<PAGE>
THE TAIWAN EQUITY FUND, INC.
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GENERAL INFORMATION
- --------------------------------------------------------------------------------
THE FUND
The Taiwan Equity Fund, Inc. (the "Fund") is a non-diversified, closed-end
management investment company. Its primary investment objective is capital
appreciation, which it seeks through investment primarily in equity securities
issued by companies located in or deriving revenue from the Republic of China.
Daiwa Asset Management (H.K.) Ltd. is the Fund's Investment Manager. National
Capital Management Corp. of Taiwan is the Fund's Investment Adviser.
SHAREHOLDER INFORMATION
The Fund's shares are listed on the New York Stock Exchange ("NYSE") and the
Stock Exchange of Singapore ("SES"). The Fund understands that its shares may
trade periodically on certain exchanges other than the NYSE or the SES, but the
Fund has not listed its shares on those other exchanges and does not encourage
trading on those exchanges.
The Fund's NYSE trading symbol is "TYW". Weekly comparative net asset value
(NAV) and market price information about the Fund is published each Monday in
THE WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES, and each Saturday in
BARRON'S, and also in many other newspapers.
The Fund held its Annual Meeting of Shareholders on June 6, 1997 and a press
release summarizing the results of that meeting had been sent to the Fund's
registered holders shortly thereafter. If you would like to receive a copy of
that release, please contact Daiwa Securities Trust Company, the Fund's
Administrator (the "Administrator") at the number shown below.
INQUIRIES
It is the policy of the Fund to respond to inquiries about its portfolio
holdings and performance. Such inquiries should be directed to the Fund's
Manager in Hong Kong at (011-8522) 521-0166, or the Administrator at (800)
933-3440 or (201) 915-3020. Inquiries concerning your share account should be
directed to State Street Bank and Trust Company (the "Plan Agent") at the number
noted below. All written inquiries should be directed to the Fund, c/o Daiwa
Securities Trust Company, One Evertrust Plaza, 9th Floor, Jersey City, New
Jersey 07302.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
A Dividend Reinvestment and Cash Purchase Plan (the "Plan") is available to
provide Shareholders with automatic reinvestment of dividends and capital gain
distributions in additional Fund shares. The Plan also allows you to make
optional annual cash investments in the Fund's shares through the Plan Agent. A
brochure fully describing the Plan's terms and conditions is available from the
Plan Agent by calling (800) 426-5523 or by writing to State Street Bank and
Trust Company, c/o The Taiwan Equity Fund, Inc., P.O. Box 8200, Boston, MA
02266-8200.
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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July 21, 1997
DEAR SHAREHOLDERS:
We are pleased to present the Semi-Annual Report of The Taiwan Equity Fund,
Inc. (the "Fund") for the six months ended June 30, 1997.
STOCK MARKET REVIEW
The Taiwan stock market as represented by the Taiwan Weighted Index ("TWI")
rose 30.23%, from 6,934 to 9,030, during the first half of 1997. During the same
period, the New Taiwan Dollar ("TWD") depreciated against the U.S. Dollar
("USD") from TWD 27.491 to 27.812, a decline of 1.17%. Consequently, the TWI
gained 28.7% in USD terms during the period.
With good liquidity and strong momentum, and boosted by a good outlook for
the economy, the Taiwanese market rose from 6,934 at the beginning of the year
to around the 8,600 level by mid-March. Stronger-than-expected orders for
electronics, a high-tech rally in other major markets, the government's proposal
to accelerate land and infrastructure development, and the continuing inflow of
foreign funds all enhanced investor buying interest. Depsite the death of
mainland China's Deng Xiaoping in February 1997, the strong Taiwanese market
sentiment was not impacted. To cool off the overheated equity market, Taiwan's
SEC and Central Bank expressed their concern and adopted several measures,
including a slowdown in the approval of new foreign investment quotas and equity
fund applications, and the rejection of applications for rights issues filed by
listed companies. From mid-March to May, the market tried to surpass strong
resistance at the 8,700 level three times, but failed. In addition, market
momentum also weakened in early May in response to public and opposition party
protests for a cabinet reshuffling due to a rising crime rate and general
dissatisfaction with the government. As a result, the market retreated, falling
to around the 8,000 level in May. Market sentiment and momentum improved in
early June as a result of the SEC's decision to speed up approval of new equity
fund applications, good sales and order growth at several major electronics
companies, as well as new highs in the U.S. market. The TWI rose 10.6% in June
1997, to close at 9,030 on June 30th.
