MediaTek, Fubon and Foxconn
Lackluster Stock Market A Headache for Investors
Why is Taiwan’s stock exchange failing to retain strong, successful companies? Share prices are falling short of expectations, raising capital is difficult, and fewer promising companies are going public here.
Lackluster Stock Market A Headache for InvestorsBy Patty Yen, Peihua Lu
From CommonWealth Magazine (vol. 613 )
In November, talk of the "Goodix miracle" dominated the Shanghai stockbroker community. On November 11, Shenzhen Huiding Technology Co. Ltd, which sells its smartphone recognition chips under the trade name Goodix, closed limit up for the 20th day in a row. Disappointed investors who hadn't been able to get their hands on Goodix shares were anxiously pestering stockbrokers, demanding an answer to the question "Will Goodix shares close limit up again tomorrow?" Goodix was the talk of the town as corporate investors, stockbrokers and individual investors scrambled to get in on the share's exceptional rally.
MediaTek vs. Goodix Miracle
With a stake of 20%, Taiwanese high-tech firm MediaTek is a major shareholder in Goodix. The differences between the stock markets in Taiwan and Shanghai become obvious when one looks at the performance of MediaTek and Goodix in terms of raising capital through these two bourses.
Goodix listed on the Shanghai Stock Exchange at a price of 19.42 renminbi (RMB). After closing limit up for 20 consecutive days, its share price had increased 7.76-fold to 170.98 RMB for a price-earnings-ratio of 113.
Goodix manufactures fingerprint recognition chips. One in three Chinese smartphone users chose a Chinese brand. Each of these smartphones is likely to contain a Goodix fingerprint recognition chip. People in China habitually pay with their smartphones, be it meals, taxi fares, or online shopping. All it takes to complete a transaction is a "beep."
Goodix's market value stands at 76.086 billion RMB (about NT$357 billion), once surpassing the market value of its major shareholder MediaTek, which is valued at NT$340 billion, and outdoing all other IC design houses in Taiwan in terms of market cap.
Undervalued Taiwanese Companies
While the price-earning ratio of Goodix skyrocketed to 113 in Shanghai, the price-earnings ratio of MediaTek, Taiwan's largest IC design company, stands at only 15. MediaTek is the world's 11th-largest IC design house, whereas Goodix has not even made it into the ranks of the top 100.
Originally, fingerprint recognition chips played only a minor role in the smartphone supply chain. However, realizing Goodix's competitive edge, MediaTek invested NT$3.9 million (about NT$124 million) in the Shenzhen-based company in 2011. Within a span of just five years, this successful investment netted MediaTek earnings of NT$76.6 billion, yet its share price fails to benefit from the Goodix deal.
How is MediaTek dealing with the fact that its share price remains depressed despite a successful investment strategy? MediaTek Vice Chairman Hsieh Ching-jiang does not hide his frustration, saying "I don't have a particular take on this, since the overall environment is difficult to control. The only problem is that liquidity is low in the Taiwan stock market, so MediaTek can only follow the market."
MediaTek holds a 20 percent stake in Goodix. "This means that the value of MediaTek is significantly undervalued," notes Li Fang-kuo, chairman of PSC Venture Capital Investment. Interested parties who want to buy an IC design company will definitely go for world-ranked MediaTek and acquire 20 percent of Goodix with the acquisition, Li points out.
Due to the negative side effects of low price-earning ratios and low turnover at the local bourse, the shares of many good Taiwanese companies are severely undervalued, making them easy targets for takeovers, Li believes.
The trading volume and price-earnings ratios are both low at the Taiwan Stock Exchange. "If I was the boss of a company and had worked hard to grow the company so that it could eventually be taken public, and the price-earnings ratio on China's new third board (over-the-counter system) is 70, whereas Taiwan has a price-earnings ratio of only 17, then I would, of course, choose the new third board," remarks Lin Chao-huan, former Chairman of JP Morgan Securities (Taiwan) Ltd.
Taiwan is a stronghold in high-tech manufacturing. Taiwan stock market investors are quite discerning about promising tech stocks. Even if companies are not yet profitable, they offer comparatively high price-earnings ratios or price-to-dream ratios. However, volume is what breaks or makes a stock market, and without high volumes, everything else comes to naught.
