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Private equity firms eye Taiwan’s services sector

Posted on: June 16, 2009

Reuters – Wednesday, June 17

* Bet on retail, tourism sectors

* Margins, competition make Taiwan banks less attractive

* Improving ties with China to help

By Lee Chyen Yee

TAIPEI, June 16 – Private equity firms are eager to invest in Taiwan’s services industry, such as the retail and tourism sectors, as better ties with China give a shot in the arm to the island’s economy, executives said on Tuesday.

But some private equity companies are more cautious of putting huge bets on companies in Taiwan’s banking sector, Asia’s fourth largest, due to narrow margins and stiff competition stemming from too many players.

“In terms of investment value, I’m positive about Taiwan’s services industry,” said Yichen Zhang, chief executive of CITIC Capital, which manages $2 billion of funds and is the investment arm of China’s largest financial conglomerate CITIC Group.

“Taiwan’s services sector is quite wholesome in terms of having the right people with the right mentality and its close relations with China. Overall, it’s better than Hong Kong,” Zhang told reporters on the sidelines of a private equity forum.

Top negotiators from Taiwan and China have signed a flurry of deals over the past year to allow more Chinese tourists to visit the island and expand transportation links, with the sentiment fuelling a rally in Taiwan’s markets.

The TAIEX <.TWII> index has gained over a third since the beginning of this year, outperforming regional peers such as South Korea’s KOSPI <.KS11> and Hong Kong’s Hang Seng <.HSI>.

Paul Yang, chief investment officer of Taiwan’s China Development Financial <2883.TW>, saw good growth in Taiwan’s tourism, medical and retail sectors.

“Taiwan has to rely on services for growth in its economy,” Yang said.

Some executives see investment potential in Taiwan’s financial sector, as private equity firms could invest in the island’s lenders and improve their services and management, then sell to Chinese banks in future when regulations allow.

But others, such as Zhang, are more cautious, as the island has nearly 40 banks serving 23 million people, which is crowded compared to South Korea, which has half the number of banks with twice the population.

The return-on-assets of Taiwan’s banks will likely be negative 0.5 percent this year, the worst in Asia, due to razor-thin margins and an expected increase in bad debt, analysts at Fitch Ratings said.

“If you look at some foreign private equity firms that invested in Taiwan banks, how many of them are actually making money?” Zhang asked.

Private equity firms such as Carlyle Group [CYL.UL], Longreach and Newbridge [NB.UL] have bought into small troubled Taiwan banks over the past few years.

(Additional reporting by Rachel Lee; Editing by Rupert Winchester)


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