New US rules could sink Asian tech stocks
Reuters
Hong Kong , August 02
Billions of dollars could be wiped from the earnings of Asian technology firms, particularly in Taiwan, Singapore and India, if US moves for strict new accounting rules on share options are adopted in the region.
Stock options are less pervasive in Asia than in the US, but there are pockets of substantial exposure.
"Although Asia-Pacific markets' reaction has so far been muted compared with that in the US, many regional investors have raised the same question -- how reliable is Asian accounting?" Ajay Kapur, head of Asia Pacific equity strategy at Salomon Smith Barney (SSB), said in a recent report.
Stock options, which gained popularity during the US stock market boom of the 1990s and were used heavily by start up firms in Silicon Valley, are more prevalent in technology companies in Taiwan, India and Singapore than in other sectors.
Taiwan's technology sector, which makes up 56 percent of the local market capitalisation, is most at risk, SSB said.
Share options and bonus issues are the most common forms of employee compensation, but there are no clear accounting rules on the treatment of the benefits in Taiwan.
Taiwan's tech sector would have lost 26 to 77 percent of its pre-tax income for the last three years, or an average annual expense of US$2.3 billion, if companies had treated employee bonus share grants as an expense, the report added.
SSB estimates that charging of employee shares at market value would drag down 2002 estimated earnings per share (EPS) of Taiwan Semiconductor Manufacturing Co (TSMC), the world's largest contract chipmaker, by 14 percent.
Similarly, it estimated 2002 EPS of United Microelectronics Corp (UMC), the world's second-largest contract chipmaker, would decline by 45 percent if the firm's options were expensed.
Not only Taiwan exposed
But Taiwan firms would not be the only ones to suffer.
Infosys Technologies Ltd, India's second largest software services exporter, is also exposed.
"If fair valuation of compensation cost using option pricing models is made compulsory, Infosys, for example, would have seen its basic EPS for financial year 2002 reduced by 36 percent," the SSB report said.
In Singapore, Venture Manufacturing, the island nation's largest electronics contract maker, tops the list of companies with the largest number of outstanding options, Kim Eng Ong Asia Securities said.
Kim Eng Ong Asia said its 2002 net profit forecast for Venture, which has 14.6 percent of outstanding shares as employee options, would slide 18.4 percent if options were amortised as expenses.
All that could change if the string of accounting scandals in the United States that has forced regulators and investors on Wall Street to turn their attention to the pay and perks enjoyed by executives, follows through in Asia.
The practice of doling out options has come under scrutiny as critics believe that efforts to boost the price of shares -- and consequently the options that form large parts of executive pay packages -- is key to Corporate America's woes.
A move kicked off by US companies like Coca-Cola Co, Amazon.com Inc and Bank One to expense stock options has turned up the heat on other firms to follow suit.
Earnings squeeze
Some analysts warn that expensing stock options would squeeze earnings of technology companies and lead to a global downgrade of the sector by investors.
That downgrade could have enormous implications for Asian equities given the importance of technology exports to the region's economies and, by extension, its stock markets.
But there could be a silver lining for investors as most Asian companies are still under the dominance of family control and rely less on stock options to compensate their employees.
"Here, usually for most firms, managers are also owners and they have considerable shareholdings. They don't need the incentives," Aris Stouraitis, assistant professor at the department of economics and finance in City University of Hong Kong, told Reuters.
CLSA Emerging Markets in a study comparing 11 Asian blue-chips with 11 US companies, showed average earnings would decline by 13.7 percent for US firms expensing stock options.
In contrast, average earnings of Asian companies would drop by only 6.8 percent.
"The issue of stock options in Hong Kong is not as significant as in the case of the US companies. There's no P&L (profit and loss) hit, just dilution of shareholdings," said David Tak-Kei Sun, chairman of corporate governance committee of Hong Kong Society of Accountants. |
