Hon Hai Precision

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Hon Hai Precision: How To Profit from the “New” Silicon Valley

by Martin Hutchinson, Advisory Panelist The Money Map Report
Friday, March 30, 2007: Issue #656

In the past 18 months, the video gaming industry has been on a tear. The Big Three – Sony, Nintendo and Microsoft – have all launched new gaming devices, and the response has been huge.

Indeed, Sony’s PlayStation 3 was in such demand last December that customers were buying the new consoles on eBay for twice the retail price. In fact, the game console business worldwide already exceeds $10 billion – and it’s growing.

And here’s the thing: Only one company designs and manufactures the gaming consoles for Sony, Nintendo and Microsoft. Needless to say, it’s poised to make investors a tidy sum…

The company is Hon Hai Precision Industries. It’s a name few investors have ever heard of, yet electronics manufacturers know it like the backs of their hands.

Introducing Hon Hai Precision

It’s the biggest maker of electronic devices on the planet.

Hon Hai, says BusinessWeek, “makes everything from PCs for Hewlett-Packard to cell phones for Nokia.” Little wonder the magazine labeled Hon Hai “an earnings machine.In 2005, its sales topped $28.4 billion – up sixfold from 2001. And it notched $1.3 billion in profits – $100 million ahead of what experts who track the company were expecting.

Hon Hai’s production lines churn out some of the world’s most popular products, including Mac minis and iPods for Apple, computer motherboards for Intel, and all three of the new gaming consoles that are now duking it out in consumer markets around the globe. Most recently, Apple cut a deal to have Hon Hai manufacture its new iPhone.The company ranks No. 206 on the Fortune International 500 list.

Mega-Profits In Taiwan – How Can Investors Invest In Hon Hai Precision?

There is one small problem you can’t buy this stock. Its shares aren’t registered with the SEC.

Actually, as a global economist always looking for companies like Hon Hai, it’s a problem I run into a lot. And it’s unfortunate. Billions of dollars are funneling into these stocks, pushing them higher by the day. In fact, a recent report from the McKinsey Global Institute estimates that the amount of cash flowing into international equities will increase from $867 billion today to $82 trillion by 2010.

Without the ability to buy these stocks directly, we’d miss out on some spectacular growth. Fortunately, there is another way to profit

When I detailed Hon Hai’s prospects to subscribers of The Money Map Report, I explained that the terrific upside this company has to offer is part of an even more alluring opportunity – one you can actually invest in today

Taiwan is the fastest growing of the Asian Tigers.

A decade ago, it was a marginal player in the global tech sector, essentially an assembler of products designed elsewhere. Today, the country occupies a premier position in the world market for specialized high-tech products, most of them designed by its own companies. Taiwan is the new Silicon Valley.

It has a per-capital GDP of $29,000 – better than most of the economies in Western Europe – and boasts one of the most efficient economies in the world. Its productivity increased at an average annual rate of 3.5% over the past 10 years, and 4.3% over the past 20 years – more than double the U.S. rate and nearly triple the pace of the developed economies in the European Union.

What’s more, the Taiwan market hasn’t shared fully in the run-up seen in many other emerging markets during the last couple of years. It’s up only 19% over the last year. So it’s not overvalued, currently trading at only about 15 to 16 times three-month trailing earnings. It’s also got a 2.1% yield.

The Best Way To Invest In Hon Hai Precision and Taiwan

The best way to invest is through the iShares MSCI Taiwan Index Fund (NYSE: EWT).

This ETF has stakes in dozens – if not hundreds – of companies like Hon Hai, many of them just as well positioned in their own markets. These companies are creating name-brand products or components for high-growth items. And most have years of growth ahead.

Listed on the New York Stock Exchange, EWT was formed in 2000 and is linked to the Morgan Stanley Capital International Taiwan share index. With a market capitalization in excess of $2 billion and a low expense ration of 0.74%, this is a well-established fund that provides a broad exposure to Taiwan’s electrifying growth potential.

Hon Hai Precision is EWT’s second-largest holding.

The fund’s #1 holding is Taiwan Semiconductor – the world’s largest dedicated independent semiconductor foundry. It makes advanced chips of its own, and it manufactures products under contract for its customers. Clients include such well-known firms as ATI Technologies, Broadcom, Conexant, Marvell, NVIDIA, and VIA.

Clearly, the EWT reflects Taiwan’s high-tech focus: Semiconductors and semiconductor-equipment firms make up 24% of the index; while electronic equipment and instrument firms account for 17%; and computer and peripheral makers another 15%.

In other words, 56% of the index is concentrated in these three high-growth sectors – a group of companies that should deliver signifiacant gains in the months and years ahead.

Good Investing,

Martin

Editor’s Note: For 25 years, Martin Hutchinson worked as an investment banker in London and New York, and has served as Senior Vice President and Head of Derivatives for Creditanstalt-Bankverein and as a U.S. Treasury advisor in Croatia. He’s a regular contributor to The Money Map Report, which follows institutional money into high-growth stocks. Learn more.

Today’s Investment U Crib Sheet

Together, Hon Hai Precision and Taiwan Semiconductor make up 23.4% of EWT. And at Taiwan Semi, business is strong. Just recently, the company inked a deal with Intel to produce a line of its WiMAX chipsets.
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