Two Asian Tech Plays

According to the Federal Reserve, US semiconductor capacity utilization rates have steadily dropped over the past two quarters to 66.3 percent, near the Great Recession low of 63.1 percent. For the sake of context, the long-term average capacity utilization rate in the semiconductor industry is 80.2 percent. In Asia, there was a similarly substantial drop in inventories among technology companies during the fourth quarter, so 2012 commenced with lean inventory along the supply chain.

Barring a major shock to the global economy, these numbers are unlikely to decline further, which means that technology stocks should be a good buy at current levels. Of course, the market has rallied significantly, and that has prompted some profit taking. But opportunistic investors should take advantage of any dip in share prices, as we expect a relatively orderly solution to the European sovereign-debt crisis will shift investor sentiment toward greater optimism.  

We continue to favor the Taiwanese market at current levels, particularly because the technology sector represents a substantial portion of this market. Although Taiwanese equities have lagged the global market’s rally thus far, they could be poised to outperform because they typically produce their best performance during the first quarter. Additionally, many investors continue to idle in cash, so their eventual participation in the rally should provide additional fuel for both the Taiwanese market and the global market’s ascent.

Even so, the Taiwanese market could face difficulty breaching the 8,000 level in the TSEC index (currently trading at 7,870), but it should eventually overcome that resistance and trade higher.

On the economic front, Taiwan is technically in the midst of a recession after having recorded consecutive declines in gross domestic product (GDP) during the last two quarters of 2011. And exports and industrial production have declined for three straight quarters, while domestic demand has collapsed.

However, the current quarter should prove a turning point for the Taiwanese economy. Global economic indicators have started to stabilize, and demand is no longer declining precipitously. That bodes well for Taiwan’s predominantly export-oriented economy.

As we noted earlier, we continue to favor Taiwan’s technology industry because it’s relatively undervalued and offers solid growth prospects. In fact, Taiwan Semiconductor (NYSE: TSM) offers both of these qualities.
 
The company has been ramping up production of its line of high-performance 28 nanometer (nm) chips, and now anticipates that this product line will account for 10 percent of sales by the second half of this year. That’s a testament to the company’s technological prowess, as well as to the strong growth in its telecommunications segment, which was responsible for 53 percent of its sales last quarter. The company’s orders remain solid and it should start showing revenue growth by the second quarter.

Investors should also consider South Korea’s LG Display (NYSE: LPL), which is basically a turnaround technology story.

In its most recent quarterly report, LG Display reported continued improvement in earnings, although net profits remain elusive because the company is still in the midst of retooling its operations. However, margins have been expanding and capacity utilization rates have been climbing. Additionally, LG Display has cut costs while its inventory level remains low at around 20 days to 25 days.

The company expects further improvement for 2012, as the LCD (liquid crystal display) cycle continues to recover, especially given the limited growth in supply. Demand is expected to grow by 10 percent this year, outpacing the single-digit growth in supply.

Although demand for new televisions in the US is hardly robust, it’s trending better than market participants had previously forecast. Flat screen televisions still account for roughly 50 percent of LG Display’s revenue, so an uptick in demand should add substantially to its bottom line.