In a pre-event interview with DIGITIMES, Quantum International Corp. (QIC) founder and CEO Alex Lee shared his insights on the triple forces boosting the growth of Taiwan after the US-China Trade War and the COVID-19 pandemic. He also made an impressive prediction on the new digital economy of Taiwan in the next 10 years.
Lee will be a panel speaker in an online forum, Asia Venturing (V): Capital Market is Flat, co-powered by Anchor Taiwan and DIGITIMES, along with Duncan Davidson, founder and general partner of Bullpen Capital and the moderator, Sonia Sun, senior counsel at KPMG.
Q: Most of the listed companies in Taiwan are hardware manufacturers. However, the valuations of hardware companies are much lower than software ones. What should those hardware companies do to get their deserved recognition from international investors?
More than 80% of the public companies in Taiwan are manufacturers, whose operations were defined by capacity, capital expenditure and cashflows. And of course, how much they can sell is determined by the orders of the customers. However, those orders become more and more concentrated in a few global tech giants, so their growth potential became very predictable in the eyes of securities researchers. That restricted those companies' ability to make long-term growth projection propositions.
However, their clients who focused on inventing new technologies and developing new products were given higher valuation by global markets. Those manufacturers that realized the clients' visions, on the other hand, saw their valuations lagging far behind due to a lack of abilities to define their true value, and the gap was getting bigger and bigger.
Now, two things happened during the Trade War and the pandemic. The world woke up to the fact that the supply chain infrastructures and inventories basically are all located in Asia. As they realized they have been too obsessed with the software sector and return-on-equity (ROE) in the past, so they started readjusting the valuation of hardware manufacturers.
On the other hand, the new economy of digital technologies in Asia is also emerging. QIC is using the western methodology to help new economy companies to do strategic communications and elaborate on their long-term developments.
You see, there are two forces bolstering the economy of Taiwan right now. On one hand, the importance of hardware manufacturers is getting rediscovered by their international customers during the supply chain relocation; and on the other hand, capital and talents returned to Taiwan to join the new economy industries.
We are also seeing another trend, the old economy and the new economy are increasingly in sync to create new momentums. This is something that Taiwan has not seen over the past decades.
A diversified ecosystem of enterprises in Taiwan will bring in new opportunities: there are old economy firms generating stable dividend cashflows, some are manufacturing companies on the growth mode, and there are new economy startups tapping the capital market. Different business models of old and new economies, online and offline, would interact and stimulate each other to innovate.
Q: You recently made a statement on your LinkedIn page – "in 2031, Taiwan will have more than 100 new economy type of companies listing, of which 10 companies will be over US$10 billion and 20 companies over $1 billion market capitalization. Then you will therefore call 2021, the beginning of Taiwan's new economy." What insights and facts were behind this statement, and what needs to be done to realize that vision?
Well, I think I am still being too conservative. Taiwan's new economy is seriously under-estimated.
Right now, there are 50 software or non-hardware public companies listed in the Taiwan market. We can categorize them as the new economy. Take ecommerce website MOMO as an example, its market cap has reached $14 billion, and according to a news report, it is one of the bidders to acquire Carrefour's operations in Taiwan. Currently, the percentage of a new economy in the capital market in Taiwan is less than 2%, far lower than the 10% of South Korea and Japan. Now with consumers' behavior-changing after the pandemic, it is highly likely for the size of Taiwan's new economy to grow three-fold in the next 10 years.
We at QIC aspire to connect those new economy companies with international investors as soon as possible so that their true value will be recognized by the global markets.
Q: With the globalization of the capital market, international standards such as ESG have been introduced to Taiwan, too. More and more supply chain companies are now aware of the importance of ESG. How would you suggest they communicate with global investors on their efforts in ESG?
