The relatively low turnover in Taiwan's stock market will likely be a challenge for the island's plan to create two new trading venues aimed at getting high-growth but not-yet-profitable startups to list locally, expert say.
According to the plan announced late 2020, the Taiwan Innovation Board, to be operated by Taiwan Stock Exchange Corp. that also runs the island's main board, will no longer impose profit requirements on listing applicants. The new venue, which targets more sizable startups, will assess applications based on working capital or annual revenue in relation to their market capitalization.
Another venue, the Strategic Board, will be run by Taipei Exchange, the island's other stock-market operator. The over-the-counter trading platform will have no listing requirements as long as the applicants belong to any of the six target industries: Internet of Things, artificial intelligence, information security, biotech applications, national defense and renewable energy development.
While the market in general applauds the move to allow more companies eligible for domestic listings, the attractiveness of a Taiwan listing, even for homegrown startups, might still be dwarfed by its neighboring markets. In 2020, the annual turnover of cash equity on Taiwan's main board totaled US$1.756 trillion, which was 42% of the volume on Hong Kong's main board, or 14% in Shanghai.
"Liquidity is thin in Taiwan's exchange boards compared with other major Asian markets," said Bruce Pang, the head of macro and strategy research at China Renaissance Securities. The liquidity shortage exposes companies to the risks of lower valuation levels and vagaries of market sentiment and reduces "incentives of becoming listed, not only for existing market, but also for the proposed new boards."
Unlikely a game changer
In Taiwan, trading activity tends to concentrate on several very large companies such as TSMC and Hon Hai, which is a "rather large limitation for the smaller existing exchange boards", said Gary Ng, an economist at Natixis.
"A reasonably well-known firm can probably get a much higher valuation in Hong Kong and Shanghai," Ng said. "Comparing with Asian peers, it is unlikely that Taiwan's new boards can challenge other markets in the short run."
The government should increase the incentives for investors, such as tax rebates or lower transaction costs, to boost liquidity, he added.
"A gradual and mild relaxation of capital controls will also be helpful to allow easier access of foreign individuals to enter the market and funds to create more related products," he said.
China Renaissance's Pang said that Taiwan's relatively smaller population size, when compared with mainland China, the U.S., Japan, and South Korea, translates to a limited scale of market, data, and talent for tech platforms and as a result, a challenging environment for the local startups.
"To herd investments into next-generation industries and emerging fields, Taiwan needs to provide a flexible labor market and more friendly business environment to embrace overseas high-end talents and overseas investors," he said.
Helps groom startup scene
Creating two instead of one single board for startups "could help Taiwan to establish a multi-layered equity market that serves the needs of a wide range of companies at different developmental states in a variety of sectors," Pang said. "The landscape among different financing platforms in Taiwan's capital market will then be both complementary and competitive."
Kenny Hong, the audit and assurance business leader of Deloitte Taiwan, agreed that the multi-layer capital market framework could help startups raise capital in segments best suited to their needs.
"Both new boards only [will] allow professional investors to trade," he said. "Therefore, the Taiwan regulators set market cap requirements or recommendations from securities brokers, instead of reviewing profit or years of establishment."
Taiwan's regulators have also approved a "relatively simple" internal control review standard to allow for more flexible listing options, he added.
Although the new board may not be a game changer, it will surely widen funding channels for local companies that need a broader investor base for fund-raising.
"The new exchange boards are created to fill the missing links that the existing requirements on profits are too high for unicorns and the prohibition of secondary trading in the emerging stock market may limit capital gains," Natixis's Ng said. "Therefore, the new arrangements mean firms in innovative sectors will find it easier to tap the equity market for funding with laxer requirement on profits."