Nobody's Fool

           You take your road, I'll take mine,   The paths have both been beat

           Searching for a change of pace.    Life needs to be sweetened

           I sang my heart out just to make a dime,  With that dime I bought you love

           But now I've changed my mind,  I'm not your fool.

           Nobody's fool, Nobody's fool

                                  
                         Quoted from song lyrics – Nobody's Fool

                         Songwriters: Keifer, Thomas Carl. Performed by Cinderella

Things will get messier before they can get better.

A jumbled week for government policy – Proposed pay hike for civil servants

A confluence of contradictory news has left the island unsure of its political and economic trajectories recently. At some points, the tie between the government and the private sector is bound to tangle in a big way, and now it has.

What will be the paramount mess is the proposed 3% wage hike of public functionaries who have been in a misery state since 1998 due to lack of government aid. They are expected to receive the increase planned to be effective July 01, this year, with the needed expense, estimated around NTD11 bn, set aside by additional budget, rather than offering of national bonds.

The government's merciful idea sounds rightfully steadfast, coming after statistics showing that its tax revenue in 1Q11 soared 4.9% YoY to NTD14.6 bn, a quarterly high in 11 years. The Premier will weigh feasibility over the proposal during a meeting with related official think thanks this week before reporting to President Ma Ying-jeou. The extraordinary budget will then be forwarded to the Legislative department for ratification, in a bid to favor some 800,000 public servants who, hopefully, will open wallets to spend. According to the well-designed scheme, the upward adjustment will inject 0.64 pct to the island’s 2011 economic growth.

What's more upbeat is a chain effect that will accordingly spread to local conglomerates, and small and medium-sized enterprises (SME), which have been largely vexed of late due to the government's outcry,  though which is not a mandatory plea. The private sector, said to be on steroids, had been claimed to rake in more than NTD1.5 trillion (USD51.55 bn) in dividends and earnings in 2010, helped by a cut in corporate income tax rate, slashed from 25% to current 17%, and ongoing effect from Economic Cooperation Framework Agreement (ECFA) between Taiwan and China.

ECFA: A main factor to buttress economy

Taiwan's GDP in 2010 charged at a double-digit pace to hit a 25-year high of 10.82%. It is taken for granted that they must dole out more money to cheer workers. Meanwhile, the island's economic dynamo will power ahead this year, rumbling comfortably to their advantages. While the massive Japanese earthquake will stunt the GDP growth by 0.11-0.2 pct to 4.72-4.81%, decreasing GDP outturn by NTD15-20 bn this year, the bounty derived from the ECFA will prop up Taiwan economy, coincidentally projected stable by 2 scholars from US in Taipei Friday who opined that the ECFA pact will contribute to Taiwan's GDP by 4.4% by 2020 under the normalized trade relations.

Mainly aimed for a tariffs reduction on goods traded on both sides, the ECFA will also help Taiwan strike more FTA with other trade partners, and bring more Chinese capital and tourists to Taiwan, boosting domestic demand. Chinese visitors to Taiwan grew 68% in 2010 and are expected to arrive more this year, an actually fruitful event to the island which is now chocked full of Chinese tourists. That is water under the bridge now since the government has decisively vowed to create a ticking time bomb in the job market. But it has the rebounding tax revenue and stellar number of Chinese tourists scrambling into island as cushions to withstand pent-up blast from those economically less fortunate people.

SME urged to follow suit to raise wage

Widely hoped to be stand-outs echoing government's angling for a full-scale pay hike on the island, Taiwan Semiconductor Manufacturing Co. (TSMC, 2330 TSE Code), global No.1 contract chipmaker, and Formosa Plastics Corp. (FPC, 1301), Taiwan's leading petrochemical goliath, have expressed their endorsement for the scheme to raise labor wage this year. Affected by their leads, other firms have been urged to go hand in hand with government.

According to an official survey during Jan. 10-21 among 6,000 businesses, 33% of SME considered a raise this year. 55% of big-name businesses with pay hike plans will ponder a hike within 3%, while another 37% would map out a 3 and 6% rise. Nevertheless, in response to the request for private sector modeling after government, the National Association of SME asked the government to jump out of pack first to set an example. According to the association, more than 50% of SME have in fact begun to raise their workers' salaries, ranging in most cases between 3% and 5% but going as high as 20%.

A further hike of minimum wage is necessary

Several legislators expressed their opposition to the government's plan to give an across the-board pay raise of 3% to its employees, arguing that this could enlarge the income gap. There's still an uneven disposition in the proposal which should at the same time make sure that it would bode well for those underprivileged people.

Granted that the pay hike will ultimately usher in a repercussion effect from public servants who may spend more, and local businesses will also jump on the bandwagon, Taiwan's income gap will keep widening in an already-formed, increasingly-palpable M-shape society. The annoying structure may sweep and deepen the island into a political and society anxiety. Suffice it to say that without a hike of minimum wage, there won't be any actual benefit toward the island.

