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

The final countdown

                  
                       We're heading for Venus and still we stand tall
                       'Cause maybe they've seen us and welcome us all
                       With so many light years to go and things to be found
                       I'm sure that we'll all miss her so
                       It's the final countdown, The final countdown.
                           
                               Quoted from song lyrics - The final countdown
                               Songwriters: Tempest, Joey;    Performed by Europe

Just occasionally, the market's creaky trading machines in tech counters can whir into rapid action.

Bears sidestep Acer pit

Pep talks from Acer's chairman and interim CEO, JT Want, delivered much-need optimism for the flagging Acer stock which defied gravity to edge up NTD1 to NTD58.1 WoW last week. Not only refuting speculation about a rerun of lowering estimate in 2Q11 for the 3rd time in a row, Wang also signaled favorable odds for the NB maker to revise upward expectations for the quarter.

At its Apr. 07 analysts meeting, Acer released a slackening growth tip for 1Q11 sales, down 3% QoQ to NTD145 bn, which will be held the same in 2Q11. By product lineup in 2011, sales of its NB stripes, including netbooks, will gain at a single-digit pace. Netbooks will be sold off at a flat clip of 30 mn units with emerging markets eyed as main channels. Acer disambiguated it that netbooks operation won't slip into a rear-view mirror, and even put in pretty picture for 2011 total sales expected to be capable of an upward revision, on assumptions of better-than-expected delivery of its first tablet soon to hit shelves globally.

Pre-orders for Iconia Tab A500, its first tablet and to be sold exclusively on Best Buy stores at USD449.99 kicked off Apr. 08, with Android-based device available April 24. The Iconia Tab A500 has 16 gigabytes of storage, and front and rear cameras. It features only Wifi wireless internet without connection via a phone operator. The tablet has a 10.1" screen similar in size to iPad2 and is USD50 cheaper than the similarly equipped device from Apple. Upbeat news indicates that the new gadget is well-received on the island, to be closely-watched as a barometer for Acer's future resilience.

Acer dismissed uncertainty about its profit margins. R&D expense to be accelerated this year will erode gross margin less than 0.2%-0.3%, a ratio far lower than sales growth. It ruled out a big impact from shortfall of key material supply caused by Japan quake, and will face threat no more than Apple. One niggling concern among foreign analysts, however, is that cost for contracting services for Acer NB had been assessed to be in for appreciations. There are grounds for them to state so, given a global inflationary specter, but a tight alliance for Acer with its Taiwanese ODM makers could serve as silver bullets in the face-off of global NB seats, despite cost hike strains will linger over 2-3 years.

Guidance for 3Q11 and the whole 2011 will be announced in late May following a finalization of its new CEO candidate this month. A reshuffling of leadership as previous CEO, Lanci, stepped down also posed anxiety about a ripple effect, connoting that Lanci will uproot a team of high-ranking workers in Acer global footholds. Such an unwarranted concern is grossly inadequate, as the NB icon can surely find one to fill the gap in light of the fact that a shake-up of management is a high-frequency occurrence in an always cut-throat IT market.

In essence, higher gears into the already-crowded tablet market is relatively too early to prove its ability revising 2Q11 bar upwardly, but will come into clearer visibility in 4Q11, a typically peak season boosted by back-to-school buying spree. Its efforts into mobile PC, in particular the tablet and netbooks applying window 8 OS and ARM processor, will become a trendy and valuable cure-all to its outlook, much as its operation in China market that is hoped to double sales this year.         

Selling pressure from foreign investors plunged Acer stock to a weekly low of NTD55.2 Wednesday, then giving way to renewed buying interest occurring on Friday session which they posted a net buy of 14.5 mn shares. The reversal of foreign pundits, though not building up faith strong enough to justify a mid-term firm ground over NTD55, has at least reflected an Acer's win in penalty kick against foreign players. Acer may be long in the tooth to play as a rising star, but isn't a clumsy laggard in global battlefield. What's more convincing is its sooner-than-expected stock buy-back policy, another ace in the hole to support its stock. Buying on dips for Acer is still deemed reasonable, albeit not necessarily pepping your portfolios immediately.

Market is abuzz with M&A - Polaris & Yageo to be taken over

April has marked would-be barn burners for M&A activists who unleashed their buyouts of 2 listed firms–Polaris Securities (2854) and Yageo (2327), both of which are going to be delisted in next 6-12 months.

