Is a Delisting Wave Imminent in Taiwan?
In late January, Hon Hai Precision Industry Co. Ltd. (also known as Foxconn Technology Group) convened its first-ever extraordinary general shareholders’ meeting since listing on the Taiwan Stock Exchange in 1991, approving the IPO of a Hon Hai subsidiary in China. With its decision, Taiwan’s largest manufacturer sounded the alarm for the currently high-flying Taiwan Stock Exchange (TAIEX).
Is a Delisting Wave Imminent in Taiwan?By Pei-hua Lu
From CommonWealth Magazine (vol. 642 )
The shareholder meeting, called by Hon Hai Group Chairman Terry Gou, smoothly approved a motion to allow Hon Hai subsidiary Foxconn Industrial Internet Co. Ltd. (FII) to issue an initial public offering on the Shanghai Stock Exchange.
What deserves our attention is the fact that a consensus has emerged among transnational companies to let split-off overseas subsidiaries go public in the market where they are based.
Namchow, Long Chen Follow Suit
Following in the footsteps of Hon Hai, a Taiwanese food manufacturer, the Namchow Group, is expected to officially announce at an extraordinary general shareholders' meeting in March the listing of its subsidiary, the Namchow Food Group (Shanghai) Co. Ltd. in China. At the end of last year, Long Chen Paper Co. Ltd., a manufacturer of industrial paper and carton, announced that its Chinese subsidiary Jiangsu Long Chen Greentech Co. Ltd. is planning to list on stock exchanges in China. Meanwhile, the prospectus has been issued. Long Chen holds a 98% stake in the Chinese subsidiary.
It is a generally accepted fact in industry circles that large companies such as Hon Hai, whose activities span multiple countries, are forced to raise capital in different stock markets. Before FII's IPO in China, Group company Foxconn Interconnect Technology Ltd. (FIT) had already listed on the Hong Kong Stock Exchange, while another group member, PCB manufacturer Zhen Ding Technology Holding Limited (ZDT), spun off its Chinese subsidiary Avary Holding (Shenzhen) Co. Ltd. through an IPO in Shenzhen. Hsinchu-based IC design house Fitipower Integrated Technology Inc., which was expected to list on the Taiwan Stock Exchange in 2016, has meanwhile withdrawn its application and is currently assessing raising capital in other markets.
Stock brokers and accountants likewise believe that, as long as Taiwan-listed companies do not delist in Taiwan when spinning off units via IPOs abroad, the advantages for the TAIEX outweigh the disadvantages. The important point is that when, for instance, a Hon Hai spin-off goes public in China and the price-earnings ratio of its shares is higher than in Taiwan, the company can then raise capital funds in that market at a lower cost, which in return benefits the parent company’s shareholders’ equity. When the company needs to carry out an acquisition, it will be easier to raise capital through Chinese shares than through share sales in Taiwan.
Grand Fortune Securities Co. Ltd. Chairman Michael Lin, a former TAIEX president, notes that Hon Hai, as the parent company of FII, will benefit if the IPO in Shanghai boosts FII’s business and share price. Likewise, people who invested in Hon Hai shares in Taiwan will gain from the move.
CommonWealth Magazine reported last year how clean room construction company L&K Engineering Co. Ltd. established the so-called T + A dual listing model (a Taiwan-listed company listing in China via a China-based spin-off). L&K Engineering Suzhou Co. Ltd. Deputy General Manager Chen Shu-chen confirms that, after listing in China, not only were potential customers more proactive in approaching the company, lenders’ attitudes also changed completely. While L&K had to beg for loans in the past, banks now plead with the company to let them finance its projects.
The driving force behind this spin-off wave involving L&K, Hon Hai, Long Chen and Nanchow is an accelerated IPO approval process launched by China in 2016. The Chinese government’s eagerness to clear the backlog of IPOs in the pipeline has made Taiwanese businesses aware of the opportunities that listing in China presents.
The number of IPOs reached a record 436 companies in China in 2017, according to Ernst & Young statistics. The Chinese government is also encouraging companies listed on the new third board to list on the A-share market. As many as 18 companies had their applications approved last year, compared to just one or two per year in the past.