ECONOMIC REVIEW AND OUTLOOK
TRADE
Exports grew by 4.6% year-on-year ("YOY") in the first half of 1997, which
was less than the 8.0% YOY growth rate forecast by the government. This was
mainly due to a seasonal export slowdown of information and technology products
and a suspension of all pork exports due to the outbreak of foot-and-mouth
disease in Taiwan's hog population. The impact of this outbreak may linger for
several quarters. Export orders are an indicator of Taiwan's export performance
for the next three to five months. The average growth rate of export orders in
the first five months was 3.3% YOY. The Fund's management believes that this
figure indicates a moderate growth rate in Taiwan's exports in the second half
of 1997. Imports rose by 9.4% YOY in the same period. Compared to a decline of
1.2% YOY for the entire year of 1996, import growth improved as a result of
increased consumer spending and stronger demand for capital goods in Taiwan. The
Fund's management believes that this growth can be expected to continue to
increase moderately with domestic economic growth.
The trade surplus in the first half of 1997 was USD 5.2 billion, 37% of
1996's annual surplus. In both the near-term and short-term, Taiwan's trade
surplus is expected to shrink because of continued greater import
2
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THE TAIWAN EQUITY FUND, INC.
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growth. The Fund's management believes that the first half of the year's trade
picture supports this trend. Another adverse factor is the appreciation of the
TWD against the Japanese yen and German mark, which has reduced Taiwan's export
competitiveness.
INFLATION
The Consumer Price Index ("CPI") recorded an average increase of 1.4% YOY in
the first half of 1997, much lower than the government's tolerance limit of
2.5%. The price stability was mainly due to a plunge in food prices, driven by
lower pork prices from the foot-and-mouth disease epidemic and lower import
commodity prices. The average Wholesale Price Index (WPI) showed a decrease of
- -2.6% YOY during the same period. Declining international prices for raw
materials and the appreciation of the TWD against the Japanese yen and German
mark were major contributing factors. The Fund's management expects that
inflation will not be much of a concern in view of the figures so far this year,
and predicts that the CPI will increase by about 2.2% YOY during 1997.
EXCHANGE RATE
For the period under review, the TWD depreciated from 27.49 to 27.81 against
the USD. The TWD depreciated mainly because of heavy commercial demand for the
USD and the strength of the USD against other major currencies. Taiwan's Central
Bank made it clear that it wants to prevent a rapid depreciation of the TWD. In
spite of Taiwan's continued slow export growth, the Fund's management expects
the TWD to remain within a range of 27.8 to 29.0 against the USD in the second
half of 1997. The Central Bank may also seek to prevent a sharp appreciation of
the TWD so as not to retard Taiwan's export competitiveness and the economic
recovery.
MONEY SUPPLY, INTEREST RATES AND MONETARY POLICY
The average M1b growth rate in the first half of 1997 was 13.6% YOY with an
upward trend. M1b increased from 11.26% YOY in January 1997 to 14.5% YOY in June
1997 mainly because more funds were shifted from less attractive time deposits
to demand deposits in conjunction with the buoyant equity market. M2 growth was
more stable in the first half with an average rate of 9.6% YOY, attributed to
the slow economic recovery and a decline in lending activity. In the coming
months, the Fund's management expects M2 to remain toward the low end of the
Central Bank's 9% to 14% target growth range due to limited demand for bank
loans, slow economic recovery and the trend for borrowers to use direct
financing to obtain credit. The Fund's management expects M1b to stay at a high
level due to active turnover in the equity market.
Except for the period of the Chinese New Year in late January 1997,
short-term interest rates stayed at around 6.0% for most of the period.
