No excess but some anxiety

Taiwan avoided the excesses of Asian equity market euphoria last year and has escaped the worst of the stock market corrections in 2000. Some imaginative plays have helped it to the top of the Asian primary equity market this year. But even now concerns about a slowing economy, political uncertainty and a fragile banking system have many analysts believing the market has peaked for Taiwan issuers. Gill Baker reports

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Taiwanese investors may find their market rather dull compared to others in Asia

Equity and quasi-equity deals have led the Taiwan market so far this year, and look set to continue to do so for the rest of 2000.
Taiwan was in the bottom third of the rankings for Asian stock market performance last year - although still with 31% growth - as investors grew over-enthusiastic about the so-called V-shaped Asian recovery. This year has been a different story. Many stock markets in the region have suffered serious declines - Thailand is down around 40% since the beginning of the year, the Philippines and South Korea down 33% and Singapore down 18%.
Only China and the main Hong Kong market have seen positive growth. In this context, Taiwan's 4% slide seems almost robust.

But though the Taiwan Stock Exchange has not fallen as far as many in Asia this year, it has still had its fair share of problems. The authorities had to launch a NT$500 billion ($16 billion) National Stabilization Fund in June in an attempt to smooth out the worst of the troughs in trading.
The primary markets remained open. Taiwan has had three Floatation this year, raising $351 million - just 2.9% of the total IPO market in Asia ex-Japan. It was nevertheless the third most active IPO market in the region, after Hong Kong and Singapore. And when secondary issues are taken into account, market share leaps to 25%, with seven domestic deals worth $2.2 billion, second only to Hong Kong.
The new issue pipeline also looks fairly robust for Taiwan equities, with IPOs from Nan Ya Technology due in late summer or early Autumn, and Wintech Microelectronics, Taiwan Cellular and Kimo.com in the next few months, with Far EasTone Telecommunications to follow next year. But it is privatizations that will really drive the market, with deals expected from Chunghwa Telecom, Chiao Tung Bank, China Airlines, Chinese Petroleum and Taiwan Power.
Not all the planned new issues will materialize, however, especially given market sentiment domestically and overseas. Digital United, Taiwan's second-largest internet service provider, was planning a Nasdaq IPO, but that has been postponed indefinitely. It perhaps reflected wider problems associated with foreign Nasdaq stocks, which tend to "fall in the gap" in terms of US investor interest and analyst coverage, says one local broker.
Nasdaq horror story
The listing on Nasdaq of Taiwan's Giga Media, for example, was a "horror story" the broker says. "It has not been well received, and the after-market was very poor." Overall, domestically and internationally, $4 billion of new equity issuance hit the markets from Taiwan companies in the First half of this year, although eventual issuance in the second half may yet be less than expected. "Markets have been very volatile and with stock prices moving around so much, companies have tended to hold back from the equity launch pad," says Spencer White, head of research at Merrill Lynch.

Historically, second-half issuance has tended to be higher than in the First half because of year-end shareholder meetings giving approvals for new issues. Some $18 billion has been pencilled in for the rest of this year. Of this, some $7 billion to $8 billion is domestic and $8 billion to $9 billion international, including depositary receipts and Euroconvertible bonds.
Around 80% of domestic IPO volume is likely to be accounted for by the privatization of Chunghwa Telecom. "Chunghwa Telecom is going to be huge," says an analyst. "It will be a substantial draw on domestic liquidity."
Whether Taiwanese investors will support the deal remains uncertain. The inevitable worries about restructuring plans and lay-offs have incited some popular protests against the deal, spicing an atmosphere of political uncertainty.
And the attitude of foreign institutional investors to supporting further large new issues is tough to predict. "Taiwan, like very many other Asian countries that are heavily into hi-tech, is seeing the retreat of global capital funds from their equity markets," says Terran Liang, assistant manager in the Fixed-income department at Grand Cathay Securities. This is despite strong orders for hi-tech companies and decent profits, she says.
Nasdaq's spring collapse and only slow and volatile recovery take much of the blame since it is the leading hi-tech indicator There is also concern that the semiconductor industry might peak in the beginning or middle of next year. Capacity is being added to semiconductor manufacturing facilities that will triple or even quadruple Taiwan's capacity. Investors are starting to question whether all that can be absorbed, and while orders are up, the economy is slowing.
"It is a little bit of a paradox," says Liang. "We have strong export performance and orders, but because we are exporting and the infrastructure is building, our imports have been extraordinarily increased, which reduces our trade balance, and will slow down GDP in the future," she says, adding that Grand Cathay analysts believe that will only be a short-term phenomenon.
Political concerns are also driving down the domestic stock market, says Primasia Securities economist Irmak Surenkok: "There has been some worry in the market and that is why it has been quite volatile." Falling liquidity exacerbates this.
Internationally, Taiwan Semiconductor Manufacturing Company (TSMC) has been a focus of stock market activity, with a $107 million share placement by Goldman Sachs in February, followed by a $207 million placement in April and a $1 billion tranche in June. The ADS issue in June also highlighted a narrowing of premiums achieved by companies on Nasdaq over domestic listings, reflecting a trend for foreign investors to seek Taiwan qualified foreign investor status, thus enabling them to trade directly on the local board.







Taiwan is boosting its production of semiconductors but that is fuelling imports

Foreign investors "are still coming and looking and the long-term view is that Taiwan's economy and its stocks will only improve," says Liang.
Given the shift apparent, with investors in TSMC now opting to trade on the domestic board, the merits of an ADR issue would seem uncertain. Nevertheless Taiwan companies have been queuing up to issue, once improved sentiment returns. Global depositary receipts (GDRs) and ADRs are certainly in vogue in Taipei, with Bank Sinopac, First International Computer, Lite-on Electronics, Quanta Computer and Via Technology all considering issues. Via may opt for a $1.1 billion ADR, and United Microelectronics Corporation has a $1.2 billion ADR launch pencilled in.
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