How do you conduct investor relations in a country awash with capital but with an undeveloped stock exchange, not least when the country concerned is officially unrecognised by the rest of the world?
Taiwan is the world’s 14th largest trading nation, but that trade is mostly based on the incessant enterprise of a mass of small and medium-sized firms which raise their capital from savings and family networks. Its entrepreneurs tend to go to the stock exchange for recreational purposes as much as for finance.
It does not help that the Taipei government, buoyed by one of the highest and most consistent growth rates in the world and one of the lowest rates of inflation, has felt little need to follow Western fads for liberalism. In one of life’s historic ironies ‘Free China’ now has many more restrictions on inward movement of capital and repatriation of dividends than the post-Mao People’s Republic across the straits.
Indeed, Taipei’s dirigisme is such that it actively directs private investment abroad, particularly to South East Asia and to mainland China. However, a combination of relatively undeveloped domestic capital markets and high interest rates has led some Taiwanese companies to look overseas for finance. And, conversely, the returns available from such a successful economy have a strong appeal for overseas investors eager for a piece of the action.
Investor Relations magazine spoke to two companies in Taipei which are leading the inward urge, but in different ways and with differing results and reactions. Far Eastern Textile Ltd was set to float Taiwan’s first ADR on the New York Stock Exchange in November of last year. But it postponed the listing when share prices fell after the Chinese mounted missile tests off the island to show their displeasure at Taiwanese President Lee’s visit to the US. Last month, February, the ADR was again postponed, as share prices dropped further and American investors became even more tepid in the face of Beijing’s belligerence.
On the other hand, Daniel Chiang of the ROC Taiwan Fund, an NYSE-listed country fund, reported little or no difficulty in adding to its $300 mn investment fund. Undeterred by the stock market gloom that had scuppered Far Eastern Textile’s ADR launch, Chiang saw an opportunity for good returns. He is proud to be a falling investor, looking for long-term bargains in short-term falls. He also thinks that more foreign investment will contribute to the long-term stability of the Taipei Stock Exchange. ‘At the moment 80 per cent of the market is small investors,’ he explains. ‘For many of them, it’s not so much gambling; it’s more of a social activity – like Mah Jong.’
But, sometimes even sure bets fail, as Far Eastern Textile learnt to its cost. The poor timing of its attempt to launch an ADR was the root cause of its problem. But while that may have been inauspicious it had nothing on the timing of the original founding of the company. That was in Shanghai in 1942, in the middle of World War II and just a few years before the communists took the city.
Nevertheless, in the 50-plus years since then the company has spread far beyond its base of textiles – to hotels, amusement parks, skating rinks and ‘other related businesses and investments.’ Champion Lee, Far Eastern Textile’s CFO, points out that the company has floated four issues in the past, ‘And we’re probably the most frequent issuer into the international capital market,’ he says. But those earlier issues were GDRs and, as he says, ‘An ADR is the most stringent and difficult issue. It takes very long to prepare because US regulatory requirements are tough. And we had to reconcile our accounting statements with US standards. That’s why no one else in Taiwan has tried.’
But for Lee the extra effort is wholly justified. ‘With an ADR we would have access not just to institutions but to individual investors and could expand our investor base,’ he says. ‘Some institutions in the US will not invest {in foreign companies}except with an ADR, because there is more visibility, more access to information.’ Others, of course, are precluded by regulation from investing in unregistered securities.
To boost its visibility ahead of the planned listing, FET mounted a roadshow last October, which took in Hong Kong, Singapore and Tokyo in Asia; London, Edinburgh and Glasgow in the UK; and most major cities in the US. But as the tour group returned jetlagged to their home base, ‘We found that our share price had dropped quite substantially so we decided to postpone,’ says Lee with obvious regret.
The issue was intended to raise $130-150 mn but it was not so much the cash itself that was the object of Lee’s regret. ‘With this issue we hope to enhance our position, our world reputation in the international capital market. Even though the funds to be raised are not very big relative to our size, it’s a toe in the water, to get us registered.’
If that toe had been dipped into the Taiwan Straits, it would have risked being blown away by the passing Chinese missiles that caused such a chill in the Taipei exchange – not to mention a few shivers in New York. Lee was hopeful that this would pass: ‘I remember that in the early 1990s, well before 1997, any major move in China had an impact on the Hong Kong markets. But later on they seemed to get used to it.’
FET selected Merrill Lynch as the global lead underwriter for its ADR issue, ‘after a long screening process in which we interviewed leading investment bankers.’ Lee cites Merrill’s ‘reputation and capability’ as reasons underlying the choice, adding ‘and because they are one of the largest US-based investment bankers.’