Apprehensive about an overheated stock market, Taiwan's Central Bank has been
slowing the tide of capital rushing into the securities markets by conducting
open market operations to absorb excess liquidity. This caused short-term
interest rates to hit 7.2% in early April 1997. In late June of this year, as
the equity market took funds from the banking system, the overnight interbank
rate rose to double digits.
Looking forward, the Fund's management believes that short-term rates should
come down to a range of 6.0% to 7.0% under normal conditions. Recent economic
indicators suggest that the Central Bank is likely to maintain its "moderately
loose, but not too loose" monetary policy to revive the economy. The Central
Bank will also continue to monitor the level of bank reserves and capital
flowing into the equity market, and engage in open market transactions to ensure
that the stock market does not overheat. Furthermore, in the longer term, the
Central Bank may gradually adjust downward the reserve requirement ratios to
improve the competitiveness of Taiwan's banks.
3
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THE TAIWAN EQUITY FUND, INC.
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ECONOMIC GROWTH
Gross Domestic Product ("GDP") grew by 6.8% YOY in the first quarter of
1997, higher than the previous quarter's 6.6% YOY, reflecting stronger private
consumption. In addition, growth in industrial production in the first five
months of 1997 was 6.0% YOY, higher than 4.8% YOY growth experienced during the
fourth quarter of 1996. These figures indicate that Taiwan's economy is
recovering moderately. However, the foot-and-mouth disease epidemic in March had
a significant impact on the economy. The ban on the export of pork products may
hinder economic growth by 0.5%. Despite this, 1997 GDP growth is forecast to
outpace the 5.7% YOY rate of 1996, probably reaching 6.3% YOY. The Fund's
management believes that 1997 private investment will grow an estimated 10.0%,
up from 4.6% in 1996. Government investment is expected to grow an estimated
8.0%. Increasing private investment, the expedition of public infrastructure
projects and expected stronger demand from the Peoples' Republic of China
("PRC") are all major factors supporting higher growth.
POLITICAL REVIEW AND OUTLOOK
Despite the fact that direct shipping links between Taiwan and the PRC
started in late April, the impact looks minimal because the new routes are
unpopular. Taiwan and Hong Kong reached an agreement in late May concerning
post-handover transportation links. Both Taiwan and Hong Kong have acted in a
practical manner on related issues. On July 1, 1997, the world's attention was
focused on the handover of Hong Kong from Great Britain to the PRC, which
proceeded smoothly. A meeting of Taiwan's semi-official representative with Hong
Kong authorities after the handover signaled that relations will continue in a
positive manner. Therefore, it appears that any impact on Taiwan's trade and
transport links with the mainland via Hong Kong will be limited. Taipei's policy
is to maintain its separation from mainland China for the time being, at least
until the latter has demonstrated more economic and political progress. However,
the Fund's management expects that ties between the PRC and Taiwan will develop
in a practical manner and a more positive fashion in the future.
On the domestic front, the government of Taiwan acted to form a consensus
among the different political parties. An alliance seems to have evolved between
the ruling Kuomintang Party ("KMT") and the major opposition Democratic
Progressive Party (DPP) since December 1996. These two parties reached a
consensus on a number of issues regarding the simplification of the structure of
the provincial government and an amendment to the constitution waving the
legislature's right to confirm the president's nominee for premier. However, the
KMT's reputation has been seriously damaged due to the rising rate of violent
crime in Taiwan. The cabinet was partially reshuffled in May after a massive
public demonstration protesting dissatisfaction with the government. With the
completion of constitutional amendments in early July 1997, the government is
expected to become more efficient. Another extensive cabinet reshuffling is to
be finalized by early September, 1997. From that time on, domestic politics are
expected to enter a new era. The next focus will be the year-end county
commissioner elections. The Fund's management expects political uncertainty to
increase again by year's end. However, taking a long-term view, the Fund's
management is optimistic that political influence on the stock market will
generally be neutral.