When money moves around the globe, ESG is a benchmark that best evaluates the sustainability of a company. The governance issues regarding the behavior of the management are much more important than cashflows. Environment issues are especially relevant to the supply chain companies in Taiwan because they will get pressure from their customers and stakeholders if they fail to comply. They may lose their orders if they fail to meet the international environmental protection standards. They will regret it if they don't take ESG seriously.
I would advise companies to present their efforts according to global ESG standards and provide an ESG proposition closely knitted with the long-term development plans of the company. They need to tell investors how they are going to reach those goals step by step. So far not many companies have done that.
Q: Recently Gogoro has just announced to go public via SPAC. Corporate ventures can also use SPAC to accelerate their acquisitions. Meanwhile, some firms are going overseas to set up their factories there. Would you suggest they issue deposit receipts or do another IPO overseas to get funding and communicate with investors there?
SPAC is only one of the tools for fund-raising, and so far most of the SPACs are listed in the US. When deciding on where and how to do fund-raising, I think companies should take their own specialties and long-term development objectives into consideration.
TSMC used to get a 30% premium when it issued ADR some twenty years ago, but there is no premium now anymore. It is difficult for companies to get cheaper money overseas. Is it still necessary to go IPO in the US? The capital market is already very globalized, or "flat", so we should not use old Economy mentalities to look at these funding tools. When capital and talents have all returned to Taiwan, it would make more sense for us to make our capital market more efficient and international.
I would suggest all startups to bear in mind that no matter how they raise their funds, the objective is not to make more money for shareholders but to get more efficient and cheaper funds to sustain growth and expansion. Secondly, is the ownership getting appropriate protections?
The new economy companies especially need protections as such because their business models are different from the old economy firms. They do not focus on generating positive cash flow right at the beginning, so they need to raise rounds after rounds of capital to refine their products and build strong value chains. But during that process, their shareholding might get diluted, and are susceptible to takeovers by capitalists. Without sufficient control over the company, the founder's ability to manage will be limited.
To create corporate value and sustainability of a company, sufficient protection over founder's equity is necessary. And international investors are more advanced on governance issues such as using dual voting rights to support the right management. Taiwan is one of the few countries that do not have laws to protect founders' equity. While more and more new economy firms are born each day, Taiwan should consider revising its corporate law to adopt a dual shareholder voting right system, to give founders sufficient protection of their voting rights.
Alex Lee's Bio:
Alex Lee is the CEO and founder of Quantum International Corporation (QIC), the first Taiwan-based independent financial advisory firm specializing in capital market solutions for all middle-market firms in Greater China. Since founding the firm in 2012, Alex and his team of experienced advisors have worked as the pioneers to connect numerous innovative companies to global investors via the most creative equity capital market structures. QIC has been considered the largest dedicated ECM house in Taiwan's middle market. QIC is also hosting 5,000 investor conferences through its signature event, Taiwan CEO Week, which has enabled more than 200 Taiwan public and private companies to be discovered by 5,000 global investors every year.
Alex has over 30 years of leadership experience in investment banking and equities. As CEO of Yuanta Securities, he grew the firm from the largest Taiwan local broker into a regional investment bank and led Yuanta to become the very first Taiwan-based regional investment bank with leading positions in all league tables. In his roles as country managers for Deutsche Bank and CSFB, Alex has involved or led many primary deals including a landmark US$ 1 BN UMC ADR, US$500 MN First FHC GDR deal, US$400 MN Powerchip GDR/CB, US$200mn SIMO IPO, and a US$350mn private ECB for Taiwan high-speed railroad.
(Editor's note: Asia Venturing is a series of monthly roundtables with roadmaps to the future focusing on the hype v.s. the reality of Asia's supply chain-boosted innovation ecosystem, jointly powered by DIGITIMES and Anchor Taiwan. We bring together leading industry luminaries, corporate strategists, experienced investors, and entrepreneurs to expand your network and redefine the possibilities of cross-border opportunities. The replay of the latest session can be seen on DIGITIMES or Anchor Taiwan)