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THE
R. O. C.
TAIWAN FUND
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Quarterly Report
March 31, 1998
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Dear Stockholder:
The net asset value per share (NAV) of The R.O.C. Taiwan Fund gained 8.8% in the
first quarter compared with an 11.0% rise in the Taiwan Stock Exchange Index
(TAIEX). During the period, the New Taiwan dollar depreciated 0.6% against the
U.S. dollar.
A rally in electronics stocks lifted the market in the first quarter after it
got off to a bumpy start. The initial weakness came on worries in the first few
weeks of January that a renewed outbreak of the financial problems plaguing the
region since mid-1997 would spill over into Taiwan. These early concerns were
soon overcome as investor attention focused on technology stocks in the belief
that these companies would continue to enjoy strong earnings growth.
This rally was fed by record-high buying levels on the part of foreign
institutional investors and reports by several electronics companies of
better-than-expected 1997 results. In addition, after banks started raising
interest rates in early February, the central bank eased credit and rates
thereafter were scaled back.
The market weakened somewhat toward the end of the period. Warnings early in
March of disappointing first quarter earnings by major U.S. technology companies
Intel and Compaq sapped the strength of the rally in stocks of electronics
firms, which rely on the U.S. for most of their revenue. Still, Taiwan's
electronics and semiconductor stocks--which make up about a third of market
capitalization--gained almost 35% for the whole quarter.
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Also worrying investors was the economic impact of the Asian financial turmoil.
As demand from Southeast Asia and Japan plunged and prices in many traditional
industries ranging from toys to textiles dropped, Taiwan's exports in the first
three months of the year fell 6% compared to the official forecast of a 2%
increase. This first quarterly decline in exports in almost eight years was
offset in part by solid economic performance in other areas. For one thing,
investment appeared to be strong as indicated by the 33% increase in capital
goods imports. Also, consumer spending received a boost from the buoyant stock
market.
While the government forecast of 6.2% first quarter growth was most likely not
achieved, the economy fared well under the circumstances. What's more, it may
still reach a respectable level of about 6% growth the rest of the year--barring
any further significant weakening in regional demand. And, despite earlier
predictions of a pick-up in inflation resulting from the 16% currency
depreciation last year, the consumer price index inched up less than 2% in the
first quarter. The absence of any serious signs of inflationary pressure gives
the central bank the power to provide a favorable investment climate by keeping
interest rates low.
For much of the first quarter, the Fund was overweight in electronics and
semiconductor stocks. The prospects for Taiwan's technology companies in the
near-term future, however, are somewhat clouded by a couple of factors. First,
the impact on Taiwan's electronics industry of the growing popularity of the
sub-$1,000 PC is still unclear. In addition, several Taiwan semiconductor makers
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face possible punitive tariffs in the U.S. after an initial ruling under U.S.
"dumping" laws determined that their practices had hurt American manufacturers.
As a result of these developments, we have adopted a more cautious approach to
technology stocks going into the second quarter. Our underweighting of these
stocks may be adjusted once the outlook for the industry becomes clearer. In the
meantime, the Fund will seek to enhance performance with a focus on mid-cap
stocks based on our expectation that liquidity will not be as ample as in the
first quarter. In this market environment, such stocks should have more room to
advance compared to blue chips.
We greatly appreciate your support and look forward to reviewing our market
outlook and investment strategy with you in future reports.
Respectfully submitted,
/s/ Daniel Chiang
Daniel Chiang
President
May 6, 1998
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Portfolio Highlights
Three Months Ended March 31, 1998
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Key Statistics
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Change in N.A.V. ($9.58 to $10.42) $0.84
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Total Net Assets $340.8 Million
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Security Classification
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Value
Percent of Net Assets (000)
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Common Stocks 92.89% $316,575
Short-term Investments 7.72 26,329
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Total Investments 100.61 342,904
Liabilities Less Other Assets (0.61) (2,085)
Net Assets 100.00% $340,819
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Ten Largest Holdings
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Percent of
Company Net Assets
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Yulon Motor Co. 5.47%
China Motor Corp. 4.28
Taiwan Semiconductor Manufacturing Co. 3.78
Far Eastern Textile Ltd. 3.25
China Development Corp. 3.23
Nan Ya Plastics Corp. 3.07
Hung Sheng Construction Ltd. 2.86
Formosa Plastics Corp. 2.82
Phoenixtec Power Co. 2.46
Compal Electronics Inc. 2.29
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Industry Diversification
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Percent of
Ten Largest Sectors Net Assets
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Electronics 19.65%
Semiconductors 12.36
Automobile 9.75
Banking 9.08
Other Financials 6.60
Plastics 6.19
Textiles 6.16
Construction 5.70
Electrical & Machinery 5.51
Steel & Other Metals 2.26
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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) 2-2713-7702
Fax: 886-2-2717-3077
Officers and Trustees:
Theodore S. S. Cheng, Chairman and Trustee
Daniel Chiang, President and Chief Executive
Officer, Trustee, and Fund Manager
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, Paying and Plan Agent:
State Street Bank and Trust Co.
P.O. Box 8200
Boston, Massachusetts 02266-8200
U.S.A.
Telephone: 800-426-5523
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.
