Date
23 September 2018
Media and analysts often get bullish on certain shares only after the stocks have already staged a sharp rally, not when they were still cheap. Photo: Reuters
Media and analysts often get bullish on certain shares only after the stocks have already staged a sharp rally, not when they were still cheap. Photo: Reuters

What investors can learn from this hugely volatile Taiwan stock

After a dramatic climb from NT$353 at the beginning of this year to NT$1,310 in early July, Taiwan-based passive components manufacturer Yageo Corp saw its share price fall back to around NT$650 recently.

Volatility is nothing new in the stock market. But the comments of Yageo’s chairman and confusing media reports are what make Yageo an interesting case that illustrates the risk of blindly following management guidance and media comments.

The emergence of Alpha Go two years ago has suddenly turned the spotlight on artificial intelligence (AI), sparking interest in manufacturers of GPU and DRAM chipsets, as well as passive components makers.

That definitely was a boon for the Taiwanese firm Yageo, which saw its share price spike more than 20-fold from the end-2016 level of around NT$60.

Yageo’s chairman Chen Taiming made two public appearances this year. At a shareholder meeting on June 5, he said the supply gap in multi-layer ceramic capacitors will extend to 2019. That raised investors’ expectation, and the share price surged further.

The second appearance was in a meeting held on August 8, when Yageo’s share price had already slumped one third from the peak level.

Chen assured that “the market conditions are even more positive from June”, and he reaffirmed that the supply shortage would stay for a long time.

However, the company’s stock price kept falling until stabilizing at NT$600 in the middle of August.

Investors who listened to Chen and bought shares would have suffered deep losses.

Meanwhile, misleading media reports about share purchases by Chen and a senior executive surnamed Zhang added to the woes. According to some media outlets, Zhang “spent NT$1.28 billion to buy shares, reflecting the optimistic view on Yageo.”

The truth, however, was that those shares only cost Zhang NT$70 million, because she was acquiring them by exercising options.

Stock options are very common among tech firms. The exercise price of the options is often way below market level.

Ironically, Chen’s ex-wife sold a chunk of Yageo shares at around NT$1,000, pocketing NT$12 billion.

The series of incidents suggest a few things investors should bear in mind.

First, retail investors have no edge at all in investing in highly cyclical and complex industries.

Second, media and analysts often get bullish on certain shares only after the stocks have already staged a sharp rally, not when they were still cheap.

Third, when senior management buys shares, make sure to check out if they are just exercising options.

Lastly, for firms like Yageo, which do not have strong entry barrier due to the relatively low technology, they may gain from temporary supply shortage.

But when supply catches up, which would certainly happen when new makers join the competition or existing makers ramp up capacity, the supply-demand gap is set to close sooner or later. And the temporary bump in product price as well as share price would be gone.

This article appeared in the Hong Kong Economic Journal on Sept 3

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Columnist at the Hong Kong Economic Journal

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