The stock market slump is directly affecting the ability of Taiwanese listed companies to raise capital. Not only do small and medium cap stocks suffer, even large financial holding companies are affected. Taiwan's most profitable financial holding firm, Fubon Financial Holding, was the first to take a hit.
Withdrawing Cash Capital Increase Plans
In the third quarter of last year, Fubon Financial Holding approved a cash capital increase plan, deciding to issue 520 million new shares at a price of NT$48 per share for a total value of almost NT$25 billion. To anyone's surprise, Fubon announced on January 28 this year that it would withdraw its common stock cash capital increase plan. Then, in April, the financial holding declared it would issue of Class A preferred shares instead.
On January 28, the share price of Fubon Financial Holding had slipped to only NT$35.75, about 25.5% below its underwriting price of NT$48. Consequently, Fubon was forced to withdraw its cash capital increase plan.
Subsequently, Fubon announced this April that it would issue for the first time 600 million Class A preferred shares at a price of NT$60 per share and an interest rate of 4.1 percent per annum. The share issue would allow the financial holding to raise NT$36 billion in capital.
Lured by ample international capital in the Hong Kong stock exchange and high price-earnings ratios in Chinese stock markets, FIT decided to abort its Taiwan IPO in favor of a Hong Kong listing.
That Fubon offered an interest rate four times higher than the fixed deposit interest rate sent shock waves through the market. For long-term investors seeking stable returns, the preferred shares were a lucrative alternative to high-interest fixed deposits. For Fubon, the share issue raised over NT$11 billion more money than the original plan. The additional capital contributes to strengthening the company's capital adequacy ratio. At the same time, Fubon does not have to worry about share capital expansion and diluted earnings per share.
CTBC Financial Holding, which originally planned to raise NT$15 billion through a cash capital increase, also abandoned its plans in February this year. Following suit in issuing preferred shares, Cathay Financial Holdings issued Class A preferred shares for the first time in November this year at a price of NT$60 per share for an interest rate of 3.8 percent per annum. The share issue is expected to raise about NT$50 billion in capital.
Bank Loans Make Up for Financial Market Weakness
In other words, Taiwan's stock market performed so lackluster this year that even industry leaders such as Fubon Financial Holding or Cathay Financial Holdings were forced to offer high interests in order to attract investors. A financial holding chief financial officer who declined to be named said that the share price of some financial holdings has declined below their face value of NT10. The price-to-book ratio is even lower at NT$0.7, which means they could be exposed to the risk of failure when trying to raise capital at the local financial market.
The CFO voiced concern that, "the marginalization of Taiwan's capital market does not only concern the stock market. If the situation continues to deteriorate, even the bond market, subordinated debt, or preferred stock won't find appropriate buyers."
Stanley Chu, chairman of Cathay Securities Corporation, points out that, although the Taiwan stock market index has climbed above 9,000 points, the share price of 34 percent of listed companies is lower than the book value per share. This means that financing costs will increase for companies that need to raise capital in the financial market, and that their shares will be less attractive for investors.
A weak stock market is even changing companies’ fund-raising behavior. If the stock price is not ideal when companies want to raise capital, they would now rather defer such plans; if the required amount is not big, they turn to banks for their financing needs.
Central bank statistics show that from 2009, the total stock of direct financing continued to decline for six consecutive years to reach 20.5 percent last year. At the same time, indirect financing through financial institutions increased to 79.5 percent in 2015, which means that a growing number of companies borrow money from banks.
Raising money in Taiwan's capital markets has become so difficult that even initial public offerings (IPO) are affected.
Abandoning Listing in Taiwan
Foxconn Interconnect Technology (FIT), a member of the Hon Hai/Foxconn Technology Group, fired the first shot. The Hong Kong-based cable and connector manufacturer earlier this year decided to drop plans to list on the Taiwan stock exchange and launch its IPO in Hong Kong instead.
Huang Hsien-hua, then chairman of Grand Fortune Securities Co. Ltd., recalls his shock when receiving a phone call from this big customer last summer with his counterpart telling him, "FIT will terminate underwriting consulting work in Taiwan."
The news hit Huang like a bolt out of the blue. Dumbfounded, he thought, "How could this be possible? After nearly two years of consulting process, and now they gave up on listing in Taiwan!"