With a total price tag of NTD48.87 bn for the merger with Polaris, Yuanta Financial Holding (2885) will launch right issue and place NTD28 bn in the pipelines to defray the takeover that is going to ramp up its paid-in capital to NTD91.7 bn from current NTD81 bn, with a diluted effect of 11.6X. Valuation for the deal was reportedly formulated appropriate to please shareholders in Polaris whose NAV per share stood at NTD13.25, translating into a PBR of 1.71X based on the acquisition price of NTD22.9. The huge settlement is far larger than any securities house merger before, and pricier as compared with previous record PBR of 1.5X. Yuanta, already spreading into banking sphere, is poised to further cement its leading stock brokerage market share which commands a 12% market turf. It will take a bite on life insurance area and bare claws for remaining securities houses in future, after its owners were acquitted of charges of alleged bribery to former President.

Yuanta has picked up kudos in securities houses M&A which it began as early as 1991 when Taiwan stock market was hit extremely by sharply-dwindling daily trading volume that once dived to a nadir less than NTD8 bn. At that point, its market share ranked at fifth or sixth slot. Yuanta's management style has been astute, efficient yet draconian. Employee of Polaris certainly can remain chirpy as a canary, applauding the punter's reliability to vouch a 3-year warranty ensuring their working rights, but a phenomenon will always tend to emerge, - layoff will ensue minus or plus 3 years, an event not so freaky in the industry.   

History again repeated itself as doubts about a jump-the-gun effect loomed against the blatant action. Polaris stock, before the merger news was publicized on Saturday night, raked in 2.75% gain to close at NTD20.6, outpacing other financials in a lackluster market proceeding on Friday which dipped 7 points to 8,894. Motivated by swirling rumors being as potential acquisition bait for Yuanta, Polaris stock has been a financial leader to revisit a recent top of NTD20.65 logged in late Jan. Insiders seldom went on trial for insider trading fraud in Taiwan stock market. For instance, Taiwan Int'l Securities (6012), set to fall into extinction in May by a grab from Capital Securities (6005), shot through the roof on a 22% steep updraft preceding news release.

Barbarians at the gate make their Midas touch on Yageo stock

US private equity fund Kohlberg Kravis Roberts & Co (KKR) and Yageo Corp founder Pierre Chen on Apr. 06 offered an all-cash buyout for Taiwan top-notch passive component maker, Yageo (2327), in a ticket valued at USD1.6 bn priced at NTD16.10 each. The buyout will be conducted via a joint venture between KKR and Chen called Orion Investment. In response to the news, Yageo stock jumped to NTD15.6, up by NTD1.5 WoW.

Orion is scheduled to nab a more than 50% stake in Yageo after completing the tender offer, bringing about a merger of Yageo and Orion, as planned by KKR and Chen. Yageo afterwards will be delisted, if everything goes well. Funds managed by KKR and Chen's family currently own a combined 34.3% of Yageo outstanding shares assuming a complete conversion of KKR positions of Yageo Euro convertible bonds and exercise of all employee stock options. After the decoupling from Taiwan market, Yageo will reportedly work to restructure itself, mulling over a possible relisting in about 3 years.

To be sure, Yageo has been adept at sizing up the economy and enlarging its operation scale. In 2005, it spent NTD18 bn to purchase Phillip ( Taiwan ), and a series of bangs in acquisitions or ownership increases in 3 listed firms that included MLCC field allowed it to act as a bellwether in Taiwan passive component industry. Its buy offer for Ta-I Technology (2478), a resistor maker, was however a flop in 2007. The unrepentant market raider this time around reloads its elephant gun with trigger fingers itchy to hunt after no one else but its own company. 

The scheduled doozie hug for Yageo stocks comes at a time when it is primed to stretch out blockbuster showings. Last year, its sales zoomed 42.8% YoY to NTD27.32 bn, from NTD19.13 bn a year ago. Net income grew more than five-fold to NTD4.15 bn, from NTD 673 mm in 2009. EPS topped a 10-year apex of NTD1.88, up from NTD 0.31 in 2009. Skepticism about its intention for a demise of Yageo listing has heightened, not in the least of which is how it rolled out the offering price at NTD16.1, a level widely-criticized as dirt-cheap and unacceptable.

