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Wednesday January 30, 2008
Taiwan: Invest in the 'other China'
"With a per capita income of nearly $30,000, and a productivity growth rate of 4% -- more than double the rates enjoyed by Europe and the United States -- Taiwan is one of the world’s best bargains." Here, the advisor looks at a trio of ways to invest in Taiwan. "There’s no question that the Taiwanese economy is highly dependent on China. Indeed, fully 38% of Taiwan’s exports go to China - including Hong Kong - while 16% of Taiwan’s imports originate on the mainland." "Some of Taiwan’s most important companies do a great deal of their manufacturing in China, since labor costs are lower there. Essentially, the intellectual input comes from Taiwan’s superb education system and highly competitive tech sector, while China provides the skilled labor at low cost. 
"Taiwan’s inflation rate is a paltry 3%, government spending accounts for a mere 21% of the country’s economic activity and the country runs a hefty balance-of-payments surplus. Unlike China, there are no signs of major problems in Taiwan’s banking system. "Thus, even though Taiwan’s growth rate is lower than China’s 'official' growth rate, the greater stability of Taiwan’s economy ought to make the shares of Taiwan-based companies trade at a premium to those based in China. "Unfortunately, that’s not the case. Instead, Taipei trades at less than half the earnings multiple of Shanghai, and the Taiwan stock market failed to participate in the rapid 2007 run-up seen by stock markets in China and several other Asian countries. "If the relations between China and Taiwan improve enough under the newly elected Kuomintang government to cause the economic dealings between the two countries to accelerate, Taiwan could see a nice run-up in its stock prices - even if the other Asian markets are rather dull this year. "One highly effective way to play the Taiwan market is with the iShares MSCI Taiwan Index (ASE: EWT), an exchange-traded fund that’s currently trading at only 13 times earnings and yielding a worthwhile 2.6%. "Taiwan Semiconductor (NYSE: TSM), trading at 15 times earnings and yielding 4%, is the top Taiwan blue-chip stock. It’s the world’s largest semiconductor fabricator, producing approximately 7.15 million wafers in 2006, distributing its products in the United States, Europe, Japan, China, Korea and India, among others. "You might also look at Siliconware Precision Industries (NASDAQ: SPIL), which yields a substantive 4.8%, and is trading on only 8.4 times projected 2008 earnings. These valuations are well below those available in slow-growing Western markets, let alone in China." Editor's note: For serious investors seeking a first-hand look at the China region, Money Morning co-editor Keith Fitz-Gerald, will be hosting an in-depth investor tour to China from April 15-30, 2008. The trip will cover Beijing, Xian, a Yangtze River Cruise, Shanghai, and Hong Kong. For more information, please click here.
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"Taiwan - the so-called 'other China' - is an overlooked gem," says