Top-notch Taiwanese companies cashing in on the advent of AI

(Image credit: Getty Images)

Asia is poised to drive global economic growth and is expected to account for more than half of the world’s GDP growth by 2025. There are major demographic dividends in Asia yet to be fully realised, led by giants such as China and India, while dynamic Southeast Asian economies, including Indonesia and Thailand, are also growing rapidly.

The focus on dividends is increasing across corporate Asia: 50% of the Asia-Pacific ex-Japan region is now yielding more than 2.5%. We believe the risk of dividend cuts is low in Asia owing to robust earnings and strong balance sheets, which provide good support for growing dividends.

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Taiwan’s chip champion

TSMC (Taipei: 2330), the fund’s largest holding, is a global leader in producing semiconductors that are key building blocks for supporting the use of AI. Over the past few decades it has secured a sizeable advantage when it comes to production. It leads the global market and has built relationships with key customers.

It would be difficult for potential rivals to enter the market as they would need to spend huge amounts to replicate TSMC’s production system. Demand for its products, moreover, is strong. TSMC can therefore generate robust free cash flows. This helps support growing dividends, and the group’s shareholders have enjoyed good capital and dividend growth to date.

Taiwan-based Sunonwealth (Taipei: 2421) makes cooling fans for data centres. It supplies clients in industries such as IT, automotive electronics and network communication. A niche player, Sunonwealth is a preferred partner for customised cooling solutions, which enhances its market position.

It has also developed the first-ever MagLev motor fan, the world’s smallest and thinnest magnetic levitation motor fan, showcasing its innovation. As AI technology becomes more complex, the need for advanced cooling solutions grows. This makes Sunonwealth a vital part of the AI supply chain.

The company’s strong balance sheet and cash flows have historically supported a healthy dividend payout and an attractive yield.

Accton (Taipei: 2345) is a Taiwanese firm that makes high-speed networking switches for US heavyweights such as Amazon and Facebook, as well as others, including HP, Nokia, and Ericsson. The company boasts a strong research and development edge, a broad product range and a solid record of over 30 years.

The business also has high barriers to entry, deterring rivals. This is due to complex technical designs, close relationships with high-profile, established companies, long qualification times and cost competitiveness driven by the advantages of scale.

It has not only diversified its key customer base beyond Amazon (it now has Intel and Meta on its books) but has also extended the range of its switch business, which now focuses on AI accelerators too. Accton’s consistent improvement in profitability underpins its ability to deliver steady income growth over the long term.

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Investment director and co-manager of the Aberdeen Asian Income Fund