Taiwanese semiconductor giant TSMC has a sizeable lead in the chip industry which its competitors will struggle to catch up with, according to Kamil Dimmich, a portfolio manager at North of South Capital. “It has been predicted for the last 20 years that in three years’ time everyone will have caught up, but the problem is TSMC moves faster than everyone. So by the time the others have caught up TSMC is another two, three generations ahead,” Dimmich said. “It is not for the lack of trying,” he said, adding that the likes of South Korea’s Samsung have been trying to catch up with investments in technology. “They’ve probably come the closest but they’re still consistently behind TSMC … it is incredibly hard to replicate. I’m not saying this will never happen over history, companies do end up losing their edge. It can happen but, if I were a betting man, I’d say TSMC maintains their advantage,” he said. Dimmich, who manages the $1.5 billion Pacific North of South Emerging Market All Cap Equity fund, says he is “always looking for great companies with strong cashflows that are not correctly reflected in the market.” His focus is identifying undervalued stocks in emerging markets. With close to 13% exposure to Taiwan, his fund has a huge overweight on the market. Close to 7% of its investments there are in TSMC, while other companies it has holdings with include ASE Technology — which he considers a beneficiary of TSMC investing heavily in the packaging and testing aspect of chips. When quizzed why he likes TSMC so much, Dimmich responded: “This is a market where there is really very few players, there’s a limited supply, it’s growing incredibly fast, because it’s a new market and [has] new applications, and I think there is no real risk of oversupply, especially because it is an oligopoly, or even arguably a monopoly — TSMC sets the price is it wants to [and] doesn’t have to compete with anyone. That’s what the chips cost. That’s it, they make a 50% margin.” The only risk he foresees is if there is any conflict between Taiwan and China. “That could physically destroy TSMC [and] its capacity,” he responded. Even so, Dimmich said such a possibility would be “a massive disaster for everyone involved,” and would affect stocks on a global scale. Is Nvidia cheap? Interestingly, Dimmich said the word on the ground is that stocks in fellow technology firm Nvidia are cheap — even if he may personally not think so. “Some of my colleagues think Nvidia is cheap and there’s certain scenarios you could put together where Nvidia is cheap. I personally don’t think it is cheap,” he said. Shares of Nvidia have tripled this year as the company’s market value has topped $1 trillion over the optimism surrounding its artificial intelligence-powered applications. Dimmich — who does not invest in U.S. shares — pointed out that it is “very easy to make things look cheap.” His approach to avoid this is refusing to assume that companies grow at very high rates, forever. “We don’t do that because we don’t think it is possible for companies to grow faster. We just want to be conservative and we don’t want to overpay for stuff,” he explained. Value in Chinese internet stocks Elsewhere, Dimmich is looking at China more positively and has been searching for stocks with good valuations. In particular, he has been buying Chinese internet or consumer stocks, with the likes of Alibaba , NetEase , JD.com and Vipshop Holdings in his top 15 holdings. “They’re kind of online Walmarts, if you like, with huge market share, with huge competitive positions in China, and they’re now starting to monetize that — they’re starting to look for profitability. They’re trying to generate cashflows, they’re trying to generate shareholder returns,” he said. The portfolio manager does not have holdings in Tencent , even as several investors consider it as a stock to watch out for. “It is not because we particularly dislike Tencent, it’s just when we when we run the numbers, it’s not quite as attractively valued as some of the other stocks,” he explained. In any case, Dimmich believes that it may just be a good time to accumulate Chinese stocks — particularly tech stocks — since they are profitable and are now able to focus on efficiencies and margins. “If people remain negative on China [and start] selling China, like there’s no tomorrow, then maybe [Chinese] stocks will go sideways. They might even decline a bit. But that’s the time to accumulate. Because one day, people will realize these stocks actually look very attractive and then they will start rewriting, especially if the consumer picks up in China, then they’re a big play on that,” he stressed.
