A top Greater China fund is joining billionaire investor Warren Buffett in voicing concerns over Taiwan Semiconductor Manufacturing Co (TSMC, 台積電).
Derek Lin (林鴻益), a senior fund manager at Uni-President Asset Management Corp (統一投信) whose fund has earned 11.6 percent annually for the past 10 years, said he held off on buying more of the chipmaker’s shares during a pullback early this year.
While Buffett was wary of the company’s exposure to geopolitical risks, Lin said its softening return on equity (ROE) is even more alarming.
Photo: Bloomberg
TSMC’s overseas expansion would lead to higher costs and lower efficiency, which would dent the company’s return on equity, he said.
Lin’s UPAMC Great China Fund ranks first among 144 stock mutual funds that invest at least US$200 million mainly in the Greater China region.
Last month, the chipmaker reported that gross margin dropped nearly 6 percentage points to 56.3 percent in the first quarter of this year and that the metric faces challenges ahead, citing as reasons semiconductor cyclicality and its overseas expansion.
“I think it’s very challenging for TSMC to maintain ROE at current levels in five to 10 years,” Lin said in an interview on Tuesday. “Even though TSMC may slow the decline of ROE by charging premiums due to its leading technology, it’s very difficult to completely offset the impact.”
Lin said he considered topping up his TSMC holding earlier this year when its share price dropped below NT$500, but ultimately bought more shares of electronic paper maker E Ink Holdings Inc (元太科技) instead.
E Ink, a stock his fund has owned since 2021 and is among his top holdings, has a dominant market position and a growth outlook that has not been fully priced in with increasing adoption of electronic labels, he said.
“I would buy TSMC if I couldn’t find a better target, but I did,” Lin said.
E Ink has gained 22 percent this year, while TSMC is up 11 percent.
Like Buffett, geopolitical tensions across the Taiwan Strait also worry Lin, although he said he does not see an imminent risk of a conflict.
The move by Buffett’s Berkshire Hathaway Inc to cut its TSMC holdings by 86 percent in the fourth quarter of last year over China-Taiwan tensions is “not a surprising decision to me,” Lin said.
“The location of TSMC is certainly concerning to a foreign investor,” he said.
More than 40 percent of Lin’s fund is invested in Taiwanese and Chinese technology stocks. Top holdings include Alchip Technologies Ltd (世芯電子), which he started backing in 2019.
The fund has 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.
Nvidia Corp, which makes semiconductors used in computers powering artificial intelligence (AI) applications, also has huge potential given the buzz surrounding ChatGPT, he said.
Lin said he is positive about the outlook for semiconductors in the second half of this year, with a focus on firms tied to high-performance computing and AI, especially companies that specialize in algorithms.
Demand for chips used in consumer electronics is expected to recover later this year, although future growth momentum appears murky, he said.
“Investors will give higher premium to dreams,” he said, adding that he would likely maintain his TSMC holding at about 2.5 percent, as he has for the past two years.
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