Analysts are appearing in Seoul and Taipei for the first time to get a closer look at local technology giants. Will it pay off?
By Kazuhiko Shimizu
May 2001
Institutional Investor Magazine
The 2001 Asia Research Team ranking results are now available in the Research & Rankings section of this site.
Analysts are appearing in Seoul and Taipei for the first time to get a closer look at local technology giants. Will it pay off?
They,re putting a lot of chips on the chips.
A focus on all forms of technology drives virtually every aspect of equity analysis in Asia these days. “Asia’s future is technology and telecoms,” says Chitung Liu, until recently a Taiwan-based technology analyst for UBS Warburg. If Liu (a second-teamer in both Taiwan and Technology this year) is wrong, Asia research directors will have a lot of explaining to do.
Major brokerage firms are building formidable research teams in countries like South Korea and Taiwan, home turf for global competitors such as Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. In Hong Kong, the hub of most Asia research efforts, Goldman Sachs (Asia), Merrill Lynch, Morgan Stanley, Salomon Smith Barney and UBS Warburg, among others, are busily adding to their technology staffs. In some cases, the firms are doubling or even tripling the sizes of their technology research departments to include a dozen or more analysts. “It is all about tech and telecoms. We always have to bet on these two sectors in Asia. If there is not TMT [technology, media and telecommunications], Asia is dead,” says Liu,s former boss, Michael Oertli, head of Asia research at UBS Warburg in Hong Kong. (Liu left UBS Warburg in mid-March to join Taiwan-based chip maker United Microelectronics.)
Of course, such a tightly honed strategy is not without risk. When the world’s technology markets sagged in unison last year, Asian bourses felt the fallout. South Korea’s technology-heavy Kospi index plummeted 51 percent, Taiwan’s weighted index dropped 44 percent, and Hong Kong’s Hang Seng index fell 11 percent in 2000. In fact, virtually no market in Asia was left untouched last year. Overall, the MSCI emerging-markets Asia index was off an eye-popping 40 percent for the year. Even China, growing rapidly and readying for its entry into the World Trade Organization, dropped by 32 percent. The top-performing regional market was Malaysia, which lost just 17 percent of its capitalization. Indonesia, Asia,s worst-performing marketplace, nosedived by 63 percent.
The rankings for Institutional Investor’s eighth annual Asia Research Team reflect the growing importance of tracking Asia’s biggest TMT companies. (Please note that we have separated the Asia Research Team and the All-Japan Research Team to provide fuller treatment for both; the All-Japan Team appeared last month.) The largest U.S. and European firms, able to draw on analysts in virtually every market of the world, dominate the rankings. Merrill Lynch, with an amply staffed research team of 80, maintains its top ranking for the third year running; though, with 23 team positions, its lead narrows substantially. Climbing one place to No. 2 is UBS Warburg (formerly Warburg Dillon Read), with 20 ranked teams; Credit Suisse First Boston, strengthened by seven Asia analysts picked up through its November merger with Donaldson, Lufkin & Jenrette, advances three spots to No. 3. Close behind comes Morgan Stanley, which rises two notches to fourth. CLSA Emerging Markets repeats in fifth.
Two big surprises occurred in the rankings this year. J.P. Morgan Securities, which now incorporates Jardine Fleming Securities and Chase Securities, finishes in sixth place. A year ago Jardine Fleming, still on its own, was Asia’s No. 2 overall team. Meanwhile, Goldman Sachs, which gained three spots to reach third a year ago, drops back four places to seventh in this year’s rankings. As noted in the methodology box on page 88, Institutional Investor has changed some of the sectors included this year. The shifts could have adversely affected J.P. Morgan’s and Goldman’s rankings this year. Jardine Fleming (now a part of J.P. Morgan) had runners-up in both New Zealand and Australia a year ago, and Goldman had two second-place teams in fixed-income categories. New Zealand and Australia have been combined into one category (in which J.P. Morgan finishes first), and the fixed-income categories have been dropped (costing Goldman two of the three team positions it lost). Investors and rival brokerage firms suggest other possible reasons as well.
Branding issues as well as fallout from two mergers may help explain J.P. Morgan’s ranking. Chase Manhattan Bank announced its merger with Jardine’s parent, London-based Robert Fleming Holdings, in April of last year and with J.P. Morgan in September, ultimately combining the three operations under the J.P. Morgan name. Neither J.P. Morgan nor Chase had a significant equity research presence in Asia. Predictably, in the wake of the reshuffling, some of Jardine Fleming,s well-respected Asia team of 14 economists and 85 research analysts left the firm. In June Jardine,s Taiwan research head, Mark Baughan (a runner-up in Taiwan in 2000), moved to Deutsche Bank to lead its Hong Kong,based technology research. Andrew Houston, Jardine Fleming’s former research chief who now heads J.P. Morgan’s Asia research, says it looked briefly as if Baughan had taken his entire Taiwan research team with him. “After I had a chance to talk to the team, they decided to return,” he notes. However, Houston did lose his South Korea research chief, Eugene Chung (a third-teamer a year ago), and two South Korea analysts, who joined dot-coms.
Goldman Sachs, descent in the rankings may partly reflect the firm’s relatively late entry into South Korea and Taiwan, whose markets have proved attractive to tech-hungry investors, say rivals. Although firms like UBS Warburg have been active in these countries for a decade, Goldman stationed its first analyst in Taiwan only last October. The brokerage house opened an office in Seoul with a single researcher in 1999, adding two more analysts last year. Others have suggested that Goldman has suffered as well for its aggressive pursuit of technology IPOs, an area where many investors have been burned in the past year. Goldman was the top book runner in IPOs, many of them tech-related, for the Asia-Pacific region in 2000. Barry Mannis, co,chief operating officer of global research for Goldman Sachs, defends his group’s IPO activity: “We had Internet-driven IPO stories last year, which are now trading below their issuing prices just like the majority of Internet IPOs done last year by any firm.” Each transaction, he notes, was completed because “our analysts were enthusiastic about the business model.”
