(Bloomberg) -- August Chuang believes the best thing she can personally do to protect her homeland from a Chinese invasion is to buy Taiwan Semiconductor Manufacturing Co. shares.
The 31-year-old Taipei office worker has 70% of her domestic assets in the world’s largest chipmaker. It’s been a good investment, with the stock more than doubling since she first bought shares in 2020. But this is more than just a financial decision for Chuang.
“TSMC has turned Taiwan into an irreplaceable high-end technology supplier that other countries can’t risk losing,” said Chuang. “That deters China from invading Taiwan. So the stronger TSMC becomes, the safer I feel.”
She’s not alone. While collectively owning less than 1% of TSMC, the number of retail shareholders has reached a record this year even as foreign investors have pulled back. In addition to making the chips that power the artificial intelligence boom, the company appeals to many Taiwanese who believe that TSMC’s success will determine the self-governing island’s ability to fend off China. They have dubbed the firm the “holy mountain that safeguards the nation.”
TSMC’s importance in the tech industry’s global supply chain is the basis of the thesis. The company is the largest global contract chipmaker and has a virtual monopoly over the world’s most advanced chips, including those designed by Apple Inc. and Nvidia Corp. It is on track to start making state-of-the art 2-nanometer chips domestically next year. While TSMC recently opened a chip plant in Japan and is building additional factories in the US and Europe, the Taiwanese government has pledged to keep its most advanced semiconductor technology at home.
That means Taiwan benefits from the so-called “silicon shield”. Any military action by China against Taiwan would likely trigger retaliation from its allies, in particular the US. President Joe Biden has repeatedly said the US would protect the island. Tensions have risen after the island elected president Lai Ching-te earlier this year, a man whom Beijing once called an “instigator of war.” Since Lai took office, China has held large-scale military drills around Taiwan and sent a record number of warplanes across a key boundary in the Taiwan Strait.
The certainty of the US commitment weakened after Republican presidential candidate Donald Trump questioned whether the US has a duty to defend the island. Still, the retail euphoria is showing few signs of cooling even as TSMC shares have retreated from record highs. TSMC’s odd-lot trading turnover — mostly contributed by retail investors — has surged to a record in July, according to Taiwan exchange data. Some of these small-time investors are taking out mortgages, borrowing from their savings and even diverting funds from pending marriages both in hopes of strong returns and to support the chipmaker, according to online forum discussions and local media reports.
“If TSMC fails, Taiwan fails,” said James Feng, a tech engineer, who first bought the company’s shares two years ago accounting for a third of his investments. “Nothing must happen to this company.”
The chipmaker is also crucial to a thriving local economy and property market. TSMC alone accounted for 8% of Taiwan’s gross domestic product in 2022, according to a Taiwan Semiconductor Industry Association report. As the most valuable company in Asia, TSMC accounts for over a third of the benchmark Taiex Index’s weighting. The chipmaker has also boosted property sales in parts of the island where it builds new factories.
The company’s dominance in the portfolios of small investors puts them at a more prosaic risk than a Chinese invasion, namely a sharp decline in the stock. After gaining 58% so far this year, TSMC is trading at nearly 20 times forward earnings, higher than its five-year average of 18.8 times.
“There’s still some room for shares to run, but the risk-reward is less attractive,” said Phelix Lee, an analyst at Morningstar Inc. “As earnings expectations are continuously revised higher, at one point it must be unsustainable.”
High foreign ownership in TSMC’s Taipei-listed shares — currently at 74% — also means small-time investors could be easily burnt by an exodus. Warren Buffett sold his holdings in the company last year for the same reason that some domestic investors are piling in — the threat from China. Even as he lauded the firm’s technology and management, Buffett said the geopolitical risks were too great to own the shares.
Overseas funds sold $5.8 billion of TSMC shares on a net basis in July, the most for any month in data compiled by Bloomberg going back through 2008.
Other successful tech companies that once seemed unbeatable have faltered as markets have shifted such as Sony Corp. in the early 2000s and Nokia Oyj after the introduction of the iPhone. Already, the global AI frenzy is drawing increasing caution on the Wall Street, with some analysts seeing the potential for the bubble to burst. Small shareholders do not share that view.
“I will definitely hold on to my TSMC shares,” said Colin Chen, a 28-year-old school teacher, who bought the shares in 2020 when they averaged about NT$500 and celebrated when it crossed the NT$1,000 mark. “My belief in TSMC has always been unwavering. I hope that TSMC, as Taiwan’s national pride and the holy mountain that protects the country, can continue to move toward the next milestone of NT$2,000.”
--With assistance from Andy Lin (News) and Debby Wu.
(Updates with selloff by foreign investors in 13th paragraph.)
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