Disputes over offering price level intensify

Yageo clarified the gauge on the grounds that the price was culled by a fully-diluted effect from its outstanding CB, which in turn translating into a PER of 11X. Besides pointing out the offering price verges at a premium of more than 14.2% vis-a-vis market price at disclosure date last Friday, Yageo emphasized that the price also surpasses its NAV per share of NTD14.7288 (as of 3Q10). Another factor taken into account is the price stands for a peak in a 7-year span. All the remarks, on whatever kind of algorithm, make little sense and possibly try to dupe its shareholders.

Questions have roared up against a 7-year interval reference used by Yageo as yardstick for the offering price, rather than a stretch over 10 or 20 years. Yageo stock hit an all-time high of NTD 152 in 1997, and never breached a ceiling of NTD16.5 seen in June 2007 since 2005, a year before which the stock charged to NTD 24 in Apr. The 7-year period was then "explicable", as the offering price is lower than that zenith of NTD16.5. In other words, for investors adopting a buy-and-hold mode for a stint over 8 years, the valuation will run against their hopes. Yet, will there be any compensation for the long-term stock owners, if the plan gets a go-ahead from the authorities?

Stalled growth becomes viable for failing Yageo  

What's even worse, the stock is said to too big to churn out rosy results pleasing investors, and Yageo is exhausted to engage in Q&A for performance, as cited by its chairman. A full transfer into common stocks by KKR's USD228 mn holdings of Yageo 7-year unsecured zero-coupon CB, debuted in June 2007, will help lift its paid-in capital near to NTD30 bn. In Chen's interpretation, that will stoke unease about a scenario of being "so big to fail", instead of "too big to fail".  

In terms of its history of capital structure, Yageo would definitely receive no confident vote from investors who got involved in its past right issues programs. As of Sept. 2010, rights issues, recaps from retained earnings and recaps from capital surplus respectively made up 21.58%, 44.24% and 34.18% of Yageo paid-in capital, with the right issues portion coming at a higher-end metric than other electronics. Acer turned in more comfortable figures by 4.01%, 28.81% and 67.18%.   

Partly spreading confusion will be the role of Orion Investment, the mechanism to scoop up Yageo outstanding shares registered by a hefty number of 128K public investors. Domiciled in the Dutch with capital only documented at NTD0.5 mn, the JV between KKR and Chen will start a blitz to snatch up shares with the deadline fixed at May 25, before which the JV will buy a minimum of 16.7% of Yageo floating stake. Combined with the current stash from KKR and Chen, the JV's holding will accordingly exceed over 50%, making it applicable for a public tender offer without shareholders approval.      

Offering price is close to Yageo CB convertible price

There are certainly various ways of slicing and dicing the valuation that paints a sobering picture. One comes from the convertible price of Yageo 7-year unsecured CB at NTD16.15, fractionally higher than its tender price of NTD16.1. To some, the Yageo case is nothing but a makeshift to meet cash-out call from KKR which has an average investment horizon of 5 years and more in its portfolios companies. After getting a board seat, it exits its investment through IPO, SPO, and sales to strategic buyers.

KKR, listed in NYSE in July 2010, glittered in its 1Q11 results with asset under its flag lifted 10% to USD61 bn. But it might stumble in Europe where it underwent a management makeover in Feb. this year, and KKR Europe II fund continued to underperform. In addition, on Mar. 07, 2011, it said it has received a request from US regulators for information in Jan, 2011 about the company's dealings with sovereign wealth funds. KKR is now cooperating with the agency's investigation   

For the reckless move by KKR and Chen, KKR seems to pick a good time to ask more of return, now that Taiwan market is in solid footings to sport further gains with investors' complacency appearing high, albeit a short-term downward correction is on the horizon. Whether the buyout will be finally nodded by regulators or not, Yageo stock might already hold up well above NTD16.1 or higher than that CB convertible price of NTD16.15. If so, that will give chances for KKR to raise money to buttress its balance sheet by liquidating position of Yageo CB.

Redeem CB in the form of stock buyback

To fully convert its CB holdings into stock is probably one feasible way for KKR to depart from Yageo, particularly given the fact that market liquidity for ECB has long been shallow. What's also downbeat is that the CB doesn't carry any interest coupon. Yageo in the past 7 years was likely not so willing to see a stock price over NTD16.15, a level that will generate arbitrage opportunity, - buy CB and short the stock over that price at cash market by traders in local securities houses' int'l departments. Yageo's begrudging attitude had torpedoed any attempt for its stock to stage a stellar uptrend in the past 7 years. Plus, the stock's daily trend has been characterized by high churning rate, not a goodie technical sign for stock prices at lows but helpful outcome for stock brokers.

