Investors in Taiwan call for better returns

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Taiwan’s cash-rich telecommunications companies are coming under increasing pressure from shareholders to return excess capital amid rising investor frustration.

The country’s top three telecom companies, Chunghwa Telecom, FarEasTone and Taiwan Mobile, have so far resisted investor calls to reduce their huge cash piles through capital management.

However, local and overseas investors have in recent weeks increasingly focused on the issue and raised their concerns in a series of meetings with executives of the three companies.

One investor said: “These are good companies but they all have inefficient balance sheets. They have hoarded cash while ignoring the chance to borrow despite low interest rates. If there is no movement soon, shareholders are sure to raise the temperature.”

Another said: “This is not about investors raiding the kitty. A capital reduction boosts the yield and is an efficient way for the company to deal with excess cash. Investors could start to turn their backs on this sector.”

A series of broker notes over the past few weeks have drawn further attention to the issue.

Last month JPMorgan said that Taiwan’s telecom companies were “ripe for a large capital reduction exercise given the net cash balance sheets, strong cash flows and the absence of attractive investment alternatives”.

Goldman Sachs noted that all three companies’ shares were trading at 9 to 11 times earnings, near the trough of their historical ranges, and that capital management would help to boost the share price.

A capital reduction in Taiwan differs from standard global practice because it requires regulatory approval and companies can only reduce the paid-in capital account, not other parts of shareholders’ equity such as the capital surplus or retained earnings.

JPMorgan said that Chunghwa Telecom has a legal minimum paid-in capital requirement of NT$52bn (US$1.6bn). However, it has NT$97bn in its paid-in capital account – as well as other shareholder equity of NT$275bn on its books. FarEasTone and Taiwan Mobile boast comparable excess cash piles.

Investors claim that the companies are failing to take advantage of laws that permit them to transfer funds annually from the capital surplus account to the paid-in capital account.

In response, the companies said that they had no immediate plans to return cash, potentially putting them on a collision course with some shareholders.

Chunghwa Telecom, the island’s largest telecom company, said that the “possibility” of a capital reduction was under consideration.

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