Top Greater China Fund Raises Concern Over TSMC After Buffett

(Bloomberg) — A top Greater China fund is joining Warren Buffett in voicing concerns over Taiwan Semiconductor Manufacturing Co.

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Uni-President Asset Management Corp.’s Derek Lin, whose fund has earned 11.6% annually for the past 10 years, said he held off on buying more of the chipmaker’s shares during a pullback in early 2023. While Buffett was wary of the company’s exposure to geopolitical risks, Lin reckons its softening return on equity is even more alarming.

TSMC’s overseas expansion would lead to higher costs and lower efficiency, which will dent the company’s ROE, he said. His UPAMC Great China Fund ranks first among 144 stock mutual funds that invest at least $200 million mainly in the Greater China region.

Last month, the chipmaker reported that gross margin dropped by nearly 6 percentage points to 56.3% in the first quarter and that the metric faces challenges ahead on reasons including semiconductor cyclicality and its overseas expansion.

“I think it’s very challenging for TSMC to maintain ROE at current levels in 5 to 10 years,” Lin said in an interview 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.”

TSMC shares rose 0.4% in Taipei on Friday. In an email, TSMC referred to comments Chief Executive Officer C. C. Wei made during an earnings call in January. “Even as we increase our capacity outside of Taiwan, we believe a long-term gross margin of 53% and higher continues to be achievable,” he said.

Lin considered topping up his TSMC holding earlier this year when its share price dropped below NT$500 ($16.20), but ultimately bought more shares of electronic paper maker E Ink Holdings Inc. instead. E Ink, a stock he’s owned since 2021 and is among his top holdings, has a dominant market position and a growth outlook that’s not been fully priced in with increasing adoption of electronic labels, he said.

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“I would buy TSMC if I couldn’t find a better target, but I did,” said Lin. E Ink has gained 23% this year, while TSMC is up 11%.

Like Buffett, geopolitical tensions across the strait also worry Lin, though he doesn’t see an imminent risk of a conflict.

The move by Buffett’s Berkshire Hathaway Inc. to cut its TSMC holdings by 86% in the fourth quarter over China-Taiwan tensions is “not a surprising decision to me,” Lin said. “The location of TSMC is certainly concerning to a foreign investor.”

Read: Buffett’s Quick $3.7 Billion Sale of TSMC Stock Spooks Investors

Over 40% of Lin’s fund is invested in Chinese and Taiwanese technology stocks. Top holdings include Alchip Technologies Ltd., which he started backing in 2019.

He’s 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 applications, also has huge potential given the buzz surrounding ChatGPT, he said.

Chip Outlook

He’s 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 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 will likely maintain his TSMC holding at around 2.5% as he has for the past two years.

More from Lin:

• Over the past 2-3 years, the fund has added more electric vehicle and solar stocks. But Lin has become less keen on EV shares due to US restrictions for Chinese suppliers, though he still likes Contemporary Amperex Technology Co. given its competitiveness.

• Lin is positive on Beijing Oriental Yuhong Waterproof Technology Co. due to its leadership position as a “trend setter” and its continuing expansion amid a property slump. Lin expects the company to gain share in the next upcycle.

• He sold financials like Ping An Insurance Group Co. in 2022 on signs of weakness in the sector. Lin also offloaded stocks related to baijiu, a strong-flavored white liquor, and other consumer shares due to soft demand

(Updates with TSMC comment in the sixth graph, closing share prices throughout)

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