STOCK MARKET OUTLOOK
The Taiwan market is trading at a price-to-earnings ratio of around 28 at
about 9,600 on the TWI. In light of expensive valuations and governmental
measures to cool the market, funds may move to cheaper stocks like
construction/property or cyclical issues. The 8,800 to 9,000 market level may be
considered good support if there is a correction. In the coming months, the
Central Bank may not tighten monetary policy because it wants the economy to
accelerate. Domestic liquidity should remain high and provide support for the
stock market. Bargain hunting for non-electronic blue chips and buying by
government-related, as well as new equity funds,
4
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THE TAIWAN EQUITY FUND, INC.
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should help support the market. The following factors bode well for the market:
(1) the Taiwanese government approved several new funds to invest in the equity
market; (2) the government will provide TWD 100 billion in low-interest funds
for housing loans in order to boost the property market; and (3) bidders paid a
large premium at a recent land auction in Taipei's prime business district,
signaling investor confidence in Taiwan's economy. In addition, in view of the
good liquidity and likely good sales and earnings growth of electronics
companies in the fourth quarter, the market may be even richer by October 1997.
However, by year's end, the Fund's management expects the market to trade in a
tight trading range due to increasing political uncertainty that will accompany
the county commissioner elections.
FUND PERFORMANCE AND STRATEGY
As of June 30, 1997, the Fund's total net assets were USD 81.8 million,
equivalent to USD 18.14 per share. Compared to USD 12.09 per share on December
31, 1996, the Fund's net asset value appreciated by 50.0%, out-performing the
TWI by 21.3% in USD terms.
In terms of strategy, in the coming months, the Fund's management plans to
remain fully invested. The Fund will continue to overweight in the electronics,
construction and steel sectors. The electronics sector is expected to continue
to outperform due to its strong global competitiveness and good earnings growth
potential. Semiconductors may enjoy good earnings growth in the coming year.
Downstream electronics producers may continue to increase market share in a wide
range of product categories. Property shares are favored, as the supply and
demand balance for property in Taiwan may steadily improve. Steel companies have
enjoyed rising business for months and may continue to be good investments.
Lastly, as for the over-the-counter market, the Fund may continue to hold shares
of selected securities firms and banks.
The Fund has not invested, and presently does not intend to invest, in any
derivative securities. Although foreign currency hedging is permitted by the
Fund's investment policies, the Fund has not engaged in any foreign currency
hedging.
PORTFOLIO MANAGEMENT
Mr. Victor Shih has been the Fund's portfolio manager since January 1, 1996
and is responsible for the day-to-day management of the Fund's portfolio. Mr.
Shih joined Daiwa Asset Management (H.K.) Ltd. ("DAM") in May 1995 and is
currently a portfolio manager with the company specializing in the Taiwan
market. Prior to joining DAM, from 1990 to mid-1995, Mr. Shih worked for the
Taipei Branch of ABN-AMRO Bank where he was Assistant Vice President in charge
of company/industry analysis, credit analysis, and marketing corporate financial
products to clients.
We would like to thank you for your continuing support and interest in The
Taiwan Equity Fund, Inc.
