Is This China's Best Profit Play?

We all know that China offers a wonderful profit opportunity for investors. But if we all know that to be true, how good can the opportunity really be?

OK, it's good. But as an investor -- one as concerned as my Foolish colleague Tim Hanson about the decline of the dollar -- I'm much more interested in misunderstood or mispriced profit plays than the stuff everyone already knows. That's exactly why I like Taiwan; it's overshadowed by China.

Why your portfolio should like Taiwan
That won't last. Consider the recent economic data. Industrial output -- i.e., semiconductor manufacturing and other commercial activity -- climbed 47.34% in December, a record, according to Dow Jones.

Numbers like these signal an important shift for Taiwan, which struggled with the effects of the global recession in early and mid-2009. So much so that December's record number still wasn't enough to keep the island from suffering a full-year 8.74% decline in industrial output, according to Taiwan's economic statistics ministry.

But the trend is what matters, and the economy of China's sister to the southeast is turning north in important areas. December's wholesale sales surged 20.22% and retail sales improved 13.81%, for example.

Get your cash elsewhere
Growth like that is sure to entice investors. Yet there's more than growth to this story. Stocks from emerging economies like Taiwan's tend to denominate revenue and earnings in stronger currencies, creating a windfall that lifts their bottom lines and pads dividend payments to shareholders. 

This is partly why Taiwan has a history of producing winners that trade on American exchanges. Here's a look at the top four returners from the past year, as identified by Capital IQ:

Company

Recent Price

CAPS Stars
(out of 5)

One-Year U.S. Return

ChipMOS Technologies

$0.76

4

162.5%

Advanced Semiconductor Engineering (NYSE: ASX  )

$4.19

4

170.1%

United Microelectronics (NYSE: UMC  )

$3.86

4

122.5%

Himax Technologies (Nasdaq: HIMX  )

$3.00

5

88.4%

Sources: Capital IQ, Motley Fool CAPS, Yahoo! Finance.
Data current as of Jan. 22.

The next Taiwanese multibagger?
Most of those in our 145,000-plus-member Motley Fool CAPS community who follow the island believe there's still money to be made in Taiwan. A forthcoming trade agreement with China could provide the catalyst, says Nate Parmelee, Tim's co-advisor at Motley Fool Global Gains. Here's how Nate put it in a recent email to me:

Taiwan's largely tied to China. A ton of investment in the country and plenty to gain from tightening economic relations. They're trying to balance that with not giving up political control.  They're walking a tightrope of sorts.

Tim agrees. Here's his take, also sent to me in an email last week:

[Taiwan's] a much more developed economy, so its growth should lag China's simply because of the base effect. That said, Taiwan should get a jolt if relations continue to liberalize between the two places since China is seeing significant consumer demand growth for electronics (Taiwan's bread and butter).

By and large, Fools believe Taiwanese officials can toe the line. They give four of five stars to the average Taiwanese stock in CAPS, which tracks 13 issues trading on American exchanges. Siliconware Precision Industries (Nasdaq: SPIL  ) is their top overall stock pick. The details:

Metric

Siliconware Precision Industries

Business description

Provides semiconductor packaging and testing services to the chip industry. Customers include Broadcom (Nasdaq: BRCM  ) and NVIDIA (Nasdaq: NVDA  ) .

CAPS stars (out of  5)

*****

Total ratings

587

Percent bulls

96.9%

Percent bears

3.1%

Bullish pitches

65 out of 66

CAPS members bullish on SPIL also bullish on

Companhia Vale (Nasdaq: VALE  )

Data current as of Jan. 25.

I'm generally bullish on chips because of the rise of electronics. More digital equipment means more chips, which creates a greater need for packaging and testing equipment of the sort that Siliconware provides. This is true now and will continue to be true, regardless of whether Taiwan strikes a deal with China.

And yet you wouldn't know it from how shares of Siliconware are priced. The stock trades for just under 17 times long-term projected earnings, which analysts expect to rise by an average of 20% a year over the next five years.

They could be wrong, of course, but I'm siding with them. Taiwan's improving economy and a global shift away from in-house chip manufacturing favors Siliconware. As such, I'm going long the stock in my CAPS portfolio.

What do you think? Would you buy Siliconware at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. You can also make your voice heard using the comments box below.

Each month, Tim and Nate spotlight promising international stocks in Global Gains. Try this market-beating service risk-free for 30 days and get access to coverage of all of their recommendations.

NVIDIA is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the market-beating Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is an unapologetic globetrotter.


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