Taiwan fund manager questions TSMC stock value after Buffett’s Berkshire slashes big stake
- Derek Lin at Uni-President Asset Management says TSMC will struggle to improve return on equity as overseas expansion plans erode efficiency
- Fund manager has instead picked up more shares in E Ink Holdings for better value
A top Greater China fund manager is joining Warren Buffett in voicing concerns over Taiwan Semiconductor Manufacturing Co or TSMC, the world’s biggest contract manufacturer.
“I think it’s very challenging for TSMC to maintain return on equity (ROE) at current levels in five to 10 years,” Lin said in an interview. “Even though TSMC may slow the decline of ROE by charging premiums due to its leading technology, it is very difficult to completely offset the impact.”
His UPAMC Great China Fund ranks first among 144 stock mutual funds that invest at least US$200 million mainly in the Greater China region. The fund has gained 11.6 per cent annually for the past 10 years.
Lin considered topping up his TSMC holding earlier this year when its share price dropped below NT$500 (U$16.20). Instead, he bought more shares of E Ink Holding, which is among his top holdings.
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The electronic paper has a dominant market position and a growth outlook that is not been fully priced in, he added. The stock has gained 22 per cent this year, while TSMC is up 11 per cent.
“I would buy TSMC if I could not find a better target, but I did,” said Lin. He will likely maintain his TSMC holding at around 2.5 per cent as he has for the past two years.
Like Buffett, geopolitical tensions across the strait also worry Lin, though he does not see an imminent risk of a conflict. Berkshire Hathaway’s move to cut its TSMC stake in the fourth quarter of 2022 is “not a surprising decision to me,” Lin said. “The location of TSMC is certainly concerning to a foreign investor.”
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Over 40 per cent of Lin’s fund is invested in Chinese and Taiwanese technology stocks. Other top holdings include Alchip Technologies, which he started backing in 2019. He is acquired more of the stock during its lows, even after the US blacklisting of the company’s key client in 2021 sent shares tumbling.
Lin said he sees value in the chip designer’s unique position in the semiconductor supply chain. Alchip can benefit from getting orders from China amid its frayed ties with the US, while securing TSMC’s manufacturing capacity as its vendor, he said.
He is positive on the outlook for semiconductors in the second half, with a focus on firms tied to high-performance computing and AI, especially companies that specialise in algorithms. Demand for chips used in consumer electronics is expected to recover later this year, although future growth appears murky.
“Investors will give higher premium to dreams,” Lin said.