But in the true Taiwanese spirit of self reliance, FET was not about to rely solely on the hired help. ‘It was joint work,’ says Lee. ‘We certainly know how to present our own company better. They know what the investor likes to hear . On the roadshow you just go to investors on a group or individual basis telling your story.’ That story, in this case, was told partly through a seven minute launch video prepared in house, which wisely stressed the familiar blue chip names FET collaborates with, including DuPont, ICI and Union Carbide.
If and when the ADR does take off, FET will boost its investor relations capacity which at the moment has been part of the CFO’s job. ‘We have been receiving a lot of investors. They visit our company on a regular basis,’ explains Lee. He says that the company contemplated hiring a PR firm ‘to do the after sales service,’ following advice from Merril Lynch. Merrill suggested this for FET, ‘since we are situated in a different time zone, and American investors are asleep when we are working,’ Lee notes. And he says the company was also considering appointing an IR officer since, ‘A lot of investment bankers’ research departments will visit the company to gather information. The whole purpose is to create a mood, a sentiment, to keep our shareholders supplied with information.’
Unfortunately, for the time being at least, Beijing’s sentiments seem to have clouded the issue beyond IR’s capacity to repair it.
Daniel Chiang, executive vice president of the NYSE-listed ROC Taiwan fund, did not suffer from the missile blues. When he spoke to Investor Relations magazine at the end of last year he had just returned from a roadshow in Hong Kong, Tokyo, the US and a number of European countries. ‘We travelled through 15 cities and we raised $55 mn,’ says Chiang.
A fund like his is effectively conducting IR for a whole country, so it is hardly surprising that the roadshow promoted Taiwan more than the particular fund management expertise on offer from ROC. ‘Actually, that’s the purpose,’ Chiang confesses. ‘I don’t want to talk too much about the firm because it’s too micro, and we want to be macro. Generally in the roadshow we promoted Taiwan, arguing that it is a good place to invest for long-term purposes.’
‘Fund management companies in the US know the economy and the politics,’ Chiang adds brightly. ‘Most of our investors have a much longer-term view, so they are not interested in the daily or weekly movements of the market. Some investors still think in terms of ten years. We are offering them diversification plus knowledge of local markets and conditions.’
It is difficult to restrain Chiang’s enthusiasm. ‘When we are talking about 21 mn people on one small island it’s a miracle – a GDP growth rate of about 8 per cent for the last ten years. We also enjoy a trade surplus – which is why we have $100 bn in reserves,’ he boasts. ‘A GDP growth rate never less than 5 per cent and inflation never more than that.’
Chiang’s fund issues weekly updates on the Taiwanese market, and a monthly report with a broader scope, providing current information on its ten major holdings. The documentation effort is supplemented through conference calls with analysts and visits to the US and Europe, combining roadshows and one-on-ones.
To help discount the geographical factor, Dewe Rogerson Inc helps with the IR effort outside of Taiwan. Chiang laments the parochiality of time zone-bound institutional investors. ‘They should be prepared to put more into Asia in the future, but of course they focus on Latin America for geographical reasons – it’s closer to them. Yet Asian productivity is higher, inflation is lower and we don’t have the kind of roller coaster currency speculation.’
Chiang concedes that one reason for this may be the Central Bank’s tight control over capital flows, but points out that this is another plus for the fund: ‘We are the most efficient and convenient vehicle for foreign investors to participate in this highly active market,’ he declares.
Educated in Houston in free market principles, when it comes to the Central Bank Chiang and his peers sometimes have difficulty reconciling their instincts with their education. ‘We press that they should open up the door to more investment, more freedom of movement for capital. But then sometimes we ask ourselves and others, what have they done wrong over the last 30 years? How can we say that they didn’t open the door enough when we have a growth rate and low inflation not found in any other country? Under this kind of a system we do not have to cut off an arm or a leg to survive. We don’t have to sacrifice growth in order to cut inflation. We only have to have a haircut to maintain a sound system.’
Still, he thinks the longer term trend is to open up, not least since the government has plans for the country’s future as a financial centre. ‘But traditionally they are conservative, so they will be conservatively aggressive in building the country as a finan-cial centre.’
A Rose by any other Name
While the political situation is clearly partially, if not mostly, to blame for FET’s failure to launch its ADR, some local analysts suggest other factors – one of which is the name. ‘Apart from the high price, one element is the lack of attractiveness of the textile industry. People see textiles as a sunset industry. It’s not that investors are not interested in Taiwan, but they are excited by particular fields – like electronics. So Acer’s GDR was oversubscribed seven times only a few weeks before the failed launch of FET’s ADR… It’s unfair because they are not really a textile firm. They are more technology driven, with high investment in petrochemicals. They have plants in Canada and the US, the first synthetic plant in the Philippines. But the name still makes people think of weaving and clothes.’
