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China air force incursions in Taiwan ignored in TSMC valuation

  • 25 China air force planes entered Taiwan's "air space" on 12 April versus 2.3 planes per day average ytd, 1.2 in 2020

  • China unlikely to risk full military war in Taiwan without better odds of success, but expect more testing of its rivals

  • TSMC over 55% of global outsourced semis, 6.5% of MSCI EM index (Taiwan is 14%), and 80% of its capacity is in Taiwan

China air force incursions in Taiwan ignored in TSMC valuation
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
13 April 2021
Published by

TSMC accounts for over half of global outsourced semiconductor manufacture (during a period of sustained shortages), has the most advanced production technology (with perhaps a 2-3 year lead), and is 6.5% of the MSCI EM equity index (Taiwan overall is close to 14%). The rise in its share price (90% in 12 months, 14% year to date) and the 70% premium of its trailing PE to the 5-year median suggest investors do not care that 80% of its capacity is located in Taiwan and that friction between China and the US has ramped up in the early months of the Biden administration. Perhaps they should. Now that the Chinese domestic antitrust fine for Alibaba (5.2% of MSCI EM) has been confirmed (at merely 3% of trailing 12-month revenue) perhaps it is worth a revisit (even after its nearly 10% share price bounce on the news of the fine, it is more attractively valued relative to recent history than TSMC and most mega Tech peers) for EM portfolios.

While the prospects of an all-out military conflict, ie a forcible "reunification", are low as long as China feels the odds of success are not in its favour, there is no question that it is demonstrating capability and testing the boundaries of what its rivals consider acceptable. The twenty-five Chinese military aircraft which entered the Taiwan ADIZ (Air Defence Identification Zone) on 12 April establishes a new daily peak for such an incursion and compares to an average of 4.6 aircraft per day in the prior four weeks, 2.3 year to date and 1.2 over the whole of 2020.

China aircraft sorties in Taiwan ADIZ up a lot in last month

Tech equities value in large emerging markets and the US

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