The rich premium has left many US investors questioning whether the ADRs cost too much, and why local investors seem to be getting bargain prices.
"The most common explanation people give is they want the semiconductor exposure and [the ADRs] are the easiest way to get it," said the manager of a New York City-based hedge fund, who asked not to be identified.
Still, the hedge fund manager said, "It's not economically rational to buy it for two bucks when you can have it for one dollar .... I don't understand why you wouldn't go through the trouble of buying the local shares."
But the trouble may be worth paying a little extra to get into a quickly growing market leader, say some analysts.
"Foreign investors want a position in Taiwan but the regulations are quite complicated," said Jovi Chen, equities analyst for China Securities, who rates TSMC as a "buy" with a 12-month price target of NT$280. As a result, US investors wind up paying more for the ADRs because access to the local shares is limited.
Daniel Heyler, equities analyst for Merrill Lynch Global Securities, agreed. "What keeps the premium higher are people who don't have the ability to buy local," said Heyler, who rates TSMC as a "near-term buy."
But the New York hedge fund manager isn't quite so sure. Although his firm isn't considered a "qualified foreign institutional investor" by local regulators, it was able to buy shares through a brokerage that is considered one. The transaction is called "total return swap," the hedge fund manager said, and "we plan to stay in [the local shares] a long time."
But in the fund manager's eyes, the high premium also has presented an opportunity to sell short the ADRs. The premium US investors have paid for TSMC hit a low of 31.75 percent on July 13 and the average premium has been roughly 51 percent over the last year.
"Over time, we expect the premium to decline," the hedge fund manager said.
Heyler said a premium of "65 percent to 75 percent is reasonable."
Another explanation for TSMC's rich premium in the US is the trend of momentum investing, whereby investors concentrate more on a stock's performance than its fundamentals. The ADRs have climbed 139 percent since Aug. 8, whereas the local shares are up 96 percent since about the same time.
Yet another view is that while TSMC's ADRs cost more than the local shares, that doesn't necessarily make them overvalued. Janet Hu, equities analyst for EnTrust Securities, said that at a price-to-earnings multiple of 55 for estimated 2000 earnings, the ADRs of TSMC fetch a better valuation than the ADRs of Singapore-based Chartered Semiconductor Manufacturing. To boot, Chartered's ADRs trade at a slight discount compared to the Singapore shares.
Whatever the reason for the disparity, some local TSMC shareholders have sensed an opportunity in the gulf between the local shares and their American counterparts. On Saturday, local media reported that Cathay Life (國泰) plans to convert 5 million of its TSMC shares into ADRs. The move must be approved by TSMC's board, though the Securities and Futures Commission (證券會) has no objections.
In addition, competitor United Microelectronics Corp also hopes to be a big winner in the demand for semiconductor foundry plays in the US. The company late last year filed for an ADR offering that could be worth more than US$1 billion, and the issue is expected in April.
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