“Only 28 Taiwan-funded companies have listed in China. Six were approved in 2016 alone, and three companies were approved last year, which means that the last two years account for one third of the total. This gives Taiwanese businesses the feeling that the time (to list in China) has come,” observes CPA Steven Hsieh, IPO Committee & Consumer Product Sector leader at Deloitte Taiwan.
TAIEX Lacks New Stars
But the current stock market reform in China has not only triggered a spin-off wave among Taiwan-funded companies in China. At the same time, it is also undermining the willingness of Taiwanese businesses in China (Taishang) without operations in Taiwan (so-called ‘rootless Taishang’) to return to Taiwan to list as F-shares. The F share program was designed to attract foreign-registered companies to list in Taiwan. As the Taishang do not return, the TAIEX is short on potential new star shares.
Last year, the number of IPOs in Taiwan declined by 18 companies, raising NT$4.24 billion less in capital, a reduction of 33.7 percent over 2016.
The reasons cited by Ernst & Young are that Taishang (台商) do not give priority to the Taiwan market for IPOs while considering to list overseas subsidiaries in their own market.
The chairman of a Taiwan-funded company in China who requested anonymity points out that his company originally planned to return to Taiwan to list there some three or four years ago. However, the application has meanwhile been withdrawn after the company decided to directly go public in China instead. Suzhou Jinhongshun Auto Parts Co. Ltd., which was listed on the A-share market last year, had also originally considered returning to Taiwan for a listing.
Liang Hsiang-hsien, in charge of IPOs at KSP CPA Limited., advised Jinhongshun during its A-share listing in China. Liang points out that Taiwan-funded companies in China only began to consider returning to Taiwan to list there when the China Securities Regulatory Commission stopped reviewing IPO applications for 14 months in 2012 and 2013, and no one knew when the review process would resume. Jinhongshun and Cayman Engley Industrial Co. Ltd., also an auto part manufacturer trading in Taiwan as an F-share, were both planning to return to list in Taiwan during that period of time, but only the latter actually did so.
Liang points out that Cayman Engley amended its articles of incorporation to meet regulatory requirements for listing in Taiwan. However, as a result, the Chinese tax authorities imposed taxes worth NT$40–50 million on what it considered gains from the transfer of shares. “When a ‘rootless Taishang’ in Taiwan that has not yet been able to get capital through financing must first pay so much in taxes, its willingness to list in Taiwan will weaken,” explains Liang.
A Delisting Wave in the Making?
The biggest concern surrounding the TAIEX at the moment is that Taiwanese companies might again delist in droves.
In 2008, industry software solution provider Data Systems Consulting delisted in Taiwan to relist in Shenzhen under the name Digiwin Software. In 2012, USI, a member of the ASE Group, delisted in Taiwan to trade in China’s A share market under the name Universal Scientific Industrial (Shanghai) Co. Ltd.
Today, many Taiwan-funded companies would like to list via a spin-off. However, in the past, when business followed the pattern of “taking orders in Taiwan, then manufacturing in China,” related transactions were difficult to separate clearly from each other. Since it was difficult to meet Chinese listing requirements under that model, Taiwanese companies who felt they needed to list in China would probably delist in Taiwan before going public in China.
Why are more and more Taiwan-funded companies thinking of listing in China or Hong Kong? The TAIEX’s comparatively lower P/E ratio is not the only reason. A more important consideration for Taiwanese companies in China is talent retention.
As Hsieh points out, in Taiwan-funded companies in China the number of Taiwanese officers in the higher echelons of management is on the decline as Chinese managers are moving up the in-house career ladder.
If Taiwanese companies want Chinese managers to fend for them in the Chinese market, they need to motivate them with share schemes. Distributing shares to employees is much easier when an overseas subsidiary is listed in the country where it is based.
On the other hand, the competitive advantages that listing in Taiwan offered in the past are gradually waning. For instance, the costs of taking a company public in Taiwan, such as fees for advisers and underwriting, are lower than in China and Hong Kong. But one Taishang, which did not want to be named, posits that the costs of the IPO process are not a priority consideration as long as a company can raise the capital funds it needs through the IPO.
Having traded clearly above the 10,000-point mark for many months, the TAIEX is currently putting up a dazzling performance. Yet behind the glitzy façade, the TAIEX has been losing its luster for companies that are looking to raise capital.
Translated from the Chinese article by Susanne Ganz