Taiwan's 'China plays' rise above tech shares

Thu Feb 6, 2014 3:31am EST

* 'China plays' outshine tech shares on Taiwan bourse

* Trends reflects changes in global manufacturing

* Future of Taiwan tech firms worrisome in 'post-Apple' era

By Faith Hung

TAIPEI, Feb 6 (Reuters) - Taiwanese technology stocks are losing their lustre with foreign investors who are now buying Taiwanese shares with a significant presence in mainland China instead.

Investors call these stocks "China plays" and think they have better prospects than the traditional technology shares that in many ways reflect the past rather than the future.

Taiwanese technology companies rose to prominence making components for the likes of Apple, Sony and Nokia and rode the buzz that had consumers standing in long queues to buy the latest trendy gadgets.

Now that iPhones and iPads are not so dominant and competition is intensifying in the global smartphone and tablet market, investors think China plays are a better bet.

By market capitalisation, China plays rose to 40 percent of the Taiwanese bourse as of the end of 2013, the highest in 13 years, according to data from JP Morgan, which said this would keep rising. Tech shares, by contrast, fell to below 50 percent of the market for the first time in nine years.

China plays have a big presence in China and are suppliers for a different group of companies such as Tesla Motors , Nike Inc and Lululemon, a maker of Yoga clothing. Sun Art Retail Group, which has outgunned Wal-Mart in China, is partially controlled by Taiwan's Ruentex Group.

"Those glory days when tech shares dominated the Taiwan market are gone," said James Yeh, manager of JPMorgan Asset Management's "Taiwan Gold Brick Fund." His fund generated a 34 percent return in 2013, about triple the main index's 12 percent advance.

"These companies have been around for 30-50 years," said Ryan Shen, a fund manager at Capital Investment Trust Corp, referring to China plays, on which he is bullish.

"Most of their rivals had been kicked out of the market during the process, allowing them to develop high-end products not easy to be replaced," he said.

'WOW' FACTOR STRUGGLES

Driving the change is investor concern that companies such as Apple and Samsung Electronics now struggle to launch products with a "wow" factor and face fierce competition from Chinese rivals.

"Apple's innovation has got to a point where not that much new can be done any more. After they launch the iPhone 6 this year, their high-end models demand will slow down," said Yeh.

"Samsung is in a similar tough situation. There is increasing concern its earnings growth has peaked out," he said. "Samsung has nothing new and eye-catching to show consumers this year, neither will Apple in 2015."

Since early in 2013, shares of Hon Hai Precision and TSMC , the two most recognised "Apple plays", rose 4 percent and 9.3 percent, respectively, lagging the broader market's 12.8 percent gain.

Further weighing on such Taiwanese suppliers is the fact that Apple has added Chinese companies including Shenzhen O-Film Tech Co and Goertek to its supply chain in order to maintain stability.

By comparison, Eclat Textile Corp has surged 208 percent while Tesla Motor supplier BizLink Holding Inc has soared 266 percent.

Eclat, which counts Nike, Lululemon and Under Armour as major customers, has seen foreign investors accumulate 90 million of its shares in the last three years, up from 3 million shares previously, said Capital's Shen.

Other China plays whose shares have surged over the past year are Hota Industrial Manufacturing Co, another Tesla supplier, bicycle maker Merida and convenience chain store Family Mart.

China plays have performed so well, however, that there is now some concern that their valuations have gotten too far ahead of earnings, said Alex Wang, a fund manager at Fuh Hwa Asset Management Co.

"What is Taiwan going to do in the post-Apple era? Chinese companies are catching up. Their scale is much bigger and clients are much bigger," said JPMorgan's Yeh. "Look at all of the capacity expansion that Hon Hai has done ... The combination of these two makes us worried."