Buying from foreigners on last 2 sessions last week abruptly ballooned by a total net buy of 105 mn shares. It looks like a warm-up phase for Yageo to absorb potential selling from KKR in future. This doesn't mean that one can go in front of it (i.e. short selling Yageo) at present. Their buying is supposed to be extended to prevent a fallback of Yageo stock, if Yageo determines to redeem KKR's CB holding by means of stock purchase via Orion at stock market. A sudden increase of Yageo's registered foreigners' holdings, not by market transactions, will be another valuable canary, chirping that KKR has fully converted its CB holding into common stocks in preparations of a farewell.

What will happen next is a likely step for Yageo to announce a stock buyback project. Yageo, somehow, seemingly lacks capital to redeem the load of USD228 mn CB held by KKR, especially because Yageo is well reputed as an art collector. The buyout news will serves as an upbeat catalyst for common folks to buy the ideas that the firm is on the positive bias for stock price at least for the moment. Nevertheless, a development for a listed firm that garners EPS at a 10-year pinnacle yet decides to forfeit its trading status, if put into action, sounds irrational, irresponsible and counterintuitive.

Ditch new Yageo stock on relisting

It will not go unnoticed, for sure, to regulators concerning the name of real foreign buyers, offering price and social justice to shareholders who may start to be alert about the final countdown for Yageo delisting. When the buyout hubbub is settled into dust and Yageo really finds a new strategic partner after fleeing the market, someone can then take few days off to date with Rosamund Kwang (關支林) in Paris or Venus. But there will be raised a question: will you scramble to pitch a buy order for new Yageo stock if it again goes listed on this island within 3 years, according to source by people familiar with the issue?   

Investing is a complex rocket science that requires professional help - at least that's what professionals usually say. But a winning case can be made for investors following a rule known as KISS, which stands for "Keep it simple, saver." Any listed firm should also follow that principle - all they need to do are earning money for public shareholders and keeping production lines humming. Investors' portfolios must be reallocated or reviewed at least once a month to ensure that there isn't any stock padding sales record, involving in accounting shenanigans or orchestrating a scheme to tamper with the company's listing lifetime. It is a boring but a bare-bones approach.

Good luck and good trading !
Link to The final countdown - http://www.youtube.com/watch?v=7_IKcMl_a9A

Still Loving You

 
                                                                                            (on Apr. 08, 2011)

          Time, it needs time to win back your love again.

          I will be there, I will be there.---

          If we'd go again, all the way from the start,

          I would try to change the things that killed our love.

         Yes I've hurt your pride, and I know what you've been through.

         You should give me a chance. This can't be the end.---

　　　　　　

               Quoted from song lyrics - Still loving you    
               Songwriters: Rudolf Schenker, Klaus Meine. Performed by Scorpions 

Desperate times call for desperate measures. The greatest opportunities are born from the most profound obstacles. If we can view those obstacles as opportunities, it'll serve us in good stead.

Acer bad news throws techies for a loop; Buy on Dips for Acer

An incident brought up by Acer Inc. (2353 TSE Code), the global 2nd largest NB computer maker, for its about-face in sales bets fueled massive momentum selling on its stock, another black eve for an already-smarting tech sector. Impacted by downbeat headlines that ran in websites and newspapers–"Acer falls after saying 1Q11 sales to miss forecast", "Acer CEO Lanci quits after clashing with board on strategy", and "Institutional investors dump Acer",–the tense analysts were all-but saying adieu, adios, ciao or auf Wiedersehen to Acer stock and other ODM NB stocks.

The "old-school" firm announced on Mar. 25 to slash 1Q11 sales target to a 10% decline, a far cry from originally pleasant 3% growth. The chop marked a back-to-back downward revision for quarterly shipment target from 4Q10, in which it suffered a 17% drop from a gain of 5%-10%. The damper was primarily prompted by weaker demand in US and Europe markets coupled with neck-to-neck competition from Apple's hot-selling iPad gamut.