Average monthly pay of Taiwan employees last year stood at NTD44,430 (USD1,433), up 5.34% YoY and growing to the highest territory in 16 years. Meanwhile, for the first time in 3 years, the government last Sept. reframed the minimum monthly pay to NTD17,880, up NTD600 or 3.47%, and the hourly pay to NTD98, up NTD3 or 3.15%. A survey also reflected that 55.64% of the firms contacted approve of a proposed rise in Taiwan's minimum monthly wage. A whiff of further upwardly revision is swirling in Jan. this year, but will be insufficient to those who live below the poverty line.

As reported in March, the number of households in Taiwan living below the line soared by 2,000 from a quarter earlier to 112,000 in 4Q10 and the number of persons in such households chalked up by 7,000 to 273,000, both the highest of their kinds ever recorded. Their plight is a stark decoupling from a sturdy economic revival In 2010. Taiwan adopts 3 criteria to rate a family living under poverty line: family income, assets and real property. And the criteria vary by area. A family in Taipei, for example, is viewed as living under the poverty line if average monthly household income is below NTD14,614 (USD471), average bank savings is less than NTD150,000 (USD4,839) per person, and market value of real estate owned is less than NTD5.5 mn (USD177,419). However, the gauges employed in other less-developed cities will be made with lower yardsticks.

Taiwan's fiscal health turns for the worse

There're plenty signs that the island's fiscal status will morph into a bad pattern, if the government sticks to its gun to amplify public servants welfare. During 1990 to 2008 when the island was governed by current opposition party, DPP, outstanding national debt totaled NTD3.6 trillion, up by NTD1.2 trillion in its 8-year stint at the nation's helms. But the figure rocketed by NTD1.3 trillion since the ruling KMT party took its offices within a mere 3 year span. To make matters worse would be the still-pending tug-of-war about an enforcement of 18% preferential interest rate of bank deposits for those retired civil servants. Should that put into practice, national coffers will seep further red ink.

Taiwan's aggregate tax revenue perched at a cozy level in 1Q11, a main draw cited by the government to put forward the pay hike step. However, the government will find it difficult to address the financial crunch in future. The driving force behind that momentum will be stalled as the Legislative department last week finalized the special tax against ritzy and luxury goods including real estate property, pricey furniture and jets, etc. It was seen that in 1Q11, tax revenue levied on incremental price of land hit NTD22.9 bn, constituting 7% of total tax revenue and marking a quarterly peak since 2006 amid a bustling property market.

Luxury tax revenue to cover additional budget

Emboldened by zooming land-related tax revenue, government is fairly convinced amid a belief that luxury tax will amp up its capability to realize revenue around NTD15.1 bn per year, including NTD12.9 bn from realty tax income. And that is hefty enough to offset expenditure arising from public servants pay ramped up by NTD11 bn. Meanwhile, all of listed firms this year will pay out dividend, up by 40% YoY, appropriated from last year results. The tax slapped on that dividend is regarded as part of streams to strengthen government revenue spigot.

A faltering property market narrows tax revenue

Notwithstanding official optimism, it would be a folly to take in those rosy conjectures as the sizzling transactions in property in 1Q11 can be deemed as last hurrah for property mongers to flee the market which is now turning bleak and surely will be mired in a bind. The profit generator engineered by luxury tax will likely shift into lower gears, in light of the fact that the tax, formulated to knock speculative wind out of property market, will become effective in June this year at the earliest.       

Taiwan doesn't go alone in rolling out the austerity measure to curb price rigging in property market. In synch with its regional countries, the new tax is quite hailed by those new home buyers who can in future gain easier access to tap the market with stronger bargains power. But a question remains as to whether the reversal of market is a start of downward spiral, or has been well factored into recent sluggishness. Anecdotal data suggest that a boom-and-bust will tend to proceed in a 10-year period in the market.

Construction sector, long viewed as a bellwether industry in local economy, had lost its luster for past few months. It would be relatively in an early stage to moot a buy, particularly because banking interest rates are on a potential uptrend to edge higher. A vault over 4% in lending rates will take a big bite out of profits of property bugs who in last 2 years were financially-solid profiteers, abhorred not only by President Ma but also by some scholars. They had applied an astonishing mortgage loan from banks which, truly to say, had no better channel for lending activities. But a weakening property market is on track to shrink government tax revenue.    

Intensified conflict caused by a dropping corporate income tax

Another complicated feud between government and local enterprise will be the apparently compulsory subject for the latter to replicate a pay maneuver by government. Much has been reported that SME and other heavyweight firms had capitalized on lowering corporate income tax which was shaved by 7%. Things are reasonable for government to have a lavished recommendation for them to follow suit. TSMC and FPC are joined at the hip to show their submissions, while SME is still rebuffing the demand.

TSMC, a big-cap heavily played by foreigners, is 6.38% held by government-linked fund; FPC, on the other hand, is a main beneficiary for Taiwan's tariffs reduction for importing naphtha which it reprocesses into ethylene. FPC even outpaces the state-run oil refiner, China Petrochemical Corp. in terms of profitability. As a result, the profitable twins only get one-way bet: following the lead of government. However, their outlooks might be clouded as the rising labor cost might erode their profit margins a bit, thereby unsettling foreign holders.

