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THE
R. O. C.
TAIWAN FUND
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Quarterly Report
September 30, 1996
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Dear Stockholders
The net asset value per share of The R.O.C. Taiwan Fund declined 1.7% in the
third quarter compared with a fall of 0.8% in the Taiwan Stock Exchange Index
(TAIEX). The change in value of the New Taiwan dollar was negligible,
appreciating only 0.1% against the U.S. dollar during the period.
Given the sharp rise in the second quarter when the TAIEX gained more than 30%,
the market was due for a correction. This came swiftly in the first half of July
with a 9% drop in the Index as a large sell-off by foreign institutions was
followed with profit-taking from Taiwan's legions of retail investors. From that
point, the market managed to regain most of the early July loss by the end of
the third quarter.
The only significant retreat from the slow upward climb came in mid-August with
a 5% decline in the four trading days after President Lee Teng-hui's call for
restraint on Taiwan's investment in China. This was sandwiched in between two
market-boosting moves by the central bank. After first reducing its discount
rate, the central bank in late August lowered bank reserve requirements for the
fifth time in a little more than a year.
From September 2, Taiwan was also added to three Morgan Stanley Capital
International indices--widely used by international institutional investors in
allocating assets and as performance yardsticks. This was accompanied by a
reversal of the early July situation. Foreign institutions were big net buyers,
and approvals of new foreign investment surged in September to a record high.
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Following second quarter growth of 5.4%, lower than the 6.1% official forecast
but up from the revised first quarter rate of 5.1%, the economy was projected to
advance 6.1% in the most recent period. The government has also lowered its
forecast for the full year from 6.2% to 5.9%.
This latest revision reflects a slowdown in export expansion as well as weaker
private investment. Growth in Taiwan's merchandise exports--the equivalent of
about 40% of gross national product--has slowed each of the last four quarters.
In the most recent period, it was less than 1%. As a result, third quarter
economic growth may not have reached the government's 6.1% target. What's more,
private investment actually declined in the second quarter, the first such
contraction in five years. The economy was not helped by recent government
efforts to limit the thrust of Taiwan companies into China, where they have
already invested an estimated $20 billion for their future growth.
Still, we expect economic growth in the third quarter to have improved over the
performance in the first half of the year. This is part of what we believe has
been a slow recovery, which will continue to be supported by the central bank's
loose monetary policy in promoting a low interest rate environment. There are
also positive signs that economic growth will accelerate in the final quarter of
the year. Overseas orders received by Taiwan manufacturers--the best indicator
of future foreign demand--reached record-high levels in the last two months of
the third quarter. This strongly suggests that the pace of export growth should
pick up in the last three months of the year, providing a boost to the whole
economy.
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We will maintain our investment strategy of a highly diversified portfolio to
give investors country exposure. Major holdings will be concentrated in stocks
of companies included in the MSCI indices. To provide added value, we will also
have about 5% of assets invested in Taiwan's rapidly expanding OTC market as
well as target some small-cap issues with excellent growth potential.
In the fourth quarter, our focus will be on small-cap companies producing
computer peripherals that have a leading market position or special market
niche. This emphasis is a result of the recent rally in Nasdaq high-tech shares
and the strong demand for computer peripherals.
We appreciate your support and look forward to discussing our market outlook and
investment strategy with you in future reports.
Respectively submitted,
/s/ Daniel Chiang
Daniel Chiang
President
October 28, 1996
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Portfolio Highlights
Three Months Ended September 30, 1996
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Key Statistics
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Change in N.A.V. ($10.87 to $10.68) -$0.19
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Total Net Assets $361.2 Million
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Security Classification
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Value
Percent of Net Assets (000)
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Common Stocks 91.58% $330,758
Short-term Investments 9.16 33,075
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Total Investments 100.74 363,833
Other Assets Less Liabilities -0.74 -2,652
Net Assets 100.00% $361,181
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Ten Largest Holdings
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Percent of
Company Net Assets
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Cathay Life Insurance Co. 5.62%
Hua Nan Commercial Bank 4.20
First Commercial Bank 3.64
Chang Hwa Commercial Bank 3.40
Chinatrust Commercial Bank 2.72
China Steel Corp 2.63
Taiwan Cement Corp. 2.56
Hon Hai Precision Industry Co. 2.44
President Enterprise Corp. 2.24
Compal Electronics Inc. 2.20
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Industry Diversification
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Percent of
Ten Largest Sectors Net Assets
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Banking 17.70%
Electronics 16.84
Other Financials 8.86
Plastics 6.31
Construction 5.76
Textiles 5.62
Electrical & Machinery 5.55
Food 4.04
Steel & Other Metals 3.65
Chemical 3.39
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THE R.O.C. TAIWAN FUND
Manager:
International Investment Trust Company Limited
17th Floor
167 Fuhsing North Road
Taipei, Taiwan, Republic of China
Telephone: (886) 2-713-7702
Fax: 886-2-717-3077
Officers and Trustees:
Theodore S. S. Cheng, Chairman and Trustee
Daniel Chiang, President and Chief Executive
Officer, Trustee, and Fund Manager
Raymund A. Kathe, Trustee and Audit Committee
Member
Pedro-Pablo Kuczynski, Trustee
David N. Laux, Trustee and Audit Committee
Member
Alfred F. Miossi, Trustee and Audit Committee
Member
Li-Yin Kung, Trustee and Audit Committee
Member
Gregory Kuo-Hua Wang, Trustee
James M. Wang, Chief Financial Officer,
Treasurer, and Secretary
Custodian:
Central Trust of China
49 Wuchang Street, Sec. 1
Taipei, Taiwan
Republic of China
Transfer Agent and U.S. Custodian,
Paying and Plan Agent:
State Street Bank and Trust Co.
P.O. Box 8200
Boston, Massachusetts 02266-8200
U.S.A.
U.S. Administrator:
Dewe Rogerson Inc
850 Third Avenue
New York, NY 10022
U.S.A.
Telephone: (212) 688-6840
U.S. Legal Counsel
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Telephone: (212) 373-3000
For information on the Fund, including the NAV,
please call toll free 1-800-343-9567.
