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Taiwan has built a reputation for its technological prowess

28th Jul 2011, 8:36 am

Taiwan’s integral position in technology and unique cross-strait opening up theme with mainland China are often ignored by investors due to the vast shadow cast by its huge parent nation.  Today Taiwan has built a reputation for its technological prowess and ranks in the top ten economies globally in the IMD world competitiveness rankings.

 

Historically a high-growth export-based economy, Taiwan’s GDP growth in 2010 exceeded 10%. Despite current glacial global growth this year, growth in Taiwan is anticipated to be 5%, an impressive gain.  The index and consequently the iShares MSCI Taiwan ETF (ITWN) are dominated by companies in the IT sector with a weighting of around 55%. Financials and materials are both another 15% respectively with the remainder spread across the other sectors.

 

The tech sector in Taiwan is an integral part of the global IT supply chain with companies operating across the spectrum such as upstream players designing and manufacturing chips and components, contract manufacturers and downstream plays such as notebook and handset brands Acer and HTC. Taiwan is a beneficiary of the boom in consumer electronics.

 

We believe tech demand will improve in 2H11 as inventory backlog clears post the Japan earthquake, peak season arrives and going forward global demand improves. Taiwan is now much less reliant upon US demand than previously; China is now its largest export market. Resilient demand from China and Hong Kong provide a buffer against difficult conditions in the US with exports to China/Hong Kong almost 45% of exports versus only 10% to the US.

 

Many themes within the tech sector appear promising to underpin future demand for the Taiwanese technology crowd. Vigorous growth at approximately 30% for smartphones and tablet PCs over the next several years will benefit foundries, Outsourced Semiconductor and Assembly Test companies, component and contract manufacturing players. 

 

Also the growth of cloud computing bodes well.  This is a system whereby a huge amount of computing activity is automatically distributed to numerous small programs via the Internet, which search and compute through a system of servers and then transmit the results back to end users. For businesses, cloud computing enables storage and access via the Internet, to lower costs and improve efficiency.

 

There are many holdings within the fund which stand to benefit from these themes. Taiwan Semiconductor, the leading foundry and a major spender on research and development is trading on 13x 2011 earnings.

 

The ETF also contains Hon Hai, the world's largest contract electronics manufacturer which is trading on 11.6x earnings, HTC Corporation, which designs and manufactures smartphones and MediaTek, the largest supplier of chips for wireless handsets in China and Taiwan.  Between them these four technology companies make up just over 27% of the weighting in the fund.

 

 

This report was produced by Senior Research Analyst, Aamer Nawid.  

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