For Titan’s Offshore portfolio, we’ve sold Bilibili (BILI) and trimmed ASML (ASML). We’ve used the proceeds to purchase Taiwan Semiconductor Manufacturing Company (TSM) and to increase our position in Sea Limited (SE).
We believe this offers Titan Offshore clients:
- Exposure to what we consider a first-class semiconductor business amid a massive investment cycle; and
- Reduced exposure to Chinese social media companies.
Placing chips on TSM
TSM is a leading semiconductor foundry, manufacturing the chips that power technology at the bleeding edge of innovation.
TSM’s chips power technologies that range from smartphones and tablets to electric vehicles and server farms. We often talk about wanting to own the “picks and shovels” of growing industries, and we believe TSM may be one the clearest examples of this dynamic among any business in the world.
TSM has consistently compounded its economic value through semiconductor investment cycles, and our work indicates the company may be able to sustain this growth over the next decade.
In the near-term, we believe TSM may be able to raise prices and improve margins; in our view, TSM is currently offering a discount relative to its foundry competitors.
Capital expenditures also form the basis of future growth for TSM, and we believe the company’s current budget of $100 billion may not be sufficient in this environment. Raising this outlook may be a catalyst for the stock.
Bye bye, BILI
BILI can be thought of as “China’s YouTube”: a streaming video and media platform with a Gen-Z user base operating in China’s dynamic social media landscape.
Since we first purchased BILI on April 6, 2021, regulatory scrutiny from Chinese regulators has increased. For example, minors are now limited to one hour of online gaming per day on weekend and holiday evenings, a ruling that may impact BILI’s gaming segment.
Although we believe BILI may be able to average annual returns in the high-teens through 2023, net of fees, we don’t believe this offers a compelling risk/reward given the regulatory risks associated with BILI.
In October, we divested our stake in Pinduoduo
(PDD). By exiting BILI, we have further trimmed our clients’ direct China exposure, limiting it to holdings in what we believe are three excellent businesses: Alibaba (BABA), JD.com (JD), and Tencent (TCEHY).
We believe these three names offer a more compelling risk/reward for Offshore clients, while providing the portfolio exposure to a potential China turnaround story as regulatory clarity emerges.
Taking advantage of a SE change
We’re increasing our exposure to SE, an emerging leader in e-commerce, gaming, and payments in Southeast Asia.
Following the company’s most recent quarterly report, we believe SE shares have been unfairly punished despite solid fundamentals, falling more than 20% since the market close on October 20, 2021.
We believe this recent decline in SE has improved the risk/reward for the stock and presents an opportunity to increase our position.
We believe SE continues to execute well on its growth initiatives, particularly in e-commerce via its Shopee franchise, which may be its largest value driver in the coming years.
ASML is a leading producer of photolithography equipment
, used in the production of semiconductors. Our new Offshore holding TSM is one of ASML’s largest customers.
Since being added to the Offshore portfolio at inception on April 6, 2021, ASML has been one of the best performing names in the strategy, rising 28% over that period.
Given this run-up in the stock and limited potential upside to earnings estimates over the next 6-9 months, we believe the risk/reward for ASML shares has become less compelling.
Even with this trim, our exposure to the stock remains above that of the Offshore strategy’s benchmark, the MSCI World ex-USA Index.
In our view, an active overweight to ASML remains warranted given the multi-year semiconductor investment cycle we believe is underway.