<TABLE>
<S> <C>
Sincerely,
[/S/ SHUICHI KOMORI] [/S/ MASARU ARAI]
SHUICHI KOMORI MASARU ARAI
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
5
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
- -------------------------------------------
TAIWANESE COMMON STOCKS--98.06%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
BANKS--4.52%
597,800 Chinatrust Commercial Bank.............. $ 1,085,463
908,400 Far Eastern International Bank.......... 636,912
840,000 Grand Commercial Bank................... 770,171
294,000 Hua Nan Commercial Bank................. 1,199,806
-----------
3,692,352
-----------
COMPUTERS--9.03%
697,104 Acer Inc................................ 2,506,486
200,000 Acer Sertek Inc......................... 740,687
329,030 Compal Electronics Inc.................. 1,301,356
600,000 Elitegroup Computer Systems............. 1,348,339
353,981 GVC Corp................................ 763,658
120,000 Inventec Co., Ltd....................... 724,867
-----------
7,385,393
-----------
CONSTRUCTION ENGINEERING--5.55%
1,000,000 BES Engineering Corp.................... 1,319,574
820,000 Cathay Construction Corp................ 1,415,216
780,000 Chief Construction Corp................. 1,570,545
220,000 Pacific Construction Corp............... 234,935
-----------
4,540,270
-----------
ELECTRICAL MACHINERY--3.74%
540,832 Phoenixtec Power Co., Ltd............... 1,429,281
303,275 Taichung Machinery Works................ 654,268
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
500,000 Tatung Co., Ltd......................... $ 970,804
-----------
3,054,353
-----------
ELECTRONICS--16.56%
836,250 CMC Magnetics Corp...................... 2,495,640
812,500 D-Link Corp............................. 2,278,693
125,000 Dyna Image Corp......................... 253,937
398,736 Hon-Hai Precision Industrial Corp....... 2,939,051
260,000 Macronix International Co., Ltd......... 602,977
240,000 Microtek International, Inc............. 608,371
960,000 Taiwan Liton Electronic Co., Ltd........ 3,348,195
300,000 WUS Printed Circuit Co., Ltd............ 1,013,951
-----------
13,540,815
-----------
FINANCIAL SERVICES--0.92%
200,000 Yuanta Securities Corp.................. 755,070
-----------
LIFE INSURANCE--2.14%
150,100 Cathay Life Insurance Co., Ltd.......... 858,115
220,000 Shin Kong Life Insurance Co., Ltd....... 893,859
-----------
1,751,974
-----------
METAL PRODUCTS--0.90%
500,000 Ton Yi Industrial Corp.................. 738,890
-----------
MISCELLANEOUS--2.32%
320,000 Mustek Systems Inc...................... 977,995
207,100 Taiwan SECOM Corp....................... 915,910
-----------
1,893,905
-----------
</TABLE>
6
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THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
TAIWANESE COMMON STOCKS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
PLASTICS--9.26%
800,000 China Petrochemical Development Corp.... $ 1,412,340
1,046,400 Formosa Plastics Corp................... 2,520,811
710,485 Grand Pacific Petrochemical Corp........ 733,170
996,676 Nan Ya Plastics Corp.................... 2,902,731
-----------
7,569,052
-----------
REAL ESTATE--5.37%
2,200,000 Bao Chen Construction Corp.............. 2,088,307
600,000 Hong Chung Construction Co., Ltd.+...... 478,930
600,000 Kindom Construction Co., Ltd............ 1,488,566
113,000 Sun Splendor Co., Inc................... 335,197
-----------
4,391,000
-----------
RETAIL--1.61%
700,000 Ability Enterprises Co., Ltd............ 810,442
200,000 Chun Hsin Co., Ltd...................... 506,975
-----------
1,317,417
-----------
SEMICONDUCTORS--26.28%
910,800 Advanced Semiconductor Engineering
Inc.................................... 3,454,962
840,000 Mosel Vitelic Inc....................... 2,068,891
700,000 Siliconware Precision Industries Co.,
Ltd.................................... 2,365,885
1,500,000 Taiwan Semiconductor Manufacturing
Co..................................... 6,660,794
1,700,000 United Microelectonics Corp............. 6,937,653
-----------
21,488,185
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
SHIPS & SHIPPING--2.18%
1,070,000 Evergreen Marine Corp................... $ 1,781,281
-----------
STEEL--2.70%
800,000 China Steel Corp........................ 845,678
1,000,000 Feng Hsin Iron & Steel Corp., Ltd....... 1,362,721
-----------
2,208,399
-----------
TEXTILE--3.74%
1,749,550 Formosa Chemicals & Fiber Corp.......... 2,541,415
700,000 Shinkong Synthetic Fiber Corp........... 518,481
-----------
3,059,896
-----------
TRANSPORTATION--AIR--1.24%
741,148 China Airlines.......................... 1,015,308
-----------
Total Taiwanese Common Stocks
(Cost--$53,159,428)............................. 80,183,560
-----------
</TABLE>
- -------------------------------------------
SHORT-TERM INVESTMENTS--2.02%
- -------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
- ----------
<C> <S> <C>
NEW TAIWAN DOLLAR SAVINGS ACCOUNT--2.00%
45,477 International Commercial Bank of China,
1.50% (Payable on Demand).............. 1,635,157
-----------
</TABLE>
7
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (CONCLUDED)
- -------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
- ---------- -----------
<C> <S> <C>
U.S. DOLLAR TIME DEPOSIT--0.02%
16 Bank of New York, 3.60% due 7/1/97...... $ 16,140
-----------
Total Short-Term Investments (Cost--$1,650,549)...
