HEARD IN ASIA: Broader Access to Telecoms
Is on the Horizon in Taiwan
FROM THE ARCHIVES: January 16, 2002
By JASON DEAN
Staff Reporter of THE WALL STREET JOURNAL
TAIPEI, Taiwan -- Taiwan's telecom companies are likely to get a clearer line to international investors this year, but they may have trouble getting investors to listen.
After more than a year of waiting, new legal changes and the global stock market recovery are expected to free up shares in three of the island's carriers, Taiwan Cellular, Chunghwa Telecom and Far EasTone Telecommunications, opening up a market that has long lagged its Asian peers in terms of availability to foreign investors. None of Taiwan's telecom companies is listed overseas, and only a small portion of one telecom operator, Chunghwa, a government-owned full-service carrier, trades on the island's main board.
The delays may prove costly, since Taiwan's telecom industry is near saturation in terms of subscriber numbers, but still on the cusp of potentially expensive investments in next-generation wireless systems that could unlock greater revenues per subscriber. In addition, although many analysts predict consolidation, the industry is crowded now, with four island-wide wireless companies for 21 million subscribers. And, although several Taiwan telecom players racked up impressive earnings growth last year when many of the island's best-known companies were suffering from the slump in global demand, early signs of a recovery this year mean the vast bulk of foreign money is likely to continue pouring into electronics exporters.
Small Sector, Big Business
The telecom sector is "pretty small, and it's already very competitive, so I don't see that funds will feel it's something they want to add into their portfolio," says Thomas Y. Tsao, president of Prudential Securities Investment Trust, which manages two of last year's top five Taiwan funds.
Taiwan's telecom industry is actually quite sizable compared with others in the region, ranked only behind Japan, China and South Korea by number of wireless subscribers, and several times the size of the markets of Hong Kong and Singapore. But until 1997, the market was monopolized by government-owned Chunghwa, and both the incumbent and the newcomers have been slow to raise money from international investors.
Taiwan Cellular and Far EasTone are listed on the island's over-the-counter market, which attracts little foreign money. And while Chunghwa is the third-biggest component of Taiwan's benchmark stock index, only 5% of the company has been floated. Foreign investors held just US$60 million of the US$14 billion company as of last week. By contrast, the three telecom companies in Hong Kong's 33-stock Hang Seng Index, Pacific Century CyberWorks, China Mobile and China Unicom, make up a fifth of the index by market capitalization and are widely traded.
Opening Up
Taiwan's low international profile for telecom investors is likely to change this year. First, the island's legislature is expected to pass a bill raising the allowable portion of direct foreign ownership in telecom companies, including stock market investment, to 49% from the current 20%. That measure, in the works since at least early last year, could be passed by next month, according to Tony Teng, a senior official in Taiwan's Ministry of Transportation and Communications. That change would benefit Taiwan Cellular the most, as it is part owned by Verizon Communications of the U.S. and its remaining quota of foreign ownership is full.
In addition, Taiwan's government is reviving plans for a U.S. sale of at least 12% of Chunghwa's shares in the form of American depositary receipts, an offering it shelved last year amid the global stock market swoon. With global telecom shares having recovered in recent months along with broader markets, the government is now hoping to complete that roughly US$2 billion offering in the first half of this year, says Mr. Teng. "We are quickly preparing all our application materials," he says. Taiwan Cellular might also revive a U.S. offering it delayed last year, and Far EasTone, which is 20% owned by AT&T Wireless, completed a domestic initial public offering in December that executives said was aimed at paving the way for a U.S. listing. (Taiwan's government requires local companies to list their shares on the island before doing so abroad.)
If those plans pan out, investors will get a crack at companies that boast some impressive credentials. Wireless carrier Far EasTone posted 65% growth in net earnings last year, although from a low base in 2000, and Chunghwa has rapidly expanded its ADSL high-speed data service to one of the biggest in the region. Taiwan Cellular is particularly well liked by analysts. The company's pretax earnings jumped 24% last year to 18 billion New Taiwan dollars (US$514.6 million), and it has emerged as the biggest player in the consolidating wireless industry with its acquisition last year of regional wireless operator Transasia Telecommunications. Salomon Smith Barney analyst Anand Ramachandran, in a recent report, called Taiwan Cellular an "underowned cellular powerhouse," and set a nine-month to 12-month target price of NT$72, in part because of the imminent lifting of the investment cap. The company's shares closed at NT$45.30 Tuesday.
Slowdown Coming
But growth is likely to slow sharply this year. Mr. Ramachandran expects just 3% growth in subscribers for Taiwan Cellular in the next three years, and forecasts net earnings will grow less than 9% in 2002 and 2003. While that may be attractive for more-cautious investors, it is unlikely to attract a lot of interest from those who are much more focused on the prospects for a major bounce in the electronics sector.
What's more, Taiwan's wireless companies start bidding Wednesday on licenses for third-generation, or 3G, services. While the bids are likely to be far below the totals that have hobbled European operators, the investment in 3G and network equipment remains a question mark for investors, given the lack of a proven market for the wireless video and other features it is supposed to enable.
"If you think the market is still very bullish, then we are not so keen to add [Taiwan Cellular] at this time," says Richard Kao, a fund manager at ABN Amro Asset Management Taiwan. "If the market becomes bearish, then we may increase holdings in some value stocks" like Taiwan Cellular.
Write to Jason Dean at jason.dean@awsj.com1
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Updated January 16, 2002 12:01 a.m. EST
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