The Hsinchu Miracle

Im writing you aboard my return China Airlines flight from Taipei to L.A.

My 22-year old son, Ryan, and I hit three countries Taiwan, Hong Kong, and Macau in nine days. We had so much fun we hated to leave. But for me personally, it was my packed schedule of company visits that really has me pumped.

Asia is bursting at the seams with the most exciting opportunities I have seen in my 22-year investment career.

If youre a tech investor, and youre not including Asian companies in your stock portfolio, I think youre ignoring some of the very best opportunities on the planet. As a common Chinese expression goes: Rub the sand from your eyes.

Hsinchu City: The Silicon Valley of Asia

I had seen pictures and read all about it. But when I arrived in Hsinchu City, I was completely unprepared for what I was about to see.

Getting there wasnt easy either. It took two train transfers through endless rice paddies and gritty railroad-side communities.

My main reason for going: The Hsinchu Science Park a government-sponsored technology Mecca spread out over 1,500 acres and costing $1.7 billion just in the initial investment.

This is the epicenter of Taiwans great transformation from a maker of cheap, low-margin shoes, apparel, and toys into a leading technological innovator.

The innovations at Hsinchu Science Park are powered by its Industrial Technology Research Institute, a collection of labs with 43,000 engineers working closely with scientists at MIT, UC Berkeley, and Carnegie Mellon.

The science park holds six government-sponsored laboratories: the National Center for High-Performance Computing, the Synchrotrong Radiation Research Center, the National Space Program Office, the Instrument Technology Research Center, the Chip Implementation Center, and the National Nano Device Laboratory.

It also draws from two world class universities National Tsing Hua University and National Chiao Tung University, each cranking out a steady stream of highly qualified engineers and programmers.

How is This Better Than What
We Have in Silicon Valley? Its Not.
Its Just a Heck of a Lot Cheaper!

On average, wages in Taiwan average $1,283 per month, a fraction of the U.S. equivalent. And thats despite science and math educations that significantly surpass most U.S. education systems.

End result: The tech companies of Taiwan and of Hsinchu in particular are getting far more science and engineering bang for their buck.

Thats even without the government-financed research. And its the governments commitment to technology that has given Hsinchu Science Park with some of the largest, most prosperous, most impressive companies in the world.

Taiwan Semiconductor, for example, is one of the largest in the world. Its corporate campus is the biggest Ive seen my lifetime, covering dozens of city blocks.

AU Optometrics, one of the largest flat panel display manufacturers in the world, is also impressive with 24,000 employees in a 12-story complex. But it looks like a tiny, drive-thru McDonalds compared to Taiwan Semiconductor.

All told, more than 400 vibrant, fast-growing companies call Hsinchu City home, easily the largest concentration of high-tech companies anywhere outside of the sprawling Silicon Valley itself.

Youve probably never heard of most of those companies. But neither have most people, and thats another reason I think the opportunity is potentially such a good one.

Heck, after sitting through three days of presentations and meetings in Hsinchu City, I feel like a kid in a candy store.

The Buzz of Hsinchu

I learn some of the most interesting things by accident. After touring whats considered the M.I.T. of Taiwan, I stopped in for a cup of coffee at one of Hsinchus many local Starbucks, all packed with Starbucks groupies.

But the big surprise of my visit to Starbucks wasnt the gangbuster business it was doing. It was the fascinating debate I had with a trio of engineering students eager to enter the high-tech workforce.

The three were having an animated discussion at the only table with an empty seat in the entire shop. They graciously motioned for me to take it, and I gladly took it.

Once they discovered Im American, they eagerly switched from Mandarin to English, and the dialogue that ensued made my draw drop.

I asked them what theyre going to do after they graduate. One told me his dream was to work for a company in Taiwan and make a million. His colleague shouted back that hes going to work for a company in California and make ten million!

Companies here in Hsinchu City, he added, hand out stock options like bread crumbs. American companies in California gives away stock options like drunken gamblers.

I asked all three which company would be top on their list to join if they stay in Taiwan. The two who vowed to stay responded in unison: Faraday Technology!

Whats so special about Faraday? I asked.

Their view: The company offers jobs exclusively to the top performers in each class. It is the single best chip design company in the world. Its making money hand over fist and will continue to do so as far as the eye can see.

The only gripe came from the student who wants to move to California. Ayaa! Youre crazy! He exclaimed. Those slave drivers at Faraday will work you to death. And for a small cup of stock options!

I may have walked in to Starbucks looking for a cup of coffee, but I walked out with the information that validated everything I was thinking about this company: Great profits. Low costs. No options shenanigans.

One of the Fastest Growing Chip
Design Companies in the World

The reason the engineering students at Starbucks are so impressed with Faraday Technology is that it is one of the fastest growing ASIC chip design companies in the world.