1,651,297
-----------
Total Investments--100.08%
(Cost--$54,809,977)............................. 81,834,857
Liabilities in excess of other assets--(0.08)%....
(68,777)
-----------
NET ASSETS (Applicable to 4,507,318 shares of
capital stock outstanding; equivalent to $18.14
per share)--100.00%............................. $81,766,080
-----------
-----------
</TABLE>
- ------------------------
+ Non-income producing security.
- -------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
JUNE 30, 1997 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- ----------------------------------- ----------
<S> <C>
Semiconductors..................... 26.28%
Electronics........................ 16.56
Plastics........................... 9.26
Computers.......................... 9.03
Construction Engineering........... 5.55
Real Estate........................ 5.37
Banks.............................. 4.52
Textile............................ 3.74
Electrical Machinery............... 3.74
Steel.............................. 2.70
</TABLE>
- -------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
JUNE 30, 1997 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ----------
<S> <C>
United Microelectonics Corp........ 8.48%
Taiwan Semiconductor Manufacturing
Co............................... 8.15
Advanced Semiconductor Engineering
Inc.............................. 4.23
Taiwan Liton Electronic Co.,
Ltd.............................. 4.09
Hon-Hai Precision Industrial
Corp............................. 3.59
Nan Ya Plastics Corp............... 3.55
Formosa Chemicals & Fiber Corp..... 3.11
Formosa Plastics Corp.............. 3.08
Acer Inc........................... 3.07
CMC Magnetics Corp................. 3.05
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost-$54,809,977)........................ $ 81,834,857
Interest and dividends receivable.......... 105,705
Deferred organizational expenses........... 37,674
Prepaid expenses........................... 41,502
------------
Total assets............................. 82,019,738
------------
LIABILITIES
Payable to investment manager.............. 74,418
Payable to administrator................... 12,500
Accrued expenses and other liabilities..... 166,740
------------
Total liabilities........................ 253,658
------------
NET ASSETS
Capital stock, $0.01 par value per share;
total 100,000,000 shares authorized;
4,507,318 shares issued and outstanding... 45,073
Paid-in capital in excess of par value..... 60,222,166
Accumulated net investment loss............ (721,118)
Accumulated net realized loss on
investments............................... (4,804,947)
Net unrealized appreciation on investments
and other assets and liabilities
denominated in foreign currency........... 27,024,906
------------
Net assets applicable to shares
outstanding............................. $ 81,766,080
------------
------------
NET ASSET VALUE PER SHARE............ $ 18.14
------------
------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$36,441).................................. $ 145,764
Interest (net of withholding taxes of
$1,197)................................... 8,831
------------
Total investment income.................. 154,595
------------
EXPENSES:
Investment management fee.................. 391,179
Taiwan stock dividend tax.................. 172,191
Administration fee and expenses............ 77,574
Custodian fees and expenses................ 51,090
Legal fees and expenses.................... 42,910
Audit and tax services..................... 31,675
Reports and notices to shareholders........ 25,758
Directors' fees and expenses............... 21,153
Insurance expense.......................... 19,738
Amortization of organizational expenses.... 9,750
Transfer agency fee and expenses........... 5,643
Other...................................... 27,052
------------
Total expenses........................... 875,713
------------
NET INVESTMENT LOSS.......................... (721,118)
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gains on investments.......... 5,787,181
Net realized foreign currency transaction
losses.................................... (9,189)
Net change in unrealized appreciation on
investments in equity securities.......... 22,196,209
Net change in unrealized appreciation on
translation of short-term investments and
other assets and liabilities denominated
in foreign currency....................... 589
------------
Net realized and unrealized gains from
investment activities and foreign currency
transactions................................ 27,974,790
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ 27,253,672
------------
------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED FOR THE YEAR
JUNE 30, ENDED
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (721,118) $ (934,816)
Net realized gain (loss) on:
Investments.............................. 5,787,181 (2,478,779)
