Strategist.

Warming relations between the island of Taiwan and mainland China may turn 2011 into a watershed year for this troubled political and economic relationship.

Over the last two years we’ve seen a steady warming of ties between Taiwan and the People’s Republic of China. Direct flights between the mainland and Taiwan were initiated, leading to a sharp rise of mainland visitors to the island. The signing of the Economic Cooperation Framework Agreement (ECFA) with the mainland was an extremely positive development for Taiwan.

We’ll see a deepening of this relationship on several fronts in 2011. There are plans to allow individual Chinese tourists to visit Taiwan—currently Chinese tourists must visit as part of a tour group. There is the potential for substantial strategic Chinese investment in Taiwan as the ECFA will likely be expanded to include additional industries.

The Promise of Technology
Meanwhile, Taiwan’s economy and its stock market should post solid growth in 2011, as a global recovery will fuel north Asia’s export-oriented economies. Technology should be a major beneficiary of these near-term themes and Taiwan Semiconductor Manufacturing Company (NYSE: TSM), or TSMC, is our favorite way to play that.

TSMC’s stock has performed well since February 2009. But the firm’s shares still have room to climb as the global technology cycle picks up again. 

Demand for notebook computers remains solid and mobile phones are expected to sell strongly during the Chinese New Year holiday this week, which will lead to inventory restocking.

Tablets to Drive Gains
TSMC’s superior technology has made it the clear industry leader, and the firm should increase its market share in 2011. The company’s key customers, Nvidia (Nasdaq: NVDA) and Qualcomm (Nasdaq: QCOM), dominate the growing tablet PC market with their Tegra2 and Snapdragon chips.

The growing tablet computing market has led Microsoft (Nasdaq: MSFT) to announce that its next Windows operating system will run on ARM Holdings (Nasdaq: ARMH) processors. This decision will send waves throughout the industry and benefit TSMC customers such as Broadcom (Nasdaq: BRCM), Texas Instruments (NYSE: TXN) and Marvell (Nasdaq: MRVL). Finally, greater outsourcing by Japanese companies in Taiwan will benefit TSMC.

The company reported fourth-quarter sales of $3.8 billion, down 2% quarter on quarter, but beating analyst expectations. There is still the possibility that the company’s first-quarter sales could be relatively weak due to weather- and inventory-related issues. But the technology cycle is beginning to turn in the company’s favor and 2011 should prove a good year for TSMC.

The company has a strong balance sheet, with $5.6 billion in cash and virtually no debt. This cash hoard will give TSMC greater flexibility to invest in research and development relative to its competitors. Buy Taiwan Semi up to $15. [Shares closed at $13.34 Wednesday—Editor.]

[Taiwan Semi is part of an industry-wide rally, as Tom Aspray makes clear. Paul McWilliams recently recommended Intel (Nasdaq: INTC) shares, which have stalled amid manufacturing difficulties and doubt about the company’s growth prospects, as well as Analog Devices (NYSE ADI), which has fared much better—Editor.]

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