In the News: 2003

Look Beyond Technology Stocks For Piece Of Action In Taiwan

The Wall Street Journal
14 November 2003

Squeezing more gains from Taiwan's stock market, the main index of which is up 34% this year, won't be easy. But some investors have the novel idea of looking outside the technology sector.

That takes work, as technology businesses make up about two-thirds of the Taipei exchange and account for most of the big names. But many fund managers believe technology is taking a breather, and nontechnology stocks could be the biggest gainers during the next few months.

Listed Taiwan tech companies depend largely on exports. But in the past few months, the island's domestic economy has shown signs of picking up. In September, household confidence hit its highest level since April 2002. Retail sales rose 5.3% from a year earlier in August, the third straight month of improvement.

That's especially important in Taiwan, says J.P. Morgan Chase economist Lian Chia-Liang, as personal consumption makes up two-thirds of gross domestic product, a higher level than in most Asian countries. He believes private consumption is poised for a strong rebound and could be 17% higher in the second half of 2004 than in the current half. That's part of the reason J.P. Morgan Chase has raised its forecast for Taiwan's 2004 growth to 5.3% from 4.3%.

Reflecting a consumer rebound, property prices have stopped falling and in some cases are rising, giving people more confidence to spend, says Peter Sutton, Taiwan strategist at CLSA Asia-Pacific Markets.

Still, direct plays on the consumer theme can be hard to find in Taiwan. Louisa Lo, a Hong Kong-based fund manager at Schroder Asset Management, recommends thinking of bank stocks as a proxy. As Taiwanese become more willing to spend, she says, they'll turn to banks for mortgages, credit cards and other tools.

Insurance and banking giant Cathay Financial is one of her top holdings, but with its stock priced at about 18 times projected 2003 earnings -- a higher price/earnings ratio than earlier in the year -- some analysts recommend buying it only on price declines. In some cases, analysts also feel that other investor favorites such as Chinatrust and Fubon Financial Holding are fully valued at present.

One stock that some analysts contend is better value is Cosmos Bank, a smaller bank trading at about 10 times 2003 earnings. The bank jumped early into the cash-card business and still has a 50% market share, according to analysts Paul Sheehan and Nora Hua at ING Financial Markets. Cash cards, which allow consumers to use automatic teller machines to withdraw cash against a revolving line of credit, account for 43% of the bank's loan book.

The downside to the bank's cash-card strategy is that more competitors are emerging. This is bringing lower interest rates, and could reduce Cosmos's lead and profit levels. But some analysts feel Cosmos stands out from other banks with a policy of expeditiously making provisions for bad loans.

Fund managers and analysts also are talking about Sinyi Realty, a play on Taiwan's firming property prices. (Sinyi says that in recent months some prices have risen to levels 30% above those a year earlier.) Trading at about 14 times 2003 earnings, Sinyi is relatively cheap. But even though it is one of Taiwan's largest realty companies, the company has a market capitalization of about US$200 million, making it difficult for investors to take or leave a large position.

For an investor who wants to buy nonfinancial business, some fund managers suggest looking at Fu Sheng Industrial, a golf-club maker trading at 11 times this year's earnings. "They're doing very nicely," says James Squire, who manages Baring Asset Management's New York Stock Exchange-listed Asia Pacific Fund. "There's more outsourcing, and they've got the biggest share of the titanium head market -- they're number one by a long shot," he says. His main concern about Fu Sheng is the company's purchase of a stake in a computer technology company unrelated to its core business.

When buying Taiwan stocks, Mr. Squire urges, investors should pay special attention to company assets. In part because of tax reasons, as well as a law limiting companies to investing no more than 40% of their assets in mainland China, companies tend to keep much of their assets in investment vehicles domiciled offshore. Hiding assets has the effect of making some of their financial ratios, such as their return on assets, look better than they really are, he says.

Other analysts and fund managers say loose rules on when parent companies must consolidate the accounts of related companies into their own compounds the problem. Mr. Squire recommends looking hard at any company's accounts, noting these can be "much more complicated than people think."