Foreign currency transactions............ (9,189) (92,569)
Net change in unrealized appreciation on:
Investments in equity securities......... 22,196,209 14,512,940
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 589 9,400
------------ ------------
Net increase in net assets resulting from
operations................................ 27,253,672 11,016,176
------------ ------------
NET ASSETS:
Beginning of period........................ 54,512,408 43,496,232
------------ ------------
End of period.............................. $ 81,766,080 $54,512,408
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Taiwan Equity Fund, Inc. (the "Fund") was incorporated in Maryland on
January 12, 1994. It is registered with the Securities and Exchange Commission
as a closed-end, non-diversified management investment company. Prior to
commencing operations on July 25, 1994, the Fund had no operations other than
the sale of 7,120 shares of common stock for a total of $100,036 on July 19,
1994 to Daiwa Securities America Inc. ("DSA"), the lead underwriter of the Fund
and an affiliate of Daiwa Securities Trust Company ("DSTC"), the Fund's
administrator and custodian, and Daiwa Asset Management (H.K.) Ltd., the Fund's
investment manager. Organizational costs of approximately $98,000 were deferred
and are being amortized on the straight line method over a period of five years
beginning with the date on which the Fund commenced investment operations.
11
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts and disclosures in the financial statements.
Actual reported results could differ from those estimates.
VALUATION OF INVESTMENTS--Securities which are listed on foreign exchanges
and for which market quotations are readily available are valued at the last
sale price on the exchange on which the securities are traded, as of the close
of business on the day the securities are being valued or, lacking any sales on
such day, at the closing price quoted for such securities. However, if bid and
asked quotations are available, such securities are valued at the mean between
the last current bid and asked prices, rather than at such quoted closing price.
Securities that are traded over-the-counter, if bid and asked price quotations
are available, are valued at the mean between the current bid and asked prices,
or, if such quotations are not available, are valued as determined in good faith
by the Board of Directors (the "Board") of the Fund. In instances where
quotations are not readily available or where the price as determined by the
above procedures is deemed not to represent fair market value, fair value will
be determined in such manner as the Board may prescribe. Short-term investments
having a maturity of 60 days or less are valued at amortized cost, except where
the Board determines that such valuation does not represent the fair value of
the investment. All other securities and assets are valued at fair value as
determined in good faith by, or under the direction of, the Board.
FOREIGN CURRENCY TRANSLATION--The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in foreign
currency are translated at the exchange rate prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the rate
of exchange prevailing on the respective dates of such transactions. The
resulting exchange gains and losses are included in the Statement of Operations.
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market price of
securities.
TAX STATUS--The Fund intends to distribute substantially all of its taxable
income and to comply with the minimum distribution and other requirements of the
Internal Revenue Code applicable to regulated investment companies. Accordingly,
no provision for federal income or excise taxes is required.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date upon which the order to buy or sell is
executed). Realized and unrealized gains and losses from security and foreign
currency transactions are calculated on the identified cost basis. Dividend
income and corporate actions are recorded generally on the ex-date, except for
certain dividends and corporate actions involving foreign securities which may
be recorded after the ex-date, but recorded as soon as the Fund acquires
information regarding such dividends or corporate actions. Interest income is
recorded on an accrual basis.
During the six months ended June 30, 1997, the Fund was subject to Taiwanese
withholding tax of 20% on interest and cash dividends paid to the Fund by
Taiwanese corporations. The Fund also receives stock dividends which are
recorded as stock splits without recognizing dividend income. However, for
certain stock dividends, the Fund is liable for withholding tax of 20% of the
par value of shares received. Withholding tax is recorded as an expense on the
ex-dividend date, or after the ex-dividend date, but as soon as the Fund is
informed of such dividends.
