Source: Bloomberg
Source: Bloomberg

Taiwan is one of the world’s great success stories with the sole defect that it is a one-product economy (semiconductors). Taiwan’s weighted equity index is up 11.3% during the past six months, but one company–Taiwan Semiconductor–accounts for nearly a third of the total gain.

The computer assembler Hon Hai and the optics manufacturer Largan together account for another fifth of the index. Three companies provided half the index gains.

Taiwan’s financials and materials sector both lost value during the same period. That’s a lot of dependence for a sector that doesn’t have much room to grow. The consensus estimate of equity analysts shows zero year-on-year growth in profits and revenues for Taiwan Semiconductor during the third quarter.

At 15 times earnings (compared to 10 times earnings in August 2015), Taiwan Semiconductor doesn’t look expensive, and it pays a 3.3% dividend. But it’s vulnerable to competition from the mainland, where Beijing wants to eliminate China’s dependence on imported integrated circuits during the next ten years.

The Taiwanese semiconductor companies will oblige China by helping them to create the necessary capacity, but the long-term outlook for their profit margins is a bit cloudy. Apart from the big tech companies, there isn’t a lot to buy in Taiwan. Chungwa Telecom pays an enormous dividend, but that’s equivalent to the company’s entire earnings, and its sustainability is questionable.