Taipei Trip Report – Christmas And New Year 2015/16 by Michael McGaughy, Minority Report
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.
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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).
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’ (???).
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.
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. 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, a shot of local hooch kaoliang, and a Soft-Lipa rap (link here).