Taiwan F Shares Lose Their Luster
'Taishang' No Longer Coming Home
A series of reforms by China’s stock exchanges have tempted Taiwanese businesses in China to list IPOs there rather than back in Taiwan, leading many to worry that Taiwan’s stock markets may become marginalized.
'Taishang' No Longer Coming HomeBy Pei-hua Lu
From CommonWealth Magazine (vol. 617 )
Ganso snow cakes are part of the collective memory of many Taiwanese, and after entering China late last century and becoming the symbol there for gift-giving on special occasions, people in China were well aware that they came from Taiwan.
But by the end of last year, when Ganso Co. went public on the Shanghai stock exchange, the company had become completely Chinese, its Taiwanese roots left behind.
Ganso is the best-known Taiwanese-invested company to benefit from fast track approval in launching an IPO (initial public offering) on a Chinese stock market. In the past, companies needed well over half a year to navigate the approval process – starting from the China Securities Regulatory Commission’s (CSRC’s) first review meeting to final approval – but Ganso needed barely more than a month. Two other Taiwan-invested companies also benefited from the expedited approval process to go public on the A Share market – Goodix Inc. (formally known as Shenzhen Huiding Technology Co.), a Chinese company in which Taiwanese IC designer MediaTek Inc. holds just over a 20 percent stake, and L&K Engineering Suzhou Co., which specializes in building semiconductor plants.
After listing IPOs on the A share market in China, Ganzo has become an authentic Chinese business.
The rapid approvals reflected a new approach by the regulatory agency, which was only giving the green light to four to six IPO applications a week a year ago but was reviewing 10 a week by the end of last year.
Contrast that with the Taiwan stock exchange’s F share program, designed to attract foreign-registered firms to list in Taiwan. It once relied on Taiwanese businesses in China (known as Taishang) as its primary source of business, but the number of applications from China has recently slowed to a trickle. Of the eight companies applying to list as F shares in Taiwan at the end of 2016, only one was a Taishang, unlike in the past when Taishang would account for 75 percent of F-share IPO applicants.
“There were three Taishang that listed in a short time span in China. That had never been seen before, and it may have a ‘magnetic pull’ on others,” says Kevin Lin, China business development leader at PricewaterhouseCoopers Taiwan.
So why have Taiwanese businesses in China stopped coming home, and how strong has the pull of China’s market been? At the same time, how should Taiwan respond to the reform and rise of China’s capital markets?
CommonWealth Magazine has identified four main factors that are giving Chinese markets an edge.
Factor No. 1: Registration-based System Revived
To correct the main flaw of the IPO process in China – the unpredictability of how long it took to go public – Chinese regulators launched a “registration-based system” reform that proved highly attractive to Taishang.
Miles Chiu, who heads KGI Securities’ representative office in Shanghai, explains that because companies face a steep threshold to get listed on the A share market, Chinese retail investors came to see any company able to meet the China Securities Regulatory Commission’s scrutiny as a sound enterprise. Funds poured into these companies’ stocks regardless of their results.
So China faced the challenge of maintaining the integrity of A shares under these circumstances while allowing more companies to list. Former CSRC Chairman Xiao Gang introduced a registration-based IPO system in late 2015 that imposed a lower threshold for approval and put the onus for the quality of the IPO applicants on the securities firms underwriting their bids. Xiao hoped the new system could speed up reviews and increase the number of new listings, giving investors more choices and eventually forcing market mechanisms to take shape.
The initiative seemed to promote a sounder market system, but Xiao lost his job after markets crashed in China in July 2015 and the introduction of “circuit-breakers” to halt big swings in trading ended in failure in early 2016. With Xiao gone, most observers figured the “registration-based system” would be aborted.
But after taking over as the new CSRC chairman, Liu Shiyu stressed he would resolve the IPO “dammed lake” problem – the buildup of IPO applications in the pipeline – in the next two to three years by putting in place strict reviews and eliminating from consideration companies with weak growth and unstable results or financial statements suspected of being falsified.
“A disguised registration-based IPO system has begun,” explains one Chinese securities executive.
The executive observes that unlike Xiao Gang, who announced the system with great fanfare, causing anxiety in the market, Liu Shiyu took a low-profile approach. “When people suddenly realized the IPO review process had speeded up, they discovered it had little impact on A shares,” the executive says.