Quake in Japan derails coattail effect

The aftershocks of Japan quake resulted into a magnitude of tear-down analysis which found pressure on the IT industry will be intensified. Fears of cocktail effect occurred in their minds that at least 5 parts supply chains from Japanese vendors: NAND flash, DRAM, electronic compass, touch screen's glass overlay sheet, and tablet's battery, will be severely disrupted, casting a shadow on global PC market. Taiwan's riding on the coattails of Japan's success had hit a snag.

Acer's Achilles' heel–Low-cost NB ?

Acer is commonly categorized as a traditional PC maker with NB accounting for 60% of its product line, of which consumer models constituting 70%. Given surging demand for tablets, its outlook has reportedly turned for the worst as operating margin will likely slip under 2% in 1Q11 from 2.93% in preceding quarter. Acer's mobile PC shipment, including contribution from its Chinese alliance, Founder Technology, tumbled to 8.4 mn units in 4Q10 from 9.1 mn units in 3Q10. For 2011, Acer expects its NB shipment to grow 10%-15% to 40-45 mn units, and its desktops to reach 10-15 mn units. It also painted a bright picture for its cellphone shipment rising to 5 mn units, up 50% YoY, based on a wider range of link with global telecom carriers.

A brutal sale environment has raised suspicion about its ability to meet the rosy expectation on sale, not in the least of which is its bottom line target. Apple, maker of the iPad tablet, iPhone and iMac computer had a 21.5% operating margin last year, while Acer had 2.3%. It's estimated by Acer that the ratio will drift lower to 0.5% to 1.5% in 1Q11, and will see a worst-scenario of remaining flat in 2Q11. What makes things worse is the fact that tablets will still cannibalize NB market share. 

It was reported that as much as 18.9% of tablets have replaced NB and netbooks in 2010, but this rate will jump to 32.1% this year and reach 35.1% in 2012. Apple's iPad devices are expected to be delivered at a volume of 65 mn units this year to take up a lion's share of global mobile PC items that include netbook PC. With market share sliding to 14% in 4Q10 from a 16% in the prior quarter, Acer dropped to 3rd place among mobile PC makers globally, behind Apple and HP which bagged 17.2% and 15.6%.

All eyes are on Acer moves to pick up the pieces

Acer tended to be cheerleader in Taiwan NB arena to set a high bar for its outlook, always maintaining optimism even affected by black swan events that included Intel's big recall of flawed chipsets. On Jan. 31, Intel found a defect in its 6 Series chipset, which support Acer's most advanced Sandy Bridge line of processors. The glitch, though likely reducing its shipment in 1Q11 by 1%-2%, is said to leave its position unscathed to hope for a 3% quarterly gain in NB sale. The firm repeated its assertion that its fortune will continue to rise in 2Q11 when its NB with the Sandy Bridge platform and new tablets will be available in the market. But that reassuring wording received a pitifully weak reaction considering the spectacular blows that the psyche of market analysts have been hit with.

Like the fashion industry and Hollywood , the tech sector relies on new products to create a buzz and boost company sales and earnings. Acer will realign its product lineup to pay closer attention to profitability, instead of sales volume policy emphasized by its previous CEO, Lanci, who focused on low-cost laptops in a bid to dethrone HP. Profitability goes to the core of Acer's future presence in computer area after Lanci departure. New business roadmap and management team will be introduced in analyst meeting in late Apr. amid a program what it describes as the 3rd corporate revitalization.

Set further sights on Tablet PC

To keep business afloat, Acer will be gearing up to tap tablet and smart-phones segments. On Mar. 18, Acer announced to kick off its first stage of churning out tablets to square off against other PC vendors in tablet universe, but output may be not sufficient enough to match global retailers' demand partly due to shortening supply of components and capacity constraint. Facing Apple iPad 2G, which was unveiled last month as a blockbuster on its advanced plumbing at an incredibly low price, Acer has admitted that it can hardly take on Apple. But confidence about its tablets outselling other competing models propelled it to ambitiously aim for a global tablet shipment of 5 to 10 mn units to post a market share of 20% this year. The firm will start promoting its tablets in Taiwan in early April in coordination with several local telecom carriers and 3C product retailers.

On its NB front, Acer on Mar. 29 started pre-sales in US of a new version dubbed the Iconia in efforts to outshine in a market dominated by Apple's iPad. The laptop features 2 high-definition 14" touch screens that can be used as a virtual keyboard, as an extended display or as a place to run additional applications. But doubts about its success as a hit product look rampant. The dual-screen configuration is an unusual twist in the industry which has been flooded with touch-enabled phones and tablets. Laptops and desktops equipped with touch functionality have not proven well-received as their more mobile peers. Sale of iPad, for example, had accelerated following the debut of its 2nd generation tablet on Mar. 11.