“I am the biggest victim," exclaims Huang, still reeling from the feeling of having been wronged, adding that the only reason FIT could have chosen to list in Hong Kong instead is the weak performance of the Taiwanese capital markets.
FIT was formerly known as the Network Interconnection Business Group (NWInG) of Hon Hai Precision Industry Co. Ltd. The unit, which also laid the foundation for Hon Hai's rise, was spun off as a wholly owned subsidiary in 2013. Presently, the company, whose main business entity is in China, plans to list in Taiwan as a foreign-registered company (so-called F-share) to let small shareholders partake in its success.
FIT is the first business group that was spun off from the Hon Hai/Foxconn Technology Group. Hon Hai executive Sidney Lu, who doubles as FIT CEO, is in charge of steering the Hon Hai/Foxconn Technology Group through the treacherous waters of transformation as several dozen companies will be spun off and taken public in the coming years.
The Hon Hai/Foxconn Technology Group and Lu's team believed that Hon Hai spin-off FIT should return to Taiwan for its IPO. But as Asia's largest and the world's fifth largest connector company, FIT is now fighting to become the global No. 1, taking on international renowned rivals such as Ireland-based TE Connectivity, and the Hon Hai spin-off could not afford to lose.
With a high-profile listing in Hong Kong, FIT would clearly make itself a name overnight and attract international attention and capital, which would again bolster its ambitious bid to become a global industry leader.
After careful assessment, Lu's team therefore concluded it had better abandon the Taiwan listing plan midway because of the low price-earnings ratios and the lack of liquidity in the Taiwanese stock market.
"Hon Hai's price-earnings ratio stands at less than 10, ZDT (Zhending Technology Holding Limited) is also around 10, and the GIS Group presently is about 13. Only Ennoconn performs somewhat better," remarks Huang. The Hong Kong market has always revolved around financial and real estate stocks. Although technology stocks play second fiddle, they still achieve price-earnings ratios of 11. While these may not be high, Hong Kong's abundant liquidity constitutes a very strong incentive for companies to list there.
Under its Hong Kong listing plan, FIT is to offer 15 percent of its stock, which will likely raise US$800 million to 1 billion. In Taiwan, this would be totally impossible. "Last time when GIS, which belongs to the Hon Hai/Foxconn Technology Group, returned to Taiwan to go public, it was able to raise US$75 million, which already wasn't an easy feat," notes Huang in illustrating the difficulties facing Taiwan's capital market.
Companies Forced to Choose Sides
As the top executives of Taiwan's listed companies witness Goodix’s stock market rally and FIT's about-face regarding its Taiwan IPO, many begin to wonder whether they should take action too.
Fubon Financial Holding withdrew a cash capital increase plan after its share price fell below the underwriting price. As a result, the leading financial institution was forced to issue preferred shares to raise capital.
A top executive of the world's second largest global accounting firm said privately that many business owners have inquired whether there are possibilities to work around existing legal restrictions to list their companies on both sides of the Taiwan Strait. Shouldn't companies that are already listed in Taiwan be allowed to spin off an independent subsidiary and list it in China?
Unless this is possible, companies will be forced to take sides, and cases such as Advanced Semiconductor Engineering (ASE) subsidiary Universal Scientific Industrial (USI), which delisted in Taiwan to list in China, will only increase in the future.
Taiwan Stock Exchange statistics show a wave of abandoned IPOs this year. Eight applications for listing on the stock exchange or trading over the over-the-counter market were withdrawn by the applicants, while only 17 new companies listed in the first ten months of the year. "In recent years, foreign companies listing F-shares accounted for half of the listings in Taiwan. This has already markedly affected domestic IPOs," notes Michael Lin, former president of the Taiwan Stock Exchange Corporation.
As of the end of October 2016, listed companies had barely raised some NT$100 billion through cash capital increases, a steep 25 percent decline over the previous year. Unlisted companies that are traded over-the-counter fared even worse, raising only NT$16.8 billion, less than half of the capital raised in 2015.
Confidence in Taiwan's capital market can only be rekindled if it is nursed back to robust health as soon as possible. This means markedly improving the current low turnover, low price-earnings ratios and low liquidity.
Translated from the Chinese by Susanne Ganz