Taiwan Semiconductor ADRs Hit 16-Year High Premium Amid AI Boom

Taiwan Semiconductor Manufacturing Company (TSM.US) American Depositary Receipts (ADRs) have reached a 16-year high premium over its locally listed shares. This significant price gap has raised concerns among analysts about the potential overheating of the U.S. stock market, particularly in the context of the artificial intelligence (AI) boom.

Data indicates that in July, TSM.US ADRs were trading at a 24% premium compared to their average price in China Taiwan. This premium is higher than the 17% recorded in April and the ten-year average of 7.4%. While TSM.US ADRs have historically traded at a premium to their locally listed shares, the current price difference has not been seen since April 2009. This widening gap has sparked discussions about the sustainability of the current market conditions and the potential risks associated with the AI-driven rally.

Investment research firm Zero One's executive director Vincent Fernando noted that the increasing demand for TSM.US ADRs in the U.S. market is driven by investors' growing recognition of the company's crucial role in the global AI supply chain. However, the supply of ADRs is relatively fixed, with limited new issuance and more complex conversion processes, leading to an expanding trading range for the premium.

Historically, TSM.US ADRs have maintained a premium due to two main reasons. Firstly, they are freely tradable across markets, unlike locally listed shares in China Taiwan, which require special regulatory approval for conversion to the U.S. version. Secondly, TSM.US ADRs are included in indices such as the Philadelphia Semiconductor Index, necessitating their purchase by exchange-traded funds (ETFs) that track these indices.

Since the release of ChatGPT in 2022, TSM.US ADRs have surged by over 190%, while the company's locally listed shares in China Taiwan have risen by less than 140%. During this period, foreign investment in the latter has increased to nearly 74%, although this is still below the historical peak of 80% reached in 2017.

Market observers, including Owen Lamont, an investment portfolio manager at Acadian Asset Management, view the widening price gap as a cautionary signal. Lamont stated that excessive premiums on U.S. ADRs of popular tech companies relative to their local shares often indicate a market bubble. He noted several signs of overheating in the current market.