A Safer Way to Play Taiwan's Surge

06/11/2009 12:00 pm EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, says a leading Taiwanese telecom company is a reliable stock in one of Asia’s hottest market.

Taiwanese stocks surged to a nine-month high this month after record-breaking gains in the Taiex Index on news that Taiwanese President Ma Yingjeou’s efforts to bring about peace with the mainland were succeeding. As May came to an end, the Taiex surged towards the 7,000 mark despite a 10.24% decline in the island’s economy. (It closed above 6,400 Wednesday—Editor.)

The market breakthrough started in early May when the Taiwanese government announced that it would allow institutional investors from China to buy into the island’s stock market for the first time since the two sides split in the civil war.

In yet another sign of a thaw, the two sides have agreed to more than double direct flights between the island and the mainland, and envoys from the two sides have also signed a financial cooperation agreement that paves the way for the two sides to open banks and other financial service institutions in the other’s territory.

On the political front, China suddenly dropped its longstanding opposition to Taiwan’s participation in meetings of world bodies, particularly the United Nations. The sudden appearance of peace and cooperation after six decades of bitter hostility has ramifications for Asia and the United States that few in the West fully understand. The soaring Taiwan stock exchange is the first indicator of an historic turning point.

Chunghwa Telecom (NYSE: CHT) is the big gun among Taiwan’s telecommunications operators. Formerly a government directorate, Chunghwa was spun off in 1996. [Its] hold on 98% of Taiwan’s fixed-line telephone customer base shows the depth of the company’s penetration and its grip on the domestic market.

Chunghwa is a top player in Taiwan’s wireless services, including cellular and paging services and Internet and data services. It also provides other telecommunications services like multimedia on demand, satellite services, telephone directories, and billing handling services.

We’re impressed that Chunghwa continues to find and exploit new revenue sources. As the company persistently expands data and DSL sales, Chunghwa continues to be the leading mobile operator in Taiwan in both revenue and subscriber market share.

Chunghwa has decided to invest $4 billion over the next five years to upgrade its fixed-line and mobile networks. The company will build new fiber optic fixed-line networks and expand its mobile networks and undersea cables.

The company is also involved in a trans-Pacific partnership that will make it a player in the explosion of Internet service to the Chinese mainland and the Greater China region. [A consortium] with Verizon Communications (NYSE: VZ) and Asian partners will build a $500-million high-speed undersea cable linking the United States and China.

Taking into account Chunghwa’s reasonable valuations and historically low volatility for a telecom stock, the company seems poised to be a relatively reliable earner for the long run with its dividend yield of 5.4%. We have a relatively conservative sell price target on Chunghwa of $25.00 per ADS. (It closed above $19 Wednesday—Editor.)

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