A bevy of uncertainty to disturb enterprises

It might make sense for SME and listed concerns to get closely attuned to the 2 big-caps footsteps, given the fact they rejoiced at thinner corporate tax by 7%. But the "bonanza" unfortunately will be erased by global inflation specter and firmer local currency, NTD, which appreciated nearly 7% from last year to current NTD29 against greenback. A buoyant NTD will add pressure to exporters as Taiwan is developing on an export-oriented track. Taiwan CPI in March was up 1.41% YoY, but down 0.87 MoM due to seasonal factor which Chinese lunar new year fell in Feb. to cause a spike in food and vegetable.

Local enterprises have been also irked recently by government's efforts to broaden its scope of tax revenue. The government is reckoning that tax under the bracket of companies' retained earnings should be pulled to 15% from 10%, in a belief that the move will encourage them to share more earnings with shareholders and raise salaries for employees. The SME seems to get good reason to blink at the pay hike request, when it is in face of an outlook flux.

Level playing field game in job market

A push to lift public servants pay has made a media frenzy over doubts about the ruling government's attempt behind the scene. It has been suspected that the ruling KMT party is trying to secure support of civil servants in the next legislative and presidential elections (March 2012) by raising their salaries in near future, while those employed, gainful enough, will not unleash any criticism. In reality, there should be a lassies faire fashion, or at least level playing field game in the job market to lend a hand to those financially-pinched people. A scenario of overall and fixed-rate wage hike in public sector seems outrageous and will serve as an inhibitor for economic momentum. The public sector, to some extent, needs to be slimmed down.  

The government must initiate a cogent case that we are in for a self-sustaining recovery, rather than simply relying on the ECFA. The pact has in effect solicited more Chinese tourists to beef up consumption sector locally, but not proved to lure capital eyeing investment chances in Taiwan. In first 2 months of 2011, Taiwan poured USD1.82 bn into China, up 33% YoY, while received a paltry inbound Chinese investment of USD690 mn, down 77% YoY. The striking gap should hint of a likely languish economic landscape on the island in future, due to an extended exodus of domestic capital.

Investors will be also perturbed by headlines pointing to various widely-split opinions. Those include environmental issues, which Mr. Ma believes should trump industry growth. A setup of new petrochemical plant in central Taiwan results into a struggling twist among pros and cons. Further, debate over disposals of nuke wastes and safety worry also roars resoundingly, in the wake of devastating Japan quake which puts Taiwan into a funk due to its possessions of 4 nuclear plants. Worry about the uncertainty can not be deemed as a fuss. It seems at present that the government has uncanny knack of resolving those tangled problems.     

Taiwan stock market – Listless trade ahead of earnings reports

Taiwan stock market encountered a bumpy road last week, sliding in a downward flag formation to end at 8,718, down 176 points WoW. Forecasts for NB outlook had generally turned murkier by foreign analysts' notes. Construction shares were stuck in a dilemma concerning the impact by luxury tax. Bargain hunters this time around might not be able to show a real knack for turning the overlooked constructions into the envy of other counters. Trading will likely remain lackluster, as risk-chasing mode has evaporated ahead of 2010 and 1Q11 earnings season reports due by Apr. A market's renewed interest to bounce over the 9.000 mark is deemed quite unlikely, amid a lack of wow factors in the short haul.

HTC, the market's highflier, last Friday manifested its muscle to scale a historical high of NTD1.255, a level that enabled it to record a market value over NTD1 trillion for the first time. But a market late tailspin sent it closing flat at NTD1,220, with its market share still lagging behind TSMC and Hon Hai (2317). Hon Hai in March turned in sizable sales of NTD214 bn, up 40% YoY and representing a revisiting over monthly sales of NTD200 bn that made in 4Q10. The sale figure won some grudging support for the mammoth EMS electronic which found a solid floor around NTD105. How much it spends for the relocation into inland China by its subsidiary, Foxconn, will call the tune for its future course.      

HTC in 1Q11 enjoyed sales of NTD104 bn, up a brilliant 174% YoY with net income reaching NTD14.83 bn, rising from NTD4.99 bn a year ago and translating into NTD18.36 per share. The quarterly EPS multiple more than doubled the NTD6.39 from a year ago. The cellular handset maker is set to ship out 11-12 mn units in 2Q11 inundated with orders of 12-13 mn units. As reported, a delayed rollout of iPhone 5 until Sept. will underpin its sales to jump 23% in 2Q11 to galvanize its bottom lines further. Its 4G Thunderbolt model, in a hookup with Verizon, has been well received in US. Though the stock is probably on the brink of topping out, partly justified by shortage of follow-through buying from foreigners in recent sessions, one foreign house raised HTC target price from NTD1,400 to NTD1,600.

There seems no messy wordings from a fool to evaluate HTC stock. Nobody is a fool when it comes to making decision about cross-Taiwan Straits investment, domestic political votes and protection of corporate profits.

Good Luck !

Link to Cinderella - Nobody's Fool

http://www.youtube.com/watch?v=yMEiMXa20Rc&feature=player_embedded