| TAIPEI, July 7
TAIPEI, July 7 Investors wanting a slice of the
crazy demand expected for Apple Inc's next version of the iPhone
are rushing for what they believe is more profitable than
investing in the U.S. smartphone maker: Taiwanese Apple
Shares of suppliers, such as camera module maker Largan
Precision, are at record levels on such proxy betting.
The surrogate betting itself isn't new. But relatively
inexpensive Taiwan shares, the extra mileage the suppliers get
from duplicating iPhone features for other smartphone makers and
a lack of long-term visibility for the U.S. tech giant, make the
supply chain an inviting investment prospect.
The underlying assumption is that the stocks of these
smaller firms will move faster than those of Apple Inc
itself, if the iPhone 6 is a success. Equally, the risk of
disappointing iPhone sales is reduced when the wager is on a
firm that supplies parts primarily to Apple but also to other
lower end smartphone players.
"From foreign investors' point of view, Apple is a very big
stock, and that limits the upside potential for earnings growth
and share prices," said John Chiu, chief investment officer of
Fuh Hwa Securities Investment Trust in Taiwan. The fund has $4.3
billion under management.
"Relatively speaking, Apple component makers are smaller and
their growth potential is bigger. They are more likely to get a
re-rating on their stock prices if Apple's new products are
successful," said Chiu.
It might be weeks before Apple's new iPhone 6 and its smart
watch are launched, but some of the supply chain stocks are
already at frothy levels.
Largan's earnings are set to nearly double this year. Its
shares have surged 57 percent since April, eclipsing the 20
percent rise in Apple's shares. Largan's market capitalisation
of $10.7 billion pales in comparison with Apple's $567 billion,
but explains the latter's sluggish share price movement.
Other lead gainers have been Taiwan Semiconductor
Manufacturing Co Ltd (TSMC), the world's top contract
chipmaker, and Hon Hai Precision. The former makes
next generation A8 chips while the latter assembles iPhones.
The Taipei share index is on the verge of scaling
the 10,000-point-mark for the first time in 14 years.
"Investors are waiting to see if the new products Apple is
set to launch are really as good as expected. If so, Apple's
share momentum will ride high later this year," said Edward
Chao, fund manager of Jih Sun Securities Investment Trust in
"Until then, regional investors are shifting their money to
Taiwan's Apple component makers from Samsung Electronics and
other South Korea stocks as Samsung would suffer most if Apple's
new products are a big hit."
Chao's fund, heavily weighted on Largan and other Apple
component makers, generated nearly 30 percent in returns in the
first half of the year, topping Taiwan's 180 local
equities-dedicated mutual funds.
The Taiwan stock rally is not merely restricted to Apple's
suppliers, but partly driven by recovery in the U.S. economy and
broader tech sector as well as cheap funding.
Taiwan has gained disproportionately among tech-dominant
North Asian economies, snatching market share from South Korea
and the more expensive Japanese manufacturers. The $11 billion
in net foreign portfolio flows into the island's stock market so
far this year even beat Asia's other big beneficiary, India.
That Taiwan is home to a supply chain spanning chips to
cameras and assembly of phones has helped, as has its proximity
to Chinese makers of cheaper phones and replicas.
"Sometimes the leading brands will adopt a particular
feature that the rest of the industry quickly copies," said
Peter Kurz, a Taiwan-based equity strategist at Citi. "So the
component company could benefit disproportionately with a new
product design by a leading brand."
Largan's share prices hit a record T$2,400 ($80) this week,
a level that no other Taiwan peers have seen.
The cheap valuations have helped. Although the Taiwan stock
index is up 10 percent this year, prices are trading on average
16 times earnings. Japan's Nikkei index has fallen 5
percent this year and yet trades at a price-earnings ratio of
19. The U.S. Nasdaq index trades at 23 times earnings.
On Friday, Taiwan's index ended flat at 9,510
points, having this week hit its highest close in almost seven
"There is no sign the market is pulling back," said Ryan
Shen, a fund manager at Capital Securities Investment Trust.
"The only thing to worry about is overbooking if iPhone 6 fails
to meet expectations."
(Additional reporting by Aviel Tan in Singapore; Editing by
Vidya Ranganathan and Jacqueline Wong)