There are several, relatively unknown small capitalization companies in Taiwan that offer substantial investment opportunities, Credit Suisse AG said in a report released on Friday.
As they are less well publicized than large-cap companies, small-cap firms with a market capitalization of less than NT$1 billion (US$33.58 million) tend to be less discussed among equity researchers and are often overlooked by investors.
Their shares are also more likely to be mispriced.
However, a report, authored by Credit Suisse’s Taipei-based equity strategist Jeremy Chen (陳建名), says that several of the nation’s small-cap companies are actually “global leaders in their respective fields” in terms of key technologies and global competitiveness.
Taiwan had 1.28 million small and medium-sized enterprises (SMEs) as of the end of last year, representing about 97 percent of the country’s total businesses, according to Ministry of Economic Affairs statistics.
Although many SMEs relocated their manufacturing operations to Southeast Asia and China decades ago, a number of them maintain their research and development bases, as well as sales and marketing units, in Taiwan, the report says.
“They have certain common traits: a long operation history, a solid growth track record, a strong balance sheet and they all love paying consistently high dividends,” the report says.
Because they are less well known by investors compared with their mid-cap and large-cap peers and because they have few shares outstanding, small-cap companies usually gain less attention from foreign institutional investors than local institutional ones, although their shares tend to outperform their bigger peers over the longer term.
So far this year, the GRETAI index for mainly small-cap stocks has increased by 15.44 percent, outperforming the benchmark TAIEX’s 5.14 percent rise over the same period.
However, while investing in small-cap companies may increase the odds of uncovering their hidden value, their shares tend to be more vulnerable to market volatility.
For instance, the government instructed four state-owned funds to stop trading small-cap stocks late last year because it believed such stocks were an easy target for fraudsters due to their smaller share capital.
The government later dropped the bans after strong criticism.
Small-cap firms face other risks, too. They often find it difficult to adapt to rapid changes in customer preferences and aggressive competition from larger rivals, analysts say.
Even so, the government is pushing forward a policy to develop the so-called “hidden champions” of local SMEs.
The move comes as the information technology and electronics-based economy has become stuck and other domestic industries remain dominated by contract manufacturing clusters.
The Credit Suisse’s report, titled "Taiwan Discovery Series: The hunt is on” says researchers at the brokerage have visited more than 20 fast-growing, small-cap companies across the nation over the past month.
“Many of them are global leaders in their respective fields, such as golf clubs, blood glucose meters, fishing lines, tennis rackets, treadmills, doorlock sets, auto lamps and sewing machines,” the report says.
“Over the years, several of these smaller companies have thrived and leaped on to the global stage, notably bicycle-makers Giant and Merida,” it says.