In a textbook example of financial arbitrage, shares of Taiwan Semiconductor Manufacturing Co. (TSMC) are fetching significantly higher prices in New York compared to Taipei. Traditional finance wisdom suggests a straightforward trade: short the U.S. stock while buying the cheaper shares in Taiwan, expecting the price gap to converge and yield easy profits. However, market watchers are noting that the gap between TSMC’s U.S. and Taiwan listings is not shrinking—it’s widening.
In January, the price disparity reached an average of 25%, the largest spread since 2009, up from a more typical 6.4% over the past decade. This growing divergence presents challenges for hedge funds looking to capitalize on the price convergence, as investors continue to drive up U.S. shares, causing the premium to escalate to unsustainable levels.
“The trade could be quite risky as the premium may not necessarily compress,” said Quincy Liu, chairman of Shin Kong Investment Trust Co. “Global investors have recognized TSMC’s leadership in technology and have repositioned for it with higher valuations on the ADRs (American Depositary Receipts).”
The allure of TSMC’s stock among U.S. investors is rooted in its pivotal role in the AI boom. Despite the price disparity, TSMC’s ADRs have become a favorite for those unable to access the cheaper shares in Taiwan, as the company is a key supplier for major tech giants like Nvidia and Apple. With the growing prominence of AI, particularly following the release of ChatGPT, the chipmaker’s shares in New York surged more than 160% through Wednesday, outpacing the roughly 120% gain in Taipei.
Thursday’s quarterly sales outlook and capital spending guidance will offer a chance to gauge demand for TSMC’s chips amid the AI-driven growth. The company is expected to report a gross profit margin of 58% for the December quarter, alongside 55% profit growth, according to Bloomberg data.
TSMC’s ADRs have been part of major indices, such as the Philadelphia Stock Exchange Semiconductor Index, and included in exchange-traded funds, further fueling their demand and contributing to the growing price premium. Although the ADRs make up only about one-fifth of the company’s total shares, the average daily turnover of the U.S. stock is double that of its Taiwan counterpart, according to Bloomberg data.
Alex Au, managing director at Alphalex Capital Management HK, commented, “Over the past year, global investors have been putting significant money into the AI space, and TSMC is a major play. The expansion in its U.S. investor base has only driven up the spread, making it no longer an ideal strategy for mean reversion given the rising funding costs and the growing trendiness of the premium.”
Historically, TSMC’s ADRs have traded at a premium, as they are more easily convertible than the Taiwan shares, which require special regulatory approval. Moreover, this premium has tended to persist longer than it narrows, with post-2023 trends showing a prolonged widening, according to a Goldman Sachs study from June.
As of Monday, short interest on TSMC’s ADRs stood at just 0.4% of shares outstanding, down from a high of 3.1% in June, suggesting that investors remain bullish on the stock. More than 90% of analysts covering TSMC recommend buying the shares, Bloomberg data shows.
Joseph Lai, chief investment officer at OX Capital Management in Sydney, cautioned, “The valuation premium could continue to widen in the medium term, reflecting the extent to which the U.S. market may be entering a bubble phase.”
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