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This week is the one to watch

By Michael Logan
STAFF REPORTER
Monday, Jan 10, 2000, Page 18

1303 Nan Ya Plastic Jan. 7 share price: NT$73 Shares outstanding as of 10/99: 4.6 billion Estimated 2000 earnings per share: NT$3.435 Estimated 2000 price-to-earnings ratio: 21.25

Investors worldwide last week sold off stocks -- especially technology shares, which had flown to Icarus-like heights last year -- as the prospect of higher interest rates made owning tech companies seem expensive.

Yes, Y2K was a non-event, and the absence of bugs was cause for celebration. But concerns over Y2K had prevented the US Federal Reserve from hiking rates in December, and now its board looks prepared to raise rates next month.

The NASDAQ Composite Index fell 4.6 percent last week, and much of the world followed.

The lone standout, however, was Taiwan. After finishing 1999 at 8,448.84, the TAIEX climbed 4.7 percent last week to close at 8,845.47. Since Dec. 21, the index has soared 13.6 percent. The Over the Counter (OTC) index finished the week at 217.35, up 4.9 percent.

"The [Taiwan] market didn't rise as much as the NASDAQ [last year]," said Grace Li, research manager at investment house MasterLink Securities. Therefore, she said, the TAIEX had less reason to fall.

1301Formosa Plastics Jan. 7 share price: NT$66 Shares outstanding as of 07/99: 3.5 billion Estimated 2000 earnings per share: NT$2.930 Estimated 2000 price-to-earnings ratio: 22.52

Whereas the NASDAQ Composite Index skyrocketed 85 percent in 1999, the TAIEX rose by just 31.6 percent.

In addition, the TAIEX's weighting consists mostly of high-tech manufacturing companies, such as Taiwan Semiconductor Manufacturing Company (台灣積體1q路?膝q), which trades at 31.2 times this year's estimated earnings. The NASDAQ's index, on the other hand, is home to high-flyers such as Qualcomm, a maker of wireless communication products that rose 1,891.7 percent last year and trades at 146.3 times estimated 2000 earnings.

1433 Formosa Chemical & Fiber Jan. 7 share price: NT$42.30 Shares outstanding as of 07/99: 3.2 billion Estimated 2000 earnings per share: NT$2.162 Estimated 2000 price-to-earnings ratio: 19.56

Still, there are some concerns that the NASDAQ could pull the TAIEX lower this week, as was the case in Hong Kong and Japan.

While local retail investors were buying last week, foreign institutions were selling -- dumping a net NT$4.7 billion in shares. Trading by foreign investors will be closely watched this week, as their actions could be an indicator of the market's strength or weakness.

"This week will be an important one to watch," Li said. "We'll see if the TAIEX can sustain its upward momentum."

Still, Li said the TAIEX is not likely to fall below 8,600, and that the market's near-term prospects looked good.

"There are two different market views. One is that the market will take a rest in the next month or two," Li said.

The other view -- which Li supports -- is that Taiwan stocks will trend higher on strong earning's prospects for this year. Li sees the TAIEX trading between 8,600 and 9,000 this week and hitting 9,600 on or around Chinese New Year.

The market's bright spots include DRAM makers, which have been benefiting from higher-than-expected chip prices. According to the American IC Exchange, the benchmark 64 Mbit DRAM traded between US$8.85 and US$9.38 as of Jan. 7. That's significantly greater than the US$6 many analysts had expected DRAM chips prices would fall to after reaching highs of around US$20 in October. It's also up from a price range of US$8.53 to US$9.04 per chip on Dec. 23.

"Windbond is a strong buy," Li said. "Again this week we witnessed higher than expected spot prices."

MasterLink forecasts Windbond could reach between NT$100 and NT$120 per share in the long term.

The company rose to NT$81 last week, or 8.7 percent higher than its Dec. 28 close. Winbond shares have climbed 47.2 percent since Dec. 9.

Powerchip Semiconductor finished at NT$63, up 8.6 percent for the week; Mosel Vitelic at NT$57, up 14 percent; and ProMos Technologies at NT$102, 6.8 percent.

Plastics burn rubber

Plastics makers edged higher over the last 10 trading sessions on higher product prices and anticipation of strong demand from China in the coming year.

Formosa Plastics, Asia's largest PVC maker, climbed 10.9 percent from NT$59.50 to close Friday at NT$66; sister company Formosa Chemical and Fiber rose 10.1 percent from NT$38.40 to close at NT$42.30; and Nan Ya Plastic jumped 15.8 percent higher from NT$63 to finish at NT$73.

Some industry analysts say plastics shares have room to climb even higher, as the cyclical industry is in the early stages of an upturn that began last year.

"We expect the next peak in 2001," said Jackie Chen, an equities analyst who covers the petrochemicals industry for National Securities Corp. "And we expect share prices [of plastic makers] will reflect that before then."

Chen said the plastics industry peaks about every five to seven years. While products such as PVC fetched roughly US$400 per ton in 1998 -- a level at which few companies can realize a profit -- prices began to rebound in 1999 and today PVC commands about US$700 per ton.

One positive factor for Taiwan manufacturers is growing demand from China. The world's most populous market imported 719,000 tons of PVC in the first half of 1999, a 30.2 percent increase compared to the same period a year earlier. Demand is expected to grow again this year, according to National Securities, as new home construction in China means greater need for PVC pipes.

Another positive factor is less competition from South Korea and Japan. Industry analysts say plastics makers in both countries have reduced production capacity.

Because Formosa Plastics is Asia's largest PVC maker, the company is expected to be the biggest winner in the plastics industry's upturn. In addition, Formosa's Sixth Naphtha Cracker project will boost the company's production capacity this year. Chen forecasts Formosa Plastics -- which was the second most popular company among foreign stock buyers on Friday -- could reach NT$80 per share this year, or 21.2 percent higher than the company's closing price of NT$66 on Friday.

She also sees Formosa Chemical and Fiber as undervalued and projects the firm's shares could eventually trade as high as NT$60 per share -- or 41.8 percent higher than Friday's close.

But there are some potential pitfalls, primarily China's protectionist policies. China may attempt to restrict imports through high tariffs or other trade barriers.

On the other hand, China may be forced to allow PVC and other plastics products in, as demand in that country is greater than what can be produced domestically.

"They will have to import," said one industry analyst, who was unable to be identified for this report because his company's policy forbidding it. The analyst said Formosa Plastics may reach NT$78 per share.

Another beneficiary of the anticipated upturn in the plastics industry, the analyst said, is Nan Ya Plastic, which he sees reaching NT$88 per share.

But in addition to being a plastics play, Nan Ya is also an electronics play. According to National Securities, Nan Ya's printed circuit board business is picking up and will run at full capacity this month and next. Also, the company's DRAM manufacturing unit, like most Taiwanese DRAM makers, is benefitting from healthy chip prices.
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