Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and I am joined today by Gary Greenberg to give his 3 Stock Picks. Gary is Manager of the Hermes Global Emerging Markets Fund.
Hi, Gary.
Gary Greenberg: Good morning.
Wall: And what's the first stock today?
Greenberg: The first stock is Taiwan Semiconductor Manufacturing (2330). It is a Taiwanese company, which is really the number one foundry in the world. What's happening is that although PCs, laptops and even smartphones are now peeking out, the volume of smartphones at the low end is still expanding into emerging markets. More importantly, we are now moving to new devices drones, but most importantly Internet of Things, which is becoming – which is going to become a ubiquitous phenomenon requiring huge amounts of chips. And Taiwan Semiconductor Manufacturing is really strongly positioned there.
Right now is an interesting time to buy this stock. And that's because it has dropped recently because the fourth quarter had some inventory stocking up, that destocking is now happening. They are also winning back business from Samsung, that they had lost earlier, and the stock is really reflecting all the worst news and should soon start to reflect the better news. So we think it's an interesting company right now.
Wall: Well, how reliant on it – how reliant is the stock on its big customers? You mentioned, there it lost the Samsung account. What if it lost Samsung and Apple? I mean, would it be in trouble?
Greenberg: Well, actually it competes mostly with Samsung. And, yes, if Apple completely got rid of TSMC they would have problems. However, TSMC is almost always on the cutting edge and so their technology is better than everyone else's and that's why they get the business. They have to keep reinvesting. In fact, people look at their capital expenditure plans to see how bullish they are for the next year and they recently came out and said that their CapEx was going to rise by 10%, which in this world is a lot; they also said that their dividend should rise substantially, which is also very encouraging right now.
So, we think it's a very strong company, it's well managed, it's got a good capital discipline, they pay out good chunk of their earnings and right now the stock is we think undervalued and so is attractive.
Wall: And what's the second company today?
Greenberg: The second company is a Chinese company. It trades both in the A-share market and also in the 8-share market in Hong Kong. It is a company called China Mengniu Dairy (02319). They are one of the top dairy companies in the country. They have some of their own dairy farms and they buy in a lot of milk as well.
They are a company which is headed by the CEO who used to be the CEO of Coca-Cola China. She brought in the Finance Director from Coca-Cola China and their quality control people. They cleaned up the company and now have a very strong operation, which has a high degree of purity. And food purity in China is a very, very important thing. It's hard for us to imagine how paranoid one can get when ones food supply is contaminated and in China that's really the case.
So this company has put in a lot of money into having state-of-the-art equipment, state-of-the-art quality control that no one has invested in it. They are moving into – they've got yogurt, other types of drinks that we don't have in the west and ice cream as well.
Chinese consumption of dairy is really quite low, it's improving every year and there has been a global glut of milk, that's now beginning to correct as well. The stock is corrected, it used to trade in the 20s in terms of P/E and now it trades in the mid-to-low teens, so we think it's also an attractive opportunity.
Wall: And what's the third and final stock?
Greenberg: The third stock is a tech company called Advantech (2395). It is a Taiwanese company like TSMC that is involved in solutions for – technology solutions for both companies and also cities. Their system runs the Autobahn in Germany.
So they make systems consisting of computers that are specifically designed for processes such as a highway or a factory et cetera. And what we are finding in China particularly is that wages have risen so much now that companies really are desperate to automate and this company has solutions for them.
It also has solutions for cities, for example, we were talking earlier about London and how impossible it is to get from one place to the other cities are going to have to figure out a solution with driverless vehicles and electric cars et cetera that don't pollute, that's another problem in London, the pollution. But also that are just much more efficient in getting people from one place to the other. Advantech has the kind of systems that can do that. So we see it as a company which will thrive over the next decade as we move into the digital age.
Wall: Gary, thank you very much.
Greenberg: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
The fund share class quoted in this video is not distributed in the UK. The F share class for UK investors has an ongoing charge of 1.13%.
