Smart Investors Looking at Taiwanese Stocks

“I represent the interests of the people of Taiwan,” the guy fumed at me through the video monitor, his arms flapping about like a beetle on its back and his eyes bulging out. This was my first and thus far only exchange with Chen Shui-Bian, the President of Taiwan. I was a Teaching Fellow at Harvard University at the time in early 2002. Harvard’s Fairbank Center for East Asian Research had arranged for Chen Shui-Bian to answer questions via video link because it was not easy for Chen to come to Cambridge in person due to diplomatic issues with China.

The reason for Chen’s outburst? I had asked Chen if it were better for Taiwan and China to reunite in order to spur economic development and that his actions vis a vis China were more for his own self-interest than for the people of Taiwan’s. Well, understandably, Chen was very angry in his response to my slightly mischievous question – so angry in fact that Taiwan’s media omitted our discourse in their transcripts released. The Harvard Crimson did a nice story on the incident.

I was thinking of my little exchange with Chen today as Taiwanese prosecutors indicted Chen’s wife for corruption and said that they would have indicted President Chen himself if he were not President (I guess my question was more on target than I had fathomed when I asked it). Prosecutors said that sitting Presidents in Taiwan are immune from prosecution aside from acts of treason and sedition. I think that Taiwan needs to change those rules and fast.

Until today’s indictment, recent months have seen Chen Shui-Bian and his wife beleaguered by charges of corruption and protecting their self-interests by opposition leaders from the KMT. Critics claim that Chen and his wife traded political favors for shopping cards and diverted funds to establish Taiwanese missions to their own personal accounts.

Further controversy has centered on Chen’s son-in-law, Chao Chien-Ming, and his indictment for insider trading stemming from his involvement with the Taiwan Trust and Development Corp. It certainly has been a storm for all seasons in Taipei and the corruption seems to be endemic in the first family. Perhaps people will start calling Chen Gargantua rather than Ah-Bian.

Several hundred thousand protesters marched in the capital recently in an attempt to secure Chen’s resignation. My firm, The China Market Research Group, has conducted extensive in-depth interviews with Taiwanese businessmen in China and Taiwan. Over 80% wish Chen would resign and adopt a less combative stance with China for the sake of business.

So what does this mean for investors interested in Taiwanese companies? Taiwan’s economy is comparatively strong and nimble right now as the many of the firms are benefiting from China’s boom. The Taiwanese stock market has benefited from the strength of the Taiwanese tech sector. However, the market has not fully realized gains in large part due to Chen’s administration and the resulting insecurity about Taiwan’s economic future and relationship with the mainland. Chen’s policies have prevented Taiwanese business from fully realizing the cultural advantage that they have when investing in mainland operations.

Savvy investors will look closely to see when Chen exits office. There could be some short-term volatility, but Taiwanese companies are strong and long-term are good place to allocate part of your portfolio. The iShares Taiwan ETF (EWT) that tracks the Taiwan stock market closed at $13.51 on Friday, down from a 52 week high of $14.94 is a good way to gain exposure.

Taiwanese businesses are currently finding their growth hampered by a variety of politically motivated factors. Taiwan’s geographical and cultural proximity to the mainland make China a logical choice for companies to develop operations and sell products. Chen’s pro-independence stance and seeming appetite for consumption has slowed work towards cooperative development of business. The Taiwan Chamber of Commerce in China has endorsed the KMT Party because it is seen as being more pro-business in dealing with China.

Hopefully, Taiwan’s next President will change some of the misguided policies that are hurting Taiwan economically rather than helping.

Flying to Nowhere

Currently, businessmen must fly through Hong Kong to reach the mainland. The lack of direct flights makes frequent business trips costly and inefficient. This issue is slowly being resolved. There are now 72 direct passenger flights scheduled for 2006 as well as direct cargo flights. This is not a perfect solution, but it is a start.

What should be a one and a half hour trip now takes 8 or more hours when you add up all the plane changes. Many MNCs are simply neglecting Taiwan and relegating it to a lower status, in large part because of the transportation difficulties.

Why would an executive bother to fly to Taipei, a city of a few million, if he could fly for 2 hours and land in the booming city of 30 million people called Chongqing?

Investing Restrictions

Another problem is that Taiwanese companies may only invest up to 40% of their net worth in mainland business. This prevents companies from fully taking advantage of the China market. Taiwanese companies are looking to expand sales on the mainland and are willing to invest to develop manufacturing but they are currently hampered by the limit placed on their investment.

Once these investment caps are raised, look for Taiwanese companies to grow quickly.

What Stocks to Buy?

The list of Taiwanese stocks on offer as ADRs is somewhat paltry. However, if investors are interested in Taiwanese companies there are some from the technology sector that might be worth looking at.

These stocks include:

Taiwan Semiconductor (TSM), the world’s largest manufacturer of semiconductors, which reached a 52 week high of $11.03 on May 11th and traded at $9.55 on Friday, and its competitor Advanced Semiconductor Engineering (ASX) -- 52 week high of $6.16 on May 4th and currently trading at $4.61;

AU Optronics Corp. (AUO)

United Microelectronics Corp. (UMC) -- 52 week high of $3.90 on May 6th, currently at $3.00

Chunghwa Telecom Co. Ltd (CHT) -- Taiwan’s largest Telecom provider. Chunghwa currently trades at $18.46, down sharply from its 52 week high of $22.24 but higher than in September when it traded in the mid-$17 range.

Investing in individual ADRs of Taiwanese stocks may not be viable for risk adverse investors during the political malaise that is consuming Taiwan. However, those looking to capitalize on Taiwan’s growing economy and the potential of future business developments in between Taiwan and the mainland should consider watching the political climate in Taiwan and then invest in iShares Taiwan (EWT).

Assuming that Taiwan’s political climate stabilizes, this index fund has a lot of growth potential. This eliminates much of the risk of investing in tech stocks while still affording American investors the opportunity to profit from increased political stability in Taiwan.

EWT 1-yr chart:

Comments

[Johnc]

Shaun,
No arguments with your post but I think you should mention that alot of the excitement in the market will build up into the Legislative Yuan (Congressional) and Presidential Elections in Jan and Mar, respectively. Investors should monitor the index level at that time and not feel shy about taking profits if the situation looks a bit frothy (which is very likely). There may be some buy the rumor, sell the news action in the local stock market. If one does get a correction after the elections, then your arguments are still valid and you might get a second chance to play Taiwan in mid 2008.
John

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