A Fire Sale in Taipei

12/08/2008 9:09 am EST


Nick Lanyi

Editor, High-Yield International

Taiwanese companies are on sale and paying high yields, says Nick Lanyi, editor of High-Yield International.

You think the US stock market is on sale? Valuations of US companies are still two times higher than Taiwanese companies. As well, the market in Taiwan doles out more than twice the average yield of the S&P, with some stocks yielding as high as 17.3%. 

Taiwan’s gross domestic product (GDP) growth last quarter was 4.3%. It has a per-capita GDP of roughly $30,000, and is known the world over as a major exporter of technology products.

Despite this, its market has fallen 46% over the last year, making it one of the hardest-hit developed markets in the world. Investors are panicking since this nation relies heavily on exports.
But you might have missed a few other details that make this country paradise for value investors and Shangri-La for income seekers. Not even one year ago, the country's average P/E ratio soared above 20x. Today it has fallen all the way to 10x. Compare that to the US where stocks still trade around 17x earnings.

Taiwan's long-term picture is about as rosy as it gets. Relations with China are beginning to improve. The election of Taiwan president Ma Ying-jeou last March has led to an easing of tension between the nations. Flights between Taiwan and China have now resumed after nearly 60 years. The Chinese people are hungry for the latest electronics from Taiwan, and Taiwan will be more than happy to sell them.

The next two years will see average GDP growth of 3.5%. Yet when compared to the average P/E of 10x, you get a ratio of about three times. This is simply baffling. The US, a country that just announced GDP fell -0.3% last quarter, has a much richer valuation!
That alone is a great reason for value investors to look toward Taiwan. But what about income investors? Taiwan's benchmark TAIEX Index now yields an average of 7.6%.

The panicked sell-off around the globe has led to increased yields. But Taiwanese tax law [levies] a 10% tax on any retained earnings held by a company for more than a year. This “use it or lose it” policy ensures the nation's companies will continue showering investors with dividends.

This is why even Taiwanese tech companies can pay out 10%-plus dividends to investors. AU Optronics (NYSE: AUO), a major player in the LCD screen arena, yields 10.0%. Silconware Precision Industries (Nasdaq: SPIL), a company that specializes in integrated circuit packaging, is paying 20.8%. Both of these ideas have been battered, and they still face challenges that make them better suited for more aggressive investors. 

There is no telling when Taiwanese stocks might turn around. To be frank, I am not too concerned about the timing. I know two things: Investors will eventually recognize the value waiting on this small island nation, and until then, I’m content to lock in some of the most attractive yields on the planet.

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