One way to judge when a cyclical business expects demand to take off is to watch how much it is spending. On that basis, forecasts that ASE Technology will boost capital expenditure by over one third this year look exciting.

The world’s best fund managers certainly think so. They are heavily backing the Taiwanese company that packages and tests semiconductors and provides electronics manufacturing services.

Citywire, a financial publisher that tracks the popularity of shares among the top-performing 3pc of more than 10,000 equity managers from around the globe, has found 15 of these shrewd investors hold ASE.

Based on the size of their holdings, ASE is even more popular with top managers than tech darling Nvidia. It also comfortably qualifies for Citywire’s top AAA Elite Companies rating, which is awarded based on the level of smart-money backing.

While ASE’s key end markets, which include cars and smartphones, are expected to have bottomed out following some tough years, smart-money excitement is about more than a standard upswing in the business cycle. The added oomph comes from the potential for AI to turbocharge demand.

“ASE is not a direct play on AI-related investments but should benefit from any acceleration in the PC or mobile markets due to new product launches to deliver ‘edge-AI devices’, which are consumer and business electronics that can run AI software,” says Kamil Dimmich, one of the top managers Citywire follows who runs the Pacific North of South Emerging Markets All Cap Equity fund.

ASE also believes it could also see a pick-up in work from the emergence of several tiers of AI chips, from low to high end.

The most tangible benefit from AI that ASE is currently experiencing stems from its leadership in advanced packaging.

For now, AI remains chiefly the preserve of data centres that are pouring money into leading-edge chips designed by Nvidia and made by Taiwan Semiconductor Manufacturing Company (TSMC). Supply is struggling to keep pace and the biggest bottleneck is in the advanced packaging and testing these chips require.

TSMC has pledged to double its own packaging capacity but is still expected to fall well short of what is needed to fulfil Nvidia’s orders. ASE, which has strong relationships with both TSMC and Nvidia, is helping fill the gap. This area is a key focus of its increased capital expenditure and research and development.

Such work is high margin but currently represents only a low, single-digit percentage of revenues. But this is expected to rapidly rise to mid-single digits, and the growth should keep coming based on current trends.

ASE does face competition: Taiwanese rival King Yuan Electronics, for one, is a major force in packaging and testing. The company also has powerful customers, with 46pc of last year’s sales coming from the top five, and the top two customers each accounting for over a tenth of revenue.

Nevertheless, with solid tailwinds and limited capacity in some key areas, ASE should have decent pricing power over the coming years.

Further down the line, advanced packaging could play a more important role in boosting computing power now the miniaturisation of chips is reaching its physical limits.

However, justifying ASE’s share price does not require bold visions of computing’s future.

While the risk of conflict with China is a factor valuing any Taiwanese company, priced at 16 times forecast next year earnings, the shares look attractive given expected earnings growth for each of the next three calendar years of over 27pc.

“Currently, ASE is trading towards the higher end of its historic range on price-to-earnings multiples,” says Dimmich. “If the AI boom does drive a multi-year cycle we see further upside for ASE. Otherwise, the stock is already quite reasonably valued.”

The company also has a strong dividend history, and its shares are expected to yield 3.7pc over the next 12 months. ASE’s American Depository Receipts are available through most UK brokers, but the right paperwork needs completing to minimise withholding tax on the dividend.

ASE looks a good way to participate in an anticipated cyclical pickup in the semiconductor market, but the real allure is that this opportunity comes with a meaty kicker should we see more widespread adoption of AI.

Questor says buy

Ticker: NYSE:ASX

Share price: $11.90

Algy Hall is editor of Citywire Elite Companies

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