By Ryan Lightfoot-Aminoff, investment trust research analyst at Kepler Partners
There has been much attention on the magnificent seven in the US, with a particular focus on the story of Nvidia. But while these US based firms are the household names leading the tech revolution, much of their success is built in the factories and warehouses in Asia.
Taiwan Semiconductor (TSMC), for example, has been the go-to for investors looking to capture the growth in tech and AI in Asia.
However, with shares up over 250% in five years, questions are beginning to be asked as to whether this could continue, and what alternatives are available to investors who wish to diversify away from the single stock risk.
One alternative is MediaTek. In many ways, this is very similar to TSMC in that it operates in the semiconductor industry and is based in Taiwan, but there are crucial differences.
While TSMC is a pure-play foundry, meaning they simply manufacture the chips of others rather than designing their own, MediaTek is a chip designer. It is actually a customer of TSMC, as they outsource the manufacturing of the chips they design to their compatriot firm.
MediaTek’s products are primarily used in lower-budget smartphones, as well as smart TVs and the growing ‘internet of things’ space. As a result, many of their customers are based in the Asian region, including Chinese companies Xiaomi and Oppo. It therefore offers exposure to technology giants in one the world’s fastest growing regions.
This potential has been recognised by a suite of Schroders trusts, including Asian Total Return, Oriental Income and AsiaPacific, all of which have the company as a top-ten holding.
Staying in Taiwan, though moving across the supply chain, another potential alternative is ASE Technology. ASE also operates in the semiconductor industry, but is focused on packaging and testing services, ensuring the chips that TSMC makes are working reliably and then getting them prepared for integration into end products.
As such, ASE is a customer of TSMC and therefore benefits from the company’s increased production. As ASE’s services are arguably slightly more replicable than TSMC, the company is trading at a lower valuation of c. 23x on a PE basis, versus 33x for TSMC. This gives ASE a much higher yield of c. 3.3% which has contributed to its place in the top ten holdings of Henderson Far East Income.
These alternatives may diversify the single stock risk of TSMC, yet we have kept to the same geography – Taiwan is at the centre of significant geopolitical tensions at present due to relations with China.
While any escalation would have ramifications across the global economy, Taiwan’s economy would be particularly heavily hit. Investors may therefore also want to diversify overseas, for example with South Korea’s SK Hynix.
It is also in an adjacent industry to TSMC, operating in the memory chip space, which are types of semiconductors that store data. They operate alongside the processing that TSMC manufactures, meaning both companies are tapped into the same growth trends.
SK Hynix both designs and manufactures their own chips, offering greater exposure to the memory supply chain. It is one of the market leaders in the memory sector, only lagging behind conglomerates Samsung, and in some sectors Toshiba.
The company is a popular holding among Asian investment trusts, with Invesco Asia having a long-standing holding, as well as being a top 10 holding for JPMorgan Asia Growth & Income.
Moving even further away geographically is ASML. While listed and headquartered in the Netherlands, a significant portion of the firm’s revenue comes from Asia, with nearly half coming from China alone.
It is arguably even more critical than TSMC. ASML is the only company currently that makes the lithography machines that TSMC relies on to produce chips. While TSMC might be a critical client of the likes of Nvidia, ASML is critical to TSMC as well as the broader semiconductor industry.
This trait is recognised by numerous trusts, including Asia Dragon where it is the trust’s sixth largest holding. Whilst its position size of 2.4% may pale in comparison to TSMC’s 12.1%, it is an off-benchmark position and therefore a sizeable active bet for the trust.
ASML is a stalwart of many European trusts, including Fidelity European, where it is the second largest holding.
Due to its position as a critical part of the supply chain for the largest US firms, TSMC has attracted a lot of attention, much of which has been reflected in its share price. However, investors may want to consider the numerous alternatives in the Asian region that offer exposure to the same trends, whilst potentially providing better value as they are slightly more under the radar.
Fortunately, there are several investment trust managers that have identify these alternatives. With many Asia-focused trusts trading at wide discounts to NAV given broader negative sentiment towards the region, investors also have an opportunity to invest in these companies at effectively a lower value than they are worth, which may well support long-term returns.
