US$3 billion top Asia fund prefers Samsung over TSMC in chip market

A fund that outperformed most of its peers has added Tencent Holdings back to its portfolio recently, betting on the gaming company’s attractive valuation despite further industry curbs by the Chinese government.

Federated Hermes Asia Ex-Japan Equity Fund, which beat 83 per cent of its peers for the past three years, made the purchase in the new year, even after China released a draft rule on gaming restrictions in December. The investment reflects the fund’s optimism over the nation’s beaten-down market, where valuations are “absolutely incredible”, said Jonathan Pines, who manages the US$3.1 billion fund.

“We are buying it now because of its very cheap value,” he said in an interview Wednesday, referring to Tencent’s shares. Pines’ fund sold most of its shares in Tencent as well as in Taiwan Semiconductor Manufacturing Company (TSMC) about a year ago.

Tencent yielded its position as Asia’s second-most valuable company after China’s new rules on online gaming erased US$53 billion off its market value in 2023, capping a third year of losses. The shares trade at less than 16 times forward earnings, or about half the 10-year average, making them attractive, Pines said.

While China currently is not the preferred investment destination for many, a combination of ultra-cheap valuations and low allocations outweighs the risks of investing in the nation’s stocks, according to Pines.

“We think the risks of investing in China are worth taking because the stocks are so cheap,” he said.

The fund, which is also overweight on South Korea, prefers Samsung Electronics to TSMC in the Asia semiconductor space.

TSMC is due for a cyclical downturn, and its shares trade at nearly five times book value, while Samsung’s earnings are poised to recover, Pines said, adding that the Korean company’s position in the memory chip sector makes it a better place to be for now.

While Korea’s largest company this week reported a steeper-than-expected 35 per cent drop in operating income, reflecting weak demand for consumer electronics globally, Pines said the results would not prevent him from being positive on its earnings trajectory. “Things are going to improve from here,” he said. South China Morning Post