Martin Spring believes the best Chinese investment oportunities over the next five years could lie offshore in Taiwan. Here he lists four stocks to keep an eye on.
Some of the best Chinese investment opportunities over the next five years could be in a place that is usually overlooked Taiwan. It's a part of China that does its own thing, and in many ways is a role model that China ought to follow.
The giant island 180 kms off China's coast that operates as an independent state has been one of Asia's great success stories since it emerged from Japanese colonisation, the devastation of the Pacific War and the aftermath of the Communist victory on the mainland.
Today its electronics industries are global leaders. It makes more than half the world's supply of micro-chips, the basic component at the heart of every electronic device. It is the manufacturing base for a major share of output of personal computers, flat-screen monitors, mobile phones or their components. It meets 17% of global needs for photonics lasers, CD/DVD readers, sensors and so on.
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Despite its small population (23 million), the island has an economy a third the size of India's, with annual output per person of more than $19,000, and foreign reserves of some $300 billion.
Its electronics industries accounting for half of exports have been hit hard by the global recession. But the economy has rebounded strongly in recent months. Industrial output leapt 80% in the three months to May compared to the previous period. Taiwan is running an annual foreign trade surplus even higher than China's, relative to the size of its economy.
Its pro-active government has slashed the inheritance tax rate from 50 to 10%, is cutting the corporate tax rate next year to 20%, and has introduced a stimulus plan of infrastructure investment, consumer handouts and tax concessions equivalent to 3% of annual output.
One result is rising confidence among rich Taiwanese, who are believed to have repatriated about $25 billion of their offshore wealth.
In the first quarter of this year the Taipei stock exchange was the best-performing internationally investable markets in Asia. (Many Asian bourses, China in particular, restrict foreign ownership).
International investors have long been wary of Taiwanese companies because of the island's tense relationship with the mainland.
The conflict between the governments in Beijing and Taipei is a longstanding one rooted in the Chinese civil war. After their defeat by the Communists in 1949, the Nationalists shifted the flag of their Republic of China - and 2 million of their people - to their final redoubt offshore.
Beijing is determined to prevent international recognition as a sovereign nation of what it regards as a province of China, and ultimately to reintegrate the island into the mainland's political system.
Taiwanese have divided opinions about their future, but are united in their desire to maintain their de facto independence and functioning democratic system while strengthening relationships with mainland China, which are major and continue to grow in importance.
Taiwan companies have massive investments in mainland factories. Their high-level managerial and technical skills, sophisticated international marketing skills and contacts, and capital, when matched to China's abundant cheap, well-educated and hard-working labour, within the framework of a common language and culture, make for a powerful combination.
Officials estimate that Taiwanese groups have invested as much as $300 billion in mainland enterprises since they began relocating labour-intensive production in the early 1990s, which means Taiwan is probably the largest single source of foreign direct investment in China.
An amazing one million Taiwanese business executives are estimated to have moved to the mainland to run factories there.
China has become the biggest market for Taiwan exports, taking more than 25% of the total, or twice as much as the US. Mainland business has been largely responsible for a 35% rise in export orders since the beginning of the year.
Since the election of Ma Ying-jeou last year as Taiwan's president, relations between Beijing and Taipei have improved considerably.
Direct air and sea links have been established so businessmen, for example, no longer have to fly via Hong Kong to travel between Taipei and mainland cities. There are now up to 108 flights a week between eight cities in Taiwan and 21 on the mainland. Container ships can now sail directly to Shanghai. Tourist arrivals from the mainland have leapt, and are now running at three times the level of last year.
Taiwan has now opened its doors to investment by mainland companies in a hundred sectors of its economy. Earlier this month the government relaxed its restrictions on real estate purchases by mainland individuals or companies. For example, mainlanders can now buy commercial property for their own use.
Better relations could produce an investment explosion
The economies of the "onshore" and "offshore" Chinas are already integrated to a significant extent. Assuming political relations continue to improve as seems likely even greater integration should bring more apparent benefits to Taiwan's listed companies. They are already starting to feel a boost from China's massive stimulus package.
If Taiwan eventually negotiates an historic settlement of its dispute with China, that could lead to an explosion of inward investment and economic activity similar to that enjoyed by Hong Kong and Macau after they returned to Chinese sovereignty.
If you are interested in taking a stake in Taiwan, the simplest way to do so is to buy units in an exchange-traded-fund such as iShares Taiwan (listed in the US), iShares MSCI Taiwan (UK) or DB X-trackers MSCI Taiwan (Germany).
If you prefer to invest directly in listed shares, here are a few ideas:
Taiwan Semiconductor is the world's leading player in large-scale chip production. It has been hit hard by the collapse in demand for electronic components, but will be a major beneficiary from recovery. It is well run and has virtually no debt.
Chunghwa Telecom is a very different animal of the kind that may appeal to a conservative investor. It holds more than 95% of the fixed-line market, plus 80% of broadband and more than 40% of wireless subscribers. It is also debt-free, with strong free cash flow and a good dividend yield.
Hon Hai is the world's largest contract manufacturer of electronic products for companies that market with their own brand names, and was an early investor in mainland China.
Acer has become Taiwan's most successful brand in consumer electronics, becoming the world's third largest vendor of PCs after Hewlett-Packard and Dell.
CLSA Asia-Pacific Markets' Capital Links portfolio of shares expected to benefit greatly from improving ties between the island and the mainland also include Asia Cement, Cathay FHC, Chinatrust, Evergreen Marine, Far Eastern Textile, Huaku Development, Taiwan Fertilizer and Uni-President Enterprises.
The investment bank believes that when the next boom comes in the Far East: "Taiwan will be the Asian market that goes into an asset bubble first."
Should you buy now? I suggest you wait for a cheaper opportunity later this year.
This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. EmailAfrodyn@aol.comto be included on the recipient list.
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