After the Lunar New Year holiday in February, China’s Ministry of Commerce, the CSRC and two other agencies organized a briefing on Chinese economic policy for Taishang. As a CSRC representative was briefing attendees on the Chinese IPO process and related details, some executives were busy taking notes while others used their smartphones to photograph the content, a sign of the deep interest Taishang have in listing in China.
And the interest isn’t limited to Taiwanese investors. Taiwan-based Friendly Securities Co., which recently moved its Shanghai office to within 10 minutes of the Shanghai Stock Exchange, has seen a change in how other foreign investors perceive China’s capital markets. Friendly Chairman Liu Fang-jung says the fear caused by the lack of maturity of Chinese markets and the tendency to stay away has dissipated.
“Korean companies are studying this very carefully. Some Korean securities firms have come to discuss the situation with us,” Liu says.
“The Chinese stock market’s capitalization should be similar to that in the United States and Japan. Japan has 10,000 to 20,000 listed companies, while China only has 3,000. That tells you how big volume could be in the future,” Liu says.
Factor No. 2: Limited Benefits of F-Shares
KGI Securities’ Chiu argues that F-shares have fallen out of favor for several reasons, including a lack of interest among investors who have lingering doubts about the finances of these overseas companies. That has led to disappointment among listed F-share companies, who see daily volume in their stocks fall quickly to only 20,000 to 30,000 shares a day after an initial surge in volume when the stocks first go public, Chiu says. And despite these limited benefits, F-share companies still face strict regulatory oversight, further souring them on the program.
China’s crackdown on tax avoidance also poses a huge potential threat. Cathay Securities Chairman Stanley Chu notes that when Taishang have returned to Taiwan to list as F-shares, they have typically set up a holding company in tax havens like the Cayman Islands and parked their profits there to limit their tax liabilities.
Now, however, the Chinese government is cracking down on “transfer pricing,” the tool companies use to shift profits to tax havens, meaning that setting up an F-share company could actually pose an additional legal and financial threat to Taishang.
Another problem for Taishang is the competition they face from the speed at which Chinese enterprises can acquire technology and raise capital. One of their goals in going public is to improve their visibility and increase their competitiveness, something they may not be able to achieve in Taiwan.
Factor No. 3: Listing in China Helps Firms Do Business
L&K Engineering, which set up a base in Suzhou in 2002, specializes in building clean rooms for semiconductor, flat panel and other high-tech companies. Because of the nature of its business, it has felt a difference before and after going public, as the company’s chief financial officer, Jane Chen, can attest.
Chen, who splits her time between Taipei and Suzhou, took a call one morning in the middle of February in the Taipei office from a Chinese company she had not heard of before. It was asking L&K to help it build a factory.
L&K Engineering Chairman Kenneth Yao (left) and his company has set a precedent by successfully listing on stock exchanges in both Taiwan and China, a model that has drawn the interest of many Taiwan-listed companies.
Chen says that just two months after going public, customers were calling in with business inquiries and the Suzhou Industrial Park was aggressively promoting L&K to other foreign and domestic enterprises in the park, endorsing it because of its public listing. Even Chinese banks have pushed the company to borrow more money.
Those attitudes stand in marked contrast to the situation prior to 2016. As a construction company, L&K usually receives payments for its projects on a monthly basis as work progresses, but it still needs a strong cash flow to pay for imported materials and equipment and line up workers.
L&K’s Chen notes that taking out loans in China is much harder than in Taiwan, where you can start drawing on a credit line after a loan is approved.
“China gives you a credit line, then you advise the bank a week ahead of time that you’ll be drawing on it, and the bank suddenly tells you your credit line has been taken by others. You have to wait until others pay back loans before the bank has money to lend you,” she says.
The situation is even worse if you are a foreign entity, Chen says, because banks fear the company will simply run off before a project is completed. That also leaves Chinese developers reluctant to contract work to Taishang, she says, but such concerns have eased since the company went public.
L&K Engineering Chairman Kenneth Yao, who jokes that he had to wait “from before the Beijing Olympics to after the Rio Olympics” to go public, said without hesitation that he would still push for a public listing if he had to do it all over again.
“Construction companies have to grow big in scale. They have to go public to be able to receive the trust of the local market, financial institutions and developers,” Yao explains.
Ganso Chairman Chang Hsiu-wan says a public listing has also helped her company, especially now that its operations are squarely centered in China. “Listing in China, consumers see you have stores, a main sign and publicly listed shares. It’s better when these are all connected together.”
Factor No. 4: Solving the Employee Poaching Problem
Another benefit to going public in China is to keep Chinese enterprises from poaching your employees.