ASIC stands for Application Specific Integrated Circuit, a fancy way of saying custom-designed chips. Companies come to Faraday with very specific needs and ask Faraday to design a chip exactly to their specifications.

Like a custom-tailored suit or custom-built house, custom chips arent exactly cheap. But if youre good at your craft, customers will beat a path to your door. And they are beating a steady path to Faraday.

You may never have heard of the company. But the name Michael Faraday may ring a bell for you.

Faraday was a 19th century English physicist known for his pioneering experiments in electricity and magnetism. Many consider him the greatest experimentalist who ever lived. Indeed, it was largely due to his efforts that electricity became viable for use in motors.

And today, much of the work behind modern semiconductors is based upon what Faraday discovered 170 years ago … which makes his name very appropriate for one of the most innovative semiconductor design companies in the world.

The company has grown its revenues from practically nothing nine years ago to $175 million in 2005, about a 35% sales growth rate.

Sales in 2006 should be even better. I say that because Faraday itself told me their win rate (chip speak for new business in the bag) has been soaring. In fact, Faraday management thinks its future is so bright that it has been aggressively buying back its shares: 2.5 million shares in the fourth quarter of 2005 alone.

Faraday Technology is 26% owned by United Microelectronic Corporation (UMC), the second largest chip fabrication company in the world. How much do you think UMC scratches Faradays back to help it whenever it can? Quite a bit.

Best of all, Faradays stock is selling for peanuts compared to what youd have to pay for that type of growth with a U.S. chip company. In the last 12 months, Faraday earned $5.09 of profits, which means that it selling for roughly 10 times earnings.

To put that into an American perspective, Synopsys sells for 20 times earnings … Fairchild Semiconductor sells for 17 times … and both Cadence Design and Atmel sells for 15 times. And none of them are growing as fast as Faraday.

But Faraday Technology is just one example of the dozens of great opportunities I uncovered during my trip. I havent ranked them yet, and I dont know if Faraday will be at the exact top of my list. But its certainly the type of company tech investors should start thinking about.

Why Many American Tech Stocks
Are Going to Get Killed Some More

Just as important as riding a winning horse is to make sure you jump the heck off a losing horse.

My view: While there are always exceptions, the Nasdaq is jam-packed with old nags that are going to come in close to last place. Let me give you two examples.

Example #1: An up-and-coming Chinese company just announced that, come May, it will begin selling laptop computers for an incredibly low price of just 1,500 yuan a meager $187 each. These laptops, will weigh in at a nice light 1.1 pounds and even play DVDs.

Imagine the damage they can do to U.S. laptop makers who are already having trouble moving their laptops for four or five times that price!

So if youre investing in U.S. laptop companies, dont get too cozy. I say that because the cheap competition from abroad should scare the pants off anybody that owns Dell, Gateway, Intel, Hewlett Packard, or Micron Technology.

Example #2: While I was drinking my morning coffee in Taiwan, I came across this headline: China Mobile Profits Leap

That didnt surprise me because it seemed like every 15- to 50-year old I saw in Hsinchu City, Hong Kong, or Macau had a cell phone glued to his or her ear. What did surprise me was the surge in cellular subscribers.

In the last 12 months, China Mobile increased its subscriber base by 20% to 246.6 million. 20 percent! Let me tell you, you wont find that type of growth in North America.

Plain and simple, the rules about technology investing have changed and the sweet spot of the technology investment food chain has moved from Silicon Valley and Wall Street to places like Hsinchu, Taipei and Hong Kong.

What to Do

As an American, it pains me to say that the land of opportunity for tech investors has moved across the Pacific Ocean. The world is changing, and what investors should be doing is changing along with it.

For tech investors, that means moving out of high-valuation, slow-growth U.S. tech stocks to their low-valuation, fast-growing Asian counterparts. (Ill give you more details in the weeks ahead.)

Plus, for natural resource investors, this means you should go for the companies that are best able to feed the Asian boom.

Look. Taiwan, despite its small size, is an economic powerhouse. It consumes huge amounts of energy and natural resources to feed its industrial juggernauts.

But China is over 274 times larger. So imagine what will happen to the demand for resources if Chinas industrial development catches up even half way to Taiwans.

Thats precisely whats happening now. And thats exactly why certain natural resource stocks are primed to go through the roof.

For example, one natural resource company Sean and Larry are looking at right now has $14 billion in metal, but is valued at just 14 cents on the dollar. Another is valued at a meager TWO cents on the dollar.

For their new report on these amazing Asian opportunities, just released last night, click here.

Best wishes,

Tony Sagami

For more information and archived issues, visit http://legacy.weissinc.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

Sign Up Free