Overprice of Corporations & Overpay of Executives in Taiwan?

Overprice of Corporations & Overpay of Executives in Taiwan?

- Blog by Steve Hwang

I wrote an article in March- “Where is my money? A salary crisis for majority class in Taiwan” and suggested a solution of minimum and competitive salary and wage. However, management in corporations and government policy makers had argued that raising wage will hurt business competitiveness and force corporations leave Taiwan for low labor cost countries.

Personally, I don’t agree with such notion that a competitive wage will hurt business environment in Taiwan, rather I believe it will attract more talents and accelerate business transition from manufacturing to concept & R&D oriented model as suggested by Stan Shi in his widely touted concept of “Smile Curve”.

Let’s look at comparison of Gross Margin among different companies. Gross Margin is the difference between the sales and the production costs.

Gross Margin Percentage = (Revenue-Cost of goods sold)/Revenue

Gross margin is a good indication of how profitable a company is at the most fundamental level.

(Gross Margin%) Dell: = 17%; Google:=63.8%; Apple: =42%; Microsoft: =81%; CISCO: =63%; Intel: =63%; IBM:= 48%; HP: =25.7%; Seagate:=25-35%

TSMC台積電:= 47.7%; Acer宏碁: =9.7%; Hon Hai富士康: =7-8%; Compal 仁寶電腦: = 4%; Wistron:= 5.2%; Qanta廣達電腦: =4%; AUO 友達光電: =12.8%

When taking a closer look at gross margin, you can find that companies in Taiwan, other than TSMC, have a gross margin range of 5-10% that are 20-50 points lower than those renowned companies in USA. A world class company can’t operate in 5-10% gross margin business model because it could not pay decent wage to employees and can’t spend sufficient funding in R&D.

Then, let’s look at Price/Earning (P/E) ratio. P/E ratio is defined as a valuation ratio of a company's current stock price compared to its per-share earnings.

(P/E) ratio: Stock Price per Share/ Earnings per Share.

For example, if a company stock is currently trading at $20 a share and earning over the last 12 months were $2.00 per share, the P/E ratio for the stock would be 10 ($20/$2).

In other words, the P/E ratio is how much money you are paying for $1 of the company's earnings. If the P/E ratio of company is 10, you are paying stock price for ten times of its earning.

So by comparing price and earnings per share for a company or country, we can analyze the market's stock valuation of a company or country and its shares relative to the profit the company is actually generating.

Let’s look at P/E ratios by country from 2009 data

(P/E Ratio):
Taiwan: P/E= 60; United Kingdom= 34; China= 29; South Korea= 29; Germany= 27; Switzerland= 26; Australia= 23; Brazil= 20; Malaysia= 18; Hong-Kong = 16; India= 15; Mexico= 15; USA=14; Canada=13; Singapore=12; France=11; Italy= 10; Russia=6.

Companies listed in stock exchange in Taiwan have an average of P/E ratio = 60, that is two times higher than main competitor, South Korea, and 3-4 times higher than other competitive countries, Hong-Kong and Singapore.

While comparing to well-established stock market in USA, they have a rational P/E ratio of 13-15. It means that stock investors in Taiwan pay stock price of 3-4 times higher than for the companies in USA.

What a P/E ratio of 60 means! It means that companies in Taiwan are overvalued and executives who are compensated by common stocks are overpaid by 2-4 times or more as compared to other countries.

It doesn't makes any sense that companies and executives in Taiwan are overly compensated by hefty company value and stock price while majority of workers can’t receive a competitive salary and wage.

Above is my thought. What’s yours?