The ADR premium of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) is unreasonably high! The arbitrage strategy has failed and there are no signs of the premium narrowing.

In theory, this trade has long been one of the arbitrage trades in the financial industry known as a "money-making machine": the stock price of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR(TSM.US), known as the "king of chip manufacturing", trades at a much higher price in New York than in Taiwan, leading to the so-called "ADR-Taiex arbitrage trade" based on the investment theory of "mean reversion". Based on the substantial premium between the two, hedge fund traders have been easily making profits by shorting the overpriced American ADR stocks and buying Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR Taiex, this strategy continues to generate profits under the catalyst of price convergence. However, some market observers have stated that this strategy has recently become ineffective, resulting in arbitrage losses for some hedge funds. The core issue is that the price gap between Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's ADR and Taiex prices has not narrowed, but instead widened to an average of 25% in January, reaching the highest level since 2009, significantly higher than the average premium of 6.4% over the past ten years. With the ongoing AI investment frenzy and the continued enthusiasm for global companies and governments in AI deployment, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has become a favorite investment target for American investors and global hedge funds. This is because these funds cannot easily purchase the cheaper valuation and stock prices of this chip maker listed in Taipei. If an international company is listed in both the US and its home country, "hot international money" and America's large leveraged hedge funds often prefer the company's US stocks, primarily due to the unparalleled advantage of the US dollar as an international currency. US assets are the preferred assets for American investment institutions and "hot international money," and US stocks provide these investment institutions with a much more convenient investment channel, with liquidity advantages often leading to significant premiums. For Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR stock itself, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's ADR is included in several major international indices, such as the Philadelphia Semiconductor Index, as well as related ETFs such as the VanEck Semiconductor ETF and iShares Philadelphia Semiconductor ETF; these indices and ETFs bring in a huge demand from international passive investment forces, significantly increasing the market demand for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's ADR, a passive investment advantage that Taiex completely lacks. Will the premium between Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's ADR and the Taiex continue to expand? For hedge funds that are trying to bet on the premium shrinking, their concern is that even if the premium soars to astonishing levels, investors will continue to drive up the trading price of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's ADR. "Valuation premiums may continue to expand in the mid-term," said Joseph Lai, Chief Investment Officer of Sydney's OX Capital Management. "This may reflect the extent to which the US market is in a bubble area." Quincy Liu, Chairman of Shin Kong Investment Trust Co., stated, "Arbitrage trading may be quite risky because the premium may not necessarily face compression. Global investors have acknowledged the significant technological lead of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR in chip manufacturing and have made new rounds of acquisitions based on the ADR's valuation becoming increasingly high." On Thursday, global investors will have the opportunity to assess the latest demand for artificial intelligence (AI), when this chip manufacturing giant will release its quarterly sales outlook and this year's capital expenditure guidance. According to institutional data compiled, it is expected that the chip giant will report a gross margin of approximately 58% for the three months ending in December, with Q4 profit expected to grow by 55% year-on-year. During the upcoming earnings conference call, the market will focus on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's advanced packaging capacity expansion and the latest outlook on demand, giving insight into the future 12-18 month outlook for AI chip demand. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has long been the sole chip manufacturer for chip design companies without fabs like Apple Inc., NVIDIA Corporation, AMD, and Broadcom Inc. As the fervor for AI deployment continues unabated and sweeps the globe, their clients NVIDIA Corporation, as well as chip giants AMD and Broadcom Inc., have benefited from the booming trend of the market for AI's most essential infrastructure - AI chips. These chip giants have seen a significant increase in their chip outsourcing contracts with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, driving strong performance for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR since last year, exceeding expectations. This has also been a key support for the continuous record highs of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's Taiwan stock and US stock ADR prices since last year.Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, with decades of experience in chip manufacturing technology and long-term leadership in chip manufacturing technology innovation and improvement (pioneering the FinFET era and driving the start of the 2nm GAA era), has been at the forefront of global chip manufacturers with advanced processes and packaging technologies, occupying the majority of global chip foundry orders for a long time, particularly for 5nm and below advanced processes. In addition, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has dominated almost all high-end chip packaging orders for 5nm and below processes in the market with its leading industry 2.5D and 3D advanced packaging, and its advanced packaging capacity has been unable to meet the demand. NVIDIA Corporation's H100/H200 and Blackwell's capacity have long been in short supply, mainly due to limitations in Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's 2.5D CoWoS packaging capacity. In terms of valuation, compared to American tech giants, the valuation of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR appears reasonable. It has always been a top chip company held by global stock investment institutions. Since the release of ChatGPT in 2022, as of the closing of the U.S. stock market on Wednesday, its ADR trading price has soared by over 160%, while the Taiwan stock price has risen by about 120%; in comparison, NVIDIA Corporation's price has risen by as much as 750% during the same period. The "bull market feast" of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is still ongoing. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has not only attracted active American investors and international funds, but ADR has also been included in international passive indices such as the Philadelphia Semiconductor Index and some popular U.S. ETFs, meaning that funds tracking them must purchase the U.S. version of the stock. According to institutional compiled statistics, although ADR accounts for only about one-fifth of the company's total listed shares, the average daily trading volume in the past three months is twice that of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR in Taiwan. "Over the past year, global investors have been pouring large amounts of funds into the AI hardware sector, with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR being a major player in this field," said Alex Au, Managing Director of Alphalex Capital Management HK. "The expansion of its American investor base continues to push up the price differential. Due to rising financing costs and the liquidity premium brought by international funds, the ADR premium has become exaggerated, so using mean reversion strategies is no longer a foolproof investment strategy." Alex Au said his first arbitrage trade involving Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR dates back to 1998. Historically, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has traded at higher prices because they are interchangeable, unlike Chinese Taiwanese stocks, which require special regulatory approval to convert to ADRs. Additionally, according to a study by Goldman Sachs Group, Inc. in June, the premium on U.S. ADR investment targets often remains narrower for longer periods and beyond 2023, this trend will take longer to reverse. As of Monday, the short position of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR accounted for 0.4% of the issued shares, significantly lower than the peak of 3.1% in June last year, according to data compiled by S&P Global, Inc. This indicates that investors, especially hedge funds and long-only market participants, still have high expectations for the future stock price of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. According to institutional data, over 90% of Wall Street analysts recommend buying the stock. "It's hard to predict how the price differential will change," Au said. Goldman Sachs Group, Inc. recently raised its target price for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's U.S. ADR from $248 to $254, reaffirming a "buy" rating and reiterating the stock's inclusion in Goldman Sachs Group, Inc.'s "Conviction Buy" list.