Roadblock might emerge in its push to China

Another chin taken by Acer might be the business trend probably working against it in China which made up 10% of Acer's sales in 2010, and the figure is conjured up to approach 13-15% this year. Last Aug., Acer acquired PC business unit from China`s Founder Technology for NTD120 mn to penetrate the market. Things were proved to be clicking as its market share was lifted to 8.6% to rank as the 2nd-largest brand by overall PC sales in the market in 4Q10, only next to Lenovo which dominated a 30% portion. No.3 and No.4 slots went to Dell (7.2%) and HP (7%), while Taiwan another own-brand PC maker, Asus (2357), was number 5 to occupy a 5.2%. In the same period, Acer came in at No .3 in terms of NB sales.

Acer's 2nd operating base in Chongqing, southwestern China, will take a 20%share of its global shipment in 3Q11, and the figure will rise to 40% this year, depending on a combined supply from 4 contract makers - Quanta, Compal, Wistron and Pegatron. Acer last month signed a pact to provide electronics retail chain Suning USD500 mn worth of computers in 2 years. Meanwhile, Acer licensed online electronics retail chain 360buy.com to offer after-sales service in China for it. It is the first ever after-sales service licensing that Acer has awarded to a Chinese retailer,

Acer might hit minor hiccups as it seeks ubiquity. Its products might be largely hidden from the public view in blistering competition with main Chinese rival, Lenovo, which is active by discounting more to attract buyers, as widely seen by the shops within airports in HK and inland China. Lenovo brand was ubiquitous with its product prices much cheaper. Price discrepancy, if all things equal, is another criteria in deciding customer preference. Possibly trying to break through a bitter log jam in China, Acer is reportedly going to cut 10% workforce there to strengthen profit, a meaning to tea readers that something bad is going to happen with Acer operation in China. A report for its standstill growth in China, if any, will make a huge splash in future.

Foreign investors emit bearish sighs on Acer

Acer, along with other Taiwan ODM NB makers, is still in the center of analysts' debate over extent to which tablets are biting NB market. Analysts' dire insights, such as margin contraction, disruption of key material and languishing NB market to be decimated by iPad, have reached a seemingly agreed-upon consensus that from Acer to ODM counters and everything in between, downside risk will overtake upside potential. Smart money fled the NB-related stocks this past week just as they said: "Acer is no more championship, and let's go to hunt the ones that will issue higher end of earnings views”.

Sell orders flooded the Acer counter from foreign investors not too long as Acer issued the sales warning on Mar. 25 when its stock closed at NTD72.8. Relentless sell-off knocked it down to NTD57.1 on Apr. 01. In their coverage on Acer, investment ratings generally were neutral to negative. Based on Mar. 30 newspapers, 5 out of 9 foreign houses made an underperform claims, 2 for neutral and 2 for sell. The aforementioned ratings were, frankly speaking, honest-to-God sell ratings if all added together.

Investment rating systems by foreign houses

In their recommendation system, some will use ratings from A to F. A system with an assigned numeric value from 1 to 5 will be put in place as well, and ratings are a translation of brokers' visions to the recommendation scale, which ranges from 1 (a strong buy) to 5 (a strong sell). Principally, when they want to buff a stock which merits a higher price and richer valuation, they will promote it as buy, outperform, or overweight. When it's time to sell a stock, they will name it as sell, underperform, or underweight. In other cases, any stock not assigned as a buy or a sell on an investment list is deemed neutral.

Hold, neutral, in line, market perform, or equal weight comes tricky, not all belonging to a same sentence to reflect a stock's expected pendulum. Sometimes, it can contain implications of a risk for losing ground. Also, those terms neither imply fully cash preservation, nor not to buy (sell), for clients' portfolios. In foreign houses, a stock assigned the rating will mean: 1) expected to remain flat or increase in value and are less attractive than Buy, 2) have a neutral outlook based on analyst's expected absolute or relative return over the investment period, 3) the upside or downside is less than 10%, 4) the stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe. In future, if you hear or read the abovementioned words (中立), you have to carefully figure out what it suggests by different houses. Then, how about let's get a consensus altogether to change that ambivalent kind of interpretations into "Taoyuan" (桃園)?  

