A Bet on Taiwan’s Turnaround

04/08/2008 12:00 am EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says an improving political climate makes Taiwan a good investment opportunity, and he recommends a stock that may profit from it.

In a difficult global environment, the Taiwanese stock market is actually up so far this year. As of March 12th, [it] had risen 5% in US dollar terms for the year, making it the best-performing stock market in East Asia.

How is the Taiwanese stock market defying the current global down trend? Two words: political change. A number of major elections in Taiwan this year have significantly improved the political and economic relationship between Taiwan and Mainland China.

In January, the pro-China Nationalist party beat president Chen Shui-bian’s Democratic Progressive Party (DPP) in a landslide victory. Then the Nationalist Party candidate and former mayor of Taipei, Ma Ying-jeoh, won the island's leadership election in March, securing his spot as the new president of Taiwan.

Better relations with China will also improve the already attractively valued stock market of Taiwan. After the huge run-up in the past two years, stock markets in Asia have an average P/E ratio of 15x. By comparison, Taiwan's average market valuation [of 12x] is 20% lower than the rest of Asia. In an era of low interest rates and lower risk appetite, Taiwan's cheap valuation looks increasingly attractive for investors like us.

Chunghwa Telecom (NYSE: CHT) has grown into a technology leader. It is the largest provider of fixed-line services to over 13.2 million subscribers in Taiwan, bringing 34% of revenues in 2006. And the company is also Taiwan's dominant cellular service provider in both revenues and subscribers. By the end of 2006, it had 8.5 million cellular subscribers, with a market share of 41%, and its revenues clocked in at 39% in 2006.

Chunghwa Telecom has also experienced strong growth in its Internet and data services—in 2006, it provided 25% of the company's revenues. Chunghwa Telecom is aiming to become the leading provider of digital converged services in Taiwan by enhancing its third-generation (3G) services and promotions. It is also working to increase its broadband capabilities to meet growing demands.

Chunghwa offers a generous dividend [yield]—5% last year, based on today's price. Even better, the company has a history of raising shareholders' dividends.
Chunghwa's ADRs have jumped 32% since the beginning of the year, thanks to its healthy profits, steady dividends, and political confidence on improved economic ties with China. This leap pushed the stock to new highs and its best finish in more than four years. Yet its current P/E ratio is only 14.6x—even after its run.

With such a low valuation, Chunghwa is offering us a great buying opportunity right now. I want you to buy CHT under $27. (The ADRs closed below $26 Monday—Editor.) Expect favorable exchange rates and continued momentum to push the stock to at least $32 in the next four to six months.

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