Taiwan’s Market Fortunes are Tied to TSMC Like Never Before

Cindy Wang, Bloomberg News

Silicon wafers made by Taiwan Semiconductor Manufacturing Co. (TSMC) are arranged for a photograph at the company's headquarters in Hsinchu, Taiwan, on Wednesday, Jan. 16, 2013. Taiwan Semiconductor Manufacturing Co., the world’s largest supplier of made-to-order chips, is scheduled to announce company results tomorrow. Photographer: Maurice Tsai/Bloomberg , Bloomberg

(Bloomberg) -- Taiwan’s largest stock is so dominant it’s even underpinning a surge in the local currency.

Of the more than $4 billion that foreign investors have sent into Taipei-listed equities this year, about 60% has landed with Taiwan Semiconductor Manufacturing Co. Inflows and the chipmaker’s gains his month helped the Taiwan dollar strengthen 1.4%. There are signs the stock, trading at its most expensive in a decade, is overbought.

TSMC makes up more than a fifth of the Taiex benchmark. Its prevalence shows just how much is riding on its fortunes. Apple Inc.‘s primary chip supplier reported better-than-expected earnings Thursday and gave an upbeat fourth-quarter revenue forecast. The stock was trading 0.7% higher on Friday morning.

The company influences Taiwan’s “stocks, foreign exchange, and the economy,” said Yih-kuang Chen, chairman of First Capital Management Inc. Continued foreign inflows to TSMC shares “will boost the Taiwan dollar” and may cause concern at Taiwan’s central bank, he said.

Trading at nearly 20 times projected 12-month earnings, TSMC shares are at their most expensive in a decade. The stock is also showing signs of being technically overbought, defined as a reading of more than 70 on the 14-day relative strength index, which tracks the persistence and magnitude of price moves.

“Part of TSMC’s valuation now is supported by fund flow,”said Peter Chan, analyst at CGS-CIMB Securities, whose reduce rating on the stock makes him one of its few bears. “But fund flow often hinges on geopolitical events.” He thinks the stock’s valuation is too high.

Its market cap surpassed $250 billion for the first time this week, putting it just behind Samsung Electronics Co. The stock has surged more than 19% since an August low, with a better-than-expected debut for the latest iPhones boosting sentiment toward companies in Apple’s supply chain.

--With assistance from Mengchen Lu.

To contact the reporter on this story: Cindy Wang in Taipei at hwang61@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Kevin Kingsbury, David Watkins