UBS analysts have outlined a potential relative value trading opportunity emerging from the narrowing valuation gap between Taiwan Semiconductor Manufacturing's U.S.-listed shares and its Taipei-listed shares, which may attract hedge fund interest. In a client report, UBS Taiwan equities head Hongyi Song suggested that investors could consider buying the company’s American depositary receipts while shorting its local shares. This is because recent risk releases tied to geopolitical tensions appear to have had a greater impact on foreign institutional investors than on local participants. Song indicated that improving global investor sentiment could support a rebound in the ADR premium.
This shift in positioning is becoming more evident in the data. According to media-compiled figures, the ADR premium averaged 17% this month, a one-year low, down from nearly 26% in December. On a single-day basis, the premium narrowed to around 10% last Thursday, coinciding with the company raising its revenue outlook while reporting a surge in profits. UBS noted that when the premium approaches these lower levels, a long-ADR, short-Taiwan stock strategy may become more attractive; conversely, when the premium nears 30%, the reverse strategy is more applicable. For long-only investors, the report suggested that shifting part of their holdings to ADRs when the premium is around 10% could be beneficial.
Song also highlighted differences in investor behavior, which may explain the recent compression in the premium. Local Taiwanese investors appear to remain focused on AI-related, specific, bottom-up demand, which could help sustain confidence in Taipei-listed shares. In contrast, foreign investors are more sensitive to macro factors such as oil prices, inflation, and geopolitical risks, contributing to the recent decline in the ADR premium. Given that Taipei-listed shares have risen 34% this year through Wednesday, while U.S.-listed shares are up 27%, UBS believes that a normalization of sentiment could push the ADR premium back toward its historical average of around 22%, potentially further supporting the rationale for the trading strategy.
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