By Martin Hutchinson
Contributing Editor
Taiwan is the China investors should be focusing on.
Investors in Taiwan got good news last week when the party that favors closer relations with China won the Taiwanese presidency. The win by Ma Ying-jeou of the Kuomintang party sent the Taiex Index up 4% in one day. The win reduces the risk to Taiwan investments of invasion by the million-strong Chinese Red Army, and it’s always good in these troubled times to see a risk being reduced!
Taiwan is an active democracy, making it a more stable pick for investors. The Kuomintang party is taking over after eight years of rule by the Democratic Progressive Party (DPP). And Taiwan is also much richer than China – its per capita Gross Domestic Product is $29,800 (calculated on a purchasing power parity basis), which is closer to the levels prevailing in Western Europe rather than China’s per capita GDP of $5,300.
Plus, inflation is under control in Taiwan. It’s currently at 1.8% compared to China’s 8.5% – and the United States’ 4.3%. It has $300 billion in international reserves, and very little foreign debt, which cushions the country from being heavily affected by any Western “liquidity crunch.” Taiwanese productivity has consistently grown at more than 4% per annum, more than double the rate in the United States and Western Europe, and its GDP increased 5.5% in 2007 and is expected to grow around 7% in 2008.
As for politics, both Taiwanese political parties are committed to the free market, and the state absorbs only 21% of GDP, making tax levels low. It’s one of the purest free market economies in the world, and likely to remain so.
Commercially, Taiwan’s relations with China are already excellent, and have improved substantially during the period of (theoretically anti-Chinese) DPP rule since 2000. China is Taiwan’s leading export market, with 39% of its exports, up from 22% in 2000. Most large Taiwanese companies have substantial operations in China, using Taiwanese technological excellence and relatively cheap Chinese labor to manufacture sophisticated products for the world market.
Unlike China’s market, Taiwan’s stock market has experienced neither a large run-up nor a big crash (in that respect, it’s done better than Japan, for example, which is off more than 30% from its 2007 high). Taiwan’s Taiex Index is only 12% below its all-time high, up about 98% in the last five years.
Even more interesting, it is currently on a price-earnings ratio of about 11, suggesting that a revival of investor optimism in Taiwan’s future could potentially produce a big run-up.
In short, the Taiwan stock market currently appears to have limited downside and lots of upside, the ideal situation for an investor in a world of difficult markets.
Taiwan Profit Plays
One effective way into the Taiwan market is the iShare MSCI Taiwan Index (EWT), currently trading at only 11 times earnings and yielding a worthwhile 2.5%. Unlike some exchange traded funds (ETFs), this Taiwan ETF has net assets of $2.95 billion, so it has plenty of liquidity, with trading volume averaging 13 million shares per day.
Taiwan’s leading blue-chip stock is Taiwan Semiconductor Mfg. Co. Ltd. (TSM), which is trading at 15 times earnings and yielding 3.5%. The firm is the largest semiconductor fabricator in the world, putting it into the category of “Global Titans” with a market capitalization of $54 billion.
Hon Hai Precision Industries Ltd. (PINK: HNHAF) is higher rated, trading at 18 times earnings with a yield of only 1.4%. However, Hon Hai is one of Taiwan’s foremost growth companies, a diversified high-tech electronics company with top quality design that has expanded production aggressively into China.
As the manufacturer of all three major video game systems on contract for Microsoft Corp. (MSFT), Nintendo Co. Ltd. (OTC:NTDOY) and Sony Corp. (SNE), the firm has a great business model.
And finally, you might look at Siliconware Precision Industries (SPIL), another semiconductor fabricator, which yields a chunky 4.6% and is currently trading at only 8.8 times earnings.
News and Related Story Links:
- Money Morning: The Politics of the “Two Chinas”
- Money Morning:Four Ways to Profit From the “Other China”