I wasn’t joking yesterday when I wrote that Taiwan fabless semiconductor company Silicon Motion Technology Corp. was on my watch list. I’ve had my eye on the company for a while, and as of this writing, it’s taken a fortuitous 5% plunge today. What can I say? The price was right.

The Business

Silicon Motion Technology Corp. (NASDAQ:SIMO) is a holding company that substantially conducts all its operations through a wholly-owned subsidiary, Semiconductor Manufacturing International Corporation (SMI). SMI designs a range of controllers for Not And electronic logic gate (NAND) flash memory storage products, including memory cards, USB flash drives, USB card readers, and is beginning to market embedded controller solutions and controllers for solid state drives. NAND flash memory cards (which are solid state storage media) are the storage media of choice for mobile phones, digital cameras and quite a few other consumer electronics.

SMI runs three eight-inch wafer fabs in its Shanghai mega-fab located in the Zhangjiang High-Tech Park, an eight-inch wafer fab in Tianjin, and a 12-inch wafer fab in its Beijing mega-fab located in the Beijing Economic and Technological Development Area in Beijing. Through SMI, Silicon Motion Technology Corp. is in direct competition with a number of huge international chip companies, including AMD, Samsung, and NVIDIA.

The Valuation

SIMO is cheap!

All data are from Google Finance, figures are in millions of TWD

For a small, successful, consistently profitable company in such a huge and lucrative market, I would normally expect to see a P/E of 70 to get this kind of explosive growth. Instead, it appears to be just another Taiwanese company ignored in the gold rush to our neighbor across the strait. As of my purchase this evening, Silicon Motion Technology Corp.’s P/E didn’t even crack 18. Other than NetEase (网易), none of my other tech stocks are that cheap. In fact, Select Comfort, a bed company is at a higher P/E than 18.

The Risks

There are also a few remote risks due to SIMO’s status as a Taiwanese company that does all its business in the mainland through a shell company. It’s always possible that the government will pursue even more self-destructive attempts at stopping mainland trade and investment than they already have. However, I see these risks as minimal. WTO obligations and public sentiment would make any such actions very difficult for the current or next administrations to carry out. It’s possible the stock price is as low as it is in part due to foreign investors over-valuing these very remote risks.

The real risks are competition, competition and more competition! Alcor Micro, Chipsbank, Genesys, Incomm, Phison, Samsung, Skymedi, USBest, Actions, ALi, AMD, NVIDIA, Rockchip, SigmaTel, Vimicro, Analog Devices, Infineon, NXP, Qualcomm, RFMD and Skyworks and bears, oh my! Nobody sleeps easily with those guys out to get you.

Other Thoughts

It’s quite a coincidence that today, the day I finally made a second Taiwanese investment, my first one has shot up like a pumpkin in September. It’s up by over 15% today and over 89% since I added to my holdings during a dip this summer.

10/11/2007 11:11:08 Bought 125 SIMO @ 21

Legal Disclaimer: All of the information in this article is accurate to the best of my knowledge. However, I make no guarantee about the accuracy of anything written above. I’m not responsible for any mis-typings, or any other errors in the information. If you purchase any stock solely because I did, you do so at your own risk.

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