With bases now in South Korea and Taiwan, where more than 70 percent of each market is technology names, Goldman plans to make up for lost time. Mannis says, “In every part of what we do , sales, trading, investment banking, research , we are aggressively looking to expand in Korea and Taiwan, two very large markets where our presence historically has been smaller.” The hires are part of a broader technology push: Goldman more than doubled its Asia TMT staff to 15 last year and will be adding two more analysts in 2001.
The additional staffing by Goldman and others in Taiwan and South Korea reflects the growing stature of both markets. Hong Kong remains the king of market cap in Asia: At $615 billion at year-end 2000, its capitalization was more than twice that of either Taiwan or South Korea. But each country’s turnover significantly outpaced Hong Kong,s: Last year $984 billion in equities changed hands in Taiwan; $558 billion did so in South Korea. Hong Kong’s turnover, by comparison, was just $392 billion. The frenzied pace of trading in these markets generates commissions, which in turn help fund equity research. As UBS Warburg Asia research chief Oertli notes: “We had the best year ever in Korea and Taiwan in 2000 , even though South Korean and Taiwanese stocks dropped significantly.”
He’s not alone in that assessment: “You have to have a strong presence in Korea and Taiwan, which are the major revenue generators,” says Hun Soo Kim, Merrill Lynch’s head of Asia-Pacific research. “Korea is the largest equity commission market of all Asia. If you are not doing well there, how are you making money?” Hong Kong, says Morgan Stanley’s head of Asia research, Vineet Nagrani, has always been the major market for Asia, but South Korea and Taiwan are starting to emerge as rivals. As a result, brokerage firms simply have to be there.
Projections of future growth in Asia’s TMT sectors , together with the horrid performance of many Internet stocks last year , have reversed one recent trend: Analysts who decamped to Web start-ups have been slinking back to investment banks. Dylan Tinker, a telecoms analyst, left Deutsche Bank last March to lead Hong Kong,based financial portal Quamnet.com as chief operating officer. By November he was back researching telecoms , this time for UBS Warburg. Andrew Brown, who nearly left his research spot at Deutsche Bank to join Quamnet, had a similar change of heart. “After the nosedive in [Hong Kong,s] GEM [Growth Enterprise Market], I got spooked,” Brown says. Eschewing the dot-com, he joined Morgan Stanley in July as head of its Asia regional banking team, which finishes first this year.
Although research directors have focused most of their energy on the Taiwanese and South Korean markets, their attention may now be shifting to China. In the year ahead China is expected to open more of its markets to foreign investors, to continue its string of giant IPOs from state-owned companies and to enjoy GDP growth of roughly 7 percent, the best in Asia. In 2000 China raised $21 billion in equity in the international capital markets, also tops among its neighbors. This year it is expected to raise $25 billion to $30 billion, including a $4 billion-to-$5 billion offering by Bank of China’s Hong Kong unit and an $8 billion-to-$10 billion IPO by China Telecommunications Corp., China’s dominant fixed-line telecoms operator.
And still more deals are in the pipeline. In March the government announced a plan to restructure and list overseas 35 to 50 state-owned companies. “China continues to be in the spotlight because of the primary market, IPOs and Beijing’s expected entry into the WTO,” says Oertli.
Most research executives believe placing a lot of analysts in Beijing or Shanghai to cover China,s volatile markets would be premature, particularly because the quality of information companies provide is so poor. Instead, they continue to rely on analysts based in Hong Kong. But brokerages are hiring China specialists. “China is very important for us, and will be very important for us,” says Nicolai Holt, director of Asia research for CLSA Emerging Markets. CLSA, with nine analysts plus one research head for China, last year hired former U.S. State Department economics officer Andrew Rothman as its China strategist, moving him to Beijing in February. UBS Warburg has stationed a senior analyst, Henry Wu , covering autos, infrastructure and hardware , in Shanghai and dispatched a junior analyst to Beijing. While conducting all its China-related operations from Hong Kong, Merrill Lynch now has six China analysts as well as 12 sectoral researchers covering Chinese companies. “We do focus a lot on China research. There are multibillion-dollar companies that have a good long-term future post-WTO,” says Merrill’s Kim.
The emphasis on northern countries like China, South Korea and Taiwan raises questions about the future of Southeast Asian markets. With few technology companies and an assortment of political and economic woes, will this region fall off the investment map? No one is looking for them to rebound anytime soon. “These markets are not toxic waste, but they are bear markets. We are not keen on them,” says CLSA’s Holt. Until countries like Indonesia and the Philippines show some signs of recovery, says Merrill’s Kim, they are likely to remain in the background. There are selected technology plays available in South Asia. India, with its strong software industry, remains a focus of attention. UBS Warburg added two analysts there last year and strengthened its sales force in anticipation of additional investor interest.
In mid-April of this year, investment banks, heavy bet on Asia technology looked more promising. Though the region’s stocks as a whole fell by 2.5 percent in the first quarter, tech shares rose about 15 percent. “The market has already discounted tech stocks, weak world growth and high inventory levels,” says Morgan Stanley’s Ajay Kapur, the first-teamer in Equity Strategy. “Now investors are looking forward to a pickup in the second half.” No doubt, technology analysts and research directors would like to see that, too.
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The 2001 Asia Research Team ranking results are now available in the Research & Rankings section of this site.
