In my research and investing I stress three
things: people, structure and value. I look for companies that are
controlled and managed by quality people, have corporate structures that align
minority and majority shareholder interests and trade at valuations that are
below fair value if not outright cheap. This post is about people and structure. .
Taiwan is one of my favorite places in Asia if not the world. People are friendly, the food is good, and compared to my Hong Kong home, the environment is cleaner and things are generally less expensive. Just about everybody I know in Hong Kong has positive things to say about Taiwan, but few Taiwanese I met like coming to Hong Kong these days. They have fond memories, but feel it’s now too crowded, noisy and expensive.
While the trip to Taipei was Christmas and New
Year’s vacation, talk inevitably turned to the economy, Taiwanese society, and
of course the upcoming elections.
For those who don’t know, Tsai Ing-wen and her
DPP party won the election with more than 50% of the vote for both presidential
and the Legislative Yuan. Wikipedia has
a decent update on the election results (see here).
The KMT
is believed to be among the richest political organizations in the world and
is widely believed to be very integrated into the government and state-owned businesses. With a new party controlling both the presidency and legislature this cozy relationship may start to unravel.
What is most important is that the campaign period and
election seemed to have been peaceful and orderly. While there is the usual uncertainty of a new leadership, a peaceful
change of government is typically good for investors and asset values.
There are four months before Tsai is due to be sworn
in on 20 May so there could still be some drama. Less than 48-hours after the polls closed
Taiwan’s entire cabinet resigned (see here).
Stormy Weather
It could have been the depressing rainy and cold weather, but most people I talked to were not upbeat on Taiwan’s prospects.
While most headlines were about cross-strait
relations, I got the impression during my trip that the election is just as much
about local issues. Grievances that favor the opposition taking over
include Taiwan’s slowing economy, housing affordability, and the lingering
benefits given to ‘waisheng ren’ (外省人).
Taiwan’s economy is estimated to have grown
by just 1% in 2015. Much of this weakness is due to Taiwan’s large
technology industry, which is in a slump according to the several people who
follow and work in the sector. There are no killer products in the
pipeline, high-end smart phone sales are leveling off and there has been a
steady decline in consumer demand for electronic products in China and globally
(see here).
Local firms know they are in a dangerous
position as many seem to have one key customer, Apple, but
don’t seem to know how – or even want – to diversify.
Family owners of successful companies are getting older and may not be
interested in launching new business lines.
Property prices are in a funk with most
expecting further falls. According to one local agent prices are down 10-20%
YoY in the upper-middle class neighborhood of Neihu. Most thought that
property will fall even more when/if Tsai Ing-wen is elected. I was told
there was a lot of residential property built in anticipation of new laws being
passed that would give PRC nationals Taiwan residency if they invested in
property as was the case in Hong Kong until a few years ago. This is less
likely to happen under a DPP-led government.
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| Taipei Real Estate Falling – Neihu Store Front |
Falling prices may not be a bad thing.
Prices in Taiwan are up 3X in the past 15 years and it now has some of Asia's least affordable property and among its lowest gross
rental yields (see here).
Finally, some contacts were grumbling about the benefits eligible to people from the post-war wave of immigration from China, known as waishengren (外省人). These differences were played down in past visits, and I’m surprised they’re resurfacing. A good summary of some of these can be found here.
Finally, some contacts were grumbling about the benefits eligible to people from the post-war wave of immigration from China, known as waishengren (外省人). These differences were played down in past visits, and I’m surprised they’re resurfacing. A good summary of some of these can be found here.
The Sun Will Come Out Tomorrow
I’m not as depressed as the locals are about
Taiwan and its economy. Its citizens are amongst the smartest and most
educated in the world. It has stable institutions, and amongst the most
savvy business people in the world.
While technology may not be the growth driver
as it once was, other industries such as biotechnology, high-end consumer
goods, and arts and entertainment may pick up the slack.
Taiwan has a large non-tech sector and these
companies have been some of the best investments in Taiwan (see my previous
post here).
It’s also hard to feel too down on Taiwan
after a plate of hot dumplings (小籠包), a shot of local hooch kaoliang (高粱), and a Soft-Lipa rap (link here).