Hold rating is almost not different from negative spin

To some extent, a hold rating carries a selling metaphor. Knowledgeable investors have long perceived that the term is, in effect, a sell signal. The stock unloading insinuations can be exemplified by the dot-com bubble. That popped to near-devastating effect in 2001 and was powered by rise of Internet sites and tech start-ups, many of which went under to get some valuable lessons when the bubble finally burst. Cisco, the onetime highflier, was so formidable that no analyst flipped its rating to a sell on its way up to historic high of USD71.87 registered in May 2000, because the network goliath acted as a major kicker for M&A activities, regarded as meat and potatoes by investment banks as a whole.

In 2001, when the US stock markets were headed south, less than 2% of the stocks followed by major brokerage houses were rated as sell; in the previous year, only 1% of stocks were touted as sell. They balked on issuing sell notes, often because their investment banking divisions wanted to gather business from the same companies, managing new-stock sales, floating debt securities, and providing financial consulting services. They can be quite profitable, and a sell recommendation by the company's analyst can cause executives to take his business elsewhere. Therefore, researchers at best issued hold rating with the flip side of it actually suggesting a sell even when the covered stock is at a worst state. To make matters worse, Fitch and S&P rating agencies were far behind trying to avoid a potential sell warning in cementing their respective client bases.      

Diverse views for expected return and time horizon by foreign houses

Questions about how they come up with assessment, or return potential, in plain words – buy, hold and sell, will lurk in investors' mind. Most brokerage firms, as they assert, use a wide variety of data, including momentum, financial strength, earnings, sales volume, cash flow, price/earnings ratios, dividend, and discounted cash flow or multiple analysis etc.. One company uses 100 variables in 7 categories to build its stock ratings. At issue, still, is what kind of relative performance they base upon in global stock market's herky-jerky trends. Initially, they will roll out a to-be-expected price, such as target, fair or intrinsic value, and then simply tip a targeted % of gain/decline of any given stock, or compare that with certain gauges for relative strengths. But things are certain that their notes are subject to their discretion, and in need for a revision or reversal, if condition warrants.

Briefly speaking, their rules include: 1) a stock absolute price return relative to the analyst's sector, not the overall market, 2) relative to the average total return of the analyst's industry (or industry team's) coverage universe, 3) as compared to relevant local indices, 4) relative to benchmark return, 5) relative to companies in its industry, 6) absolute upside or downside, which they define as (target price - current price) / current price, or 7) absolute valuation upside (downside), which is defined as (fair value - current price)/current price. As for the investment period or time horizon associated with a stock price target, there's also a variety of definition stated in a bracket from 5 to 15 months. Their ways to define a potential price gain, indeed, will drive you mad and deserve serious rethinking before jumping onto their bandwagons.   

Too much complaint about Acer

In the case of Acer, foreign investors this time play nicely, not because of their sell callings, including hold ones, to denote lower valuation in Acer, but because of the fact that a jump-the-gun effect didn't sneak into market in the lead-up to Acer's shocking shift of sales projection, - avalanche of selling orders by foreigners just came after the bad news was released. However, to receive a sell rating by any listed firm shouldn't cause a whole lot of fuss among market participants. Analysts' logic to behoove their clients to be cautious sounds reasonable yet panic, and Acer's paltry outturn in essence earned it a downgrade.

Sell notice is easier to appear in full forces in the big-cap especially heavily invested by foreigners. Foreign houses can haul in a significant chunk of brokerage fee by suggesting a stock switch to slice holding in Acer which is now 46%-held by foreigners. Though the level is still far below that highest one of 76% seen in Delta (2308), Acer's successive, disheartening moves had stirred up criticism and complaint. Analysts in foreign houses might have been degraded for their accuracy on Acer profit profiles and run the gauntlet of sharpening barbs and negative rhetoric from clients and supervisors. Acer's target price  was then undoubtedly slammed to a band as low as NTD46.2, with room to be pulled lower by those late-to-the-party analysts. As a result, bears will be on parade against Acer at least in the short term. But how can you complain about their readjusted judgment after their pride had been taken away so much by Acer?