In 2008, enterprise resource planning (ERP) specialist Data System Consulting Co. delisted from the Taiwan stock exchange and changed its name to DigiWin Software Co. when it listed on the Shenzhen stock exchange’s startup board. The move helped the company retain its 1,800 Chinese employees because it was able to issue them Chinese shares.
“Beijing people often say ‘bentou.’ It means companies have to give employees hope, and stock represents hope,” says Friendly Securities’ Liu. “If you want to compete for talent with Chinese enterprises or other foreign enterprises, going public is one way to do it.”
Grand Fortune Securities Chairman Michael Lin argues that with the rise of China’s own supply chains, Taishang have to integrate themselves into those supply chains and going public in China makes sense in that context.
“Can Taiwan help with the advantages that companies get by listing in China? If Taiwan cannot help, then we should wish those companies well,” Lin says.
L&K Engineering’s model of listing in China without having to delist in Taiwan has drawn the attention of Taiwan’s publicly listed companies. When L&K Engineering (Suzhou) went public on the Shanghai exchange on Dec. 30, 2016, it was listed at 4.94 renminbi a share, but barely nine weeks later on March 6, the stock closed at 35.25 renminbi and its market capitalization was already higher than that of its parent company listed in Taiwan.
As far back as 2007, TSMC Chairman Morris Chang complained about a “Taiwan Discount,” in which companies with similar operating results end up with lower price-earnings ratios if they are listed in Taiwan than if listed in the United States or Hong Kong.
That same “Taiwan Discount” now applies relative to China. One broker who spoke on condition of anonymity said the heads of many companies whose market capitalization is lower than their net worth have a clear understanding of these relative valuations. If they buy back outstanding shares in Taiwan and delist the stock and then relist the company in Shanghai on the A share market, their company can go from a P/E ratio of 10 in Taiwan to 40 in China. The result is great for large shareholders but a disservice to small investors in Taiwan, the source says.
But listing on the A share market is anything but easy. Friendly Securities’ Liu, who advised L&K Engineering (Suzhou) on its listing in Shanghai, says that if other Taishang want to follow in L&K’s footsteps, they have to make sure the businesses of the parent company and subsidiary are independent.
“Many Taishang are involved in triangular trade in which Taiwan is responsible for taking orders and purchasing and China handles production. Companies with that structure shouldn’t even think about listing in China,” Liu says.
The Threat of Marginalization
The slowdown in Taishang returning to list in Taiwan has not gone unnoticed by the Financial Supervisory Commission (FSC) and the Taiwan stock exchange (TWSE).
TWSE senior executive vice president and spokesman Chien Lih-chung has acknowledged that heavy competition exists between stock exchanges around the world and especially in Asia, while FSC Vice Chairman Cheng Cheng-mount contends that several measures have been taken to encourage Taishang to stay the course in Taiwan.
Among the measures listed by Cheng are aligning the market’s trading system with international practices and increasing market turnover, but the effectiveness of those measures is open to question.
Grand Fortune Securities’ Lin stresses that companies tend to give preference to launching IPOs in their home markets and that listing on a foreign exchange is only a last resort.
“If it’s obvious that listing in Hong Kong offers the greatest benefit, then why try so hard to bring them back to Taiwan?” Lin says. “But looking at it from another angle, if companies can get special benefits for listing in Hong Kong, why can’t Taiwan do the same?”
Lin, who once served as TWSE’s president, says that when TSMC’s Chang publicly criticized Taiwan’s low P/E ratios, Taiwan Stock Exchange Corp. considered the idea of swapping shares with the New York Stock Exchange.
“Comparing Taiwan with Hong Kong, we are a ‘local’ market while Hong Kong is a ‘regional’ and even ‘global’ market. If we had a director from the New York stock exchange, how would people see the Taiwan stock exchange? Taishang go to Hong Kong to list because they love its international visibility. If we can find a way to elevate the international visibility of Taiwan’s market, Taishang will be willing to stay here,” Lin asserts.
“You can’t force people to stay and not let them leave. That doesn’t work,” Lin says. Unfortunately for Taiwan, its plan for consolidation with the New York Stock Exchange came to nothing.
The reluctance of overseas Taiwanese businesses to return home to go public signals a clear threat to Taiwan’s capital markets. With China’s markets on a path of reform, Taiwan needs to step up the pace of action and find its regional and international market niche or face marginalization.
Translated from the Chinese by Luke Sabatier
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