There's no sense missing out on any buying opportunity for Acer, which has a checkered past when it comes to encouraging the market. It was mired in a large-scale restructuring effort in 2000 when it split off two subsidiaries, Wistron (3231) and Benq (2352). Much earlier in 1992, the firm bounced back into black, a big push assisted by government sending its stock upgraded back to the main board from the full delivery column which requires full payment for stock purchase in advance. Its stock trading code on the TSE was then recoded as 2353 from previous 2306. Acer at the moment seems well situated in running into a make-or-break crossroad, justified by its prior behaviors.

Acer has plentiful cash to burn

As of 3Q10, its cash and cash equivalents stood at NTD4.65 bn, a level to be lifted further to a 5-year high for 2010 results in which it cornered a sturdy EPS of NTD5.58. The unaudited EPS is loftier than NTD 4.31 in 2009 and may well prove to have stood it in good stead to budget expansion into the much-anticipated fields - tablet PC and smartphone. Its ROE and ROA for 2010 should surge to 16.2% and 6.22%, up from 13% and 5.79% in 2009. Both the figures top an 8-year peak, making it a cogent case that Acer's operational ability has been in a sound footing. Debt ratio hit 60.67% as of 3Q11, a steadily growing trend that jibes with the NAV per share of NTD34.98. Albeit not a risk-free play, Acer has pleased its investors by paying out an average annual cash dividend of NTD2.8 per share after 2001.

Far from being a pricey stock, Acer is currently traded at trailing PER around 10X. Even assuming a fallback of EPS to around NTD 4.5 in 2011, the stock is perched at a forward PER of 12.6X. While its current business models may not necessarily translate into a decently-undervalued stock, or deserve a PER premium enjoyed by handset makers such as HTC, the recently drastic downturn could be partly attributed to macro environment. Taiwan stock market is still exhibiting an inexpensive trait hovering at a trailing PER multiple around 15X, as compared with that of 35X-40X during its heyday when rocketing over 10.000 points. In the context of stock market future course, the island somewhat requires more hoped-for events and improved competitiveness to boots. If those factors materialize, the market will be then assigned a higher weighting in global emerging indices.

Acer management is half-full - Stock buy-back program

Another trump card on Acer's hands is stock buy-back determination. It had swiftly reacted to falling stock price by unveiling a buy-back program which will call for pro-forma NTD3.2 bn cash to repurchase a total of 54 mn shares. Effective on Apr. 01, the rescue, though not compensating for the troubles caused by sequentially missing its numbers as stock slipped further, will trigger a faith-based technical rally and lift investor mentality in future. Anecdotal evidence suggests that a buy-back by Acer has always aligned with market ebb-and-flows in the past. As was often the case in its historical pattern, bears flinched as Acer rebooted buying spree after a failure to support prices.

It's a rare reality that a listed firm launches a buying program in the immediate wake of downward adjusted forecast, a signal that management is much more convinced to see better times ahead - and is taking steps to ensure that it get shares of the pie. In doing so, Acer will make its opinions a self-fulfilling prophecy. Its well-positioned global footholds and customers' solid loyalty to its brand-name should lead to a higher implied value that entitles it a buy. A report indicates that Taiwan's top-10 global brands in 2010 again places Acer at the top with brand value of USD1.40 bn or about NTD45 bn.

No need to blame doomsayers

Chances and alternatives still exist for Acer to catch up with Apple which, however, can't eat up the entire tablet crowd. While battle of other tablet makers has been heated up for the fractional market share left over by Apple, those firms with substantial and long-standing brands, attempts to diversify to adjacent markets such as rapidly-expanding e-books and smartphone, as well as all-out forces to reinvent themselves will likely stand out in global tablet race. To Acer, the current plight is involving more a retool scheme, rather than a story of phoenix rising out ashes as in 1992, though over the short-term, it can't usher in a cherry-on-the-top scenario. At worst, iPad threat could squeeze out a 10%-15%  of the population that opts for its low-cost NB that Acer championed. 

Acer is still a proxy for Taiwan NB computer and tech industry. The simplest way for a manager to beat the market, in theory, is to cheery-pick attractive bluechips on market weakness. That doesn't mean investors can make quick money off the faltering Acer stock at present, but buying opportunity will take hold once foreigners end stop-loss selling or portfolios reallocation. A stronger buy can be ready until listed firms reveal 1Q11 results in late Apr. Finally, there's no need to spell curse on Cassandra.

Good Luck !
Link to Still loving you - http://www.youtube.com/watch?v=SUMcA--ejOc