12
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends and
distributions payable to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations, which
may differ from generally accepted accounting principles. These book basis/tax
basis ("book/tax") differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
FORWARD FOREIGN CURRENCY CONTRACTS--The Fund may enter into forward foreign
currency exchange contracts in connection with planned purchases or sales of
securities or to hedge the U.S. dollar value of its assets denominated in a
particular currency, subject to a maximum limitation of 20% of the value of its
total assets committed to the consummation of such forward foreign currency
contracts. In addition, the Fund will not take positions in foreign currency
contracts where the settlement commitment exceeds the value of its assets
denominated in the currency of the contract. If the Fund enters into forward
foreign currency contracts, its custodian or subcustodian will maintain cash or
readily marketable securities in a segregated account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
such contracts. Risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
from unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
INVESTMENT MANAGER AND INVESTMENT ADVISER
The Fund has an Investment Management Agreement (the "Management Agreement")
with Daiwa Asset Management (H.K.) Ltd. (the "Manager"). Pursuant to the
Management Agreement, the Manager makes investment management decisions relating
to the Fund's assets. For such services, the Fund pays to the Manager a monthly
fee at an annual rate of 1.20% of the Fund's average weekly net assets. During
the six months ended June 30, 1997, the Fund paid brokerage commissions of
$45,982 to Daiwa Securities Co. Ltd. (Taipei Branch), an affiliate of the
Manager, in connection with the portfolio transactions.
The Manager has entered into an Investment Advisory Agreement (the "Advisory
Agreement") with National Capital Management Corp. (the "Adviser"), which
provides general and specific investment advice to the Manager with respect to
the Fund's assets. The Manager pays to the Adviser a monthly fee at an annual
rate of 0.08% of the first $100 million of the Fund's average weekly net assets
and 0.06% of the Fund's average weekly net assets in excess of $100 million.
Brokerage commissions of $5,595 were paid by the Fund during the six months
ended June 30, 1997 to National Securities, an affiliate of the Adviser, in
connection with portfolio transactions.
13
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
DSTC provides certain administrative services to the Fund. For such
services, the Fund pays to DSTC a monthly fee at an annual rate of 0.20% of the
Fund's average weekly net assets, with a minimum annual fee of $150,000. In
addition, as permitted by the Administration Agreement, the Fund reimburses the
Administrator for its out-of-pocket expenses related to the Fund. During the six
months ended June 30, 1997, expenses of $2,574 were paid to the Administrator,
representing reimbursement to the Administrator of costs relating to the
attendance by its employees at meetings of the Fund's Board.
DSTC also acts as custodian for the Fund's assets and appoints subcustodians
for the Fund's assets held outside the United States. DSTC has appointed The
International Commercial Bank of China ("ICBC") to act as the subcustodian for
all of the cash and securities of the Fund held in Taiwan. As compensation for
its services as custodian, DSTC receives a monthly fee and reimbursement of
out-of-pocket expenses. Such expenses include the fees and out-of-pocket
expenses of each of the subcustodians. During the six months ended June 30,
1997, DSTC earned $18,629 from the Fund for its custodial services, excluding
the fees and expenses of ICBC.
At June 30, 1997, the Fund owed to DSTC $12,500 and $20,785 for
administration and custodian fees, respectively. The latter amount includes fees
and expenses payable to ICBC totalling $17,421.
During the six months ended June 30, 1997, the Fund paid or accrued $42,763
for legal services in connection with the Fund's on-going operations to a law
firm of which the Fund's Assistant Secretary is a partner.
INVESTMENTS IN SECURITIES AND FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the cost of securities owned at June 30,
1997 was $53,189,146, excluding $1,650,549 of short-term investments. At that
date, for federal income tax purposes, the net unrealized appreciation on
investments, excluding short-term securities, of $26,994,414 was composed of
gross appreciation of $27,841,966 for those investments having an excess of
value over cost, and gross depreciation of $847,552 for those investments having
an excess of cost over value. For the six months ended June 30, 1997, the total
aggregate cost of purchases and net proceeds from sales of portfolio securities,
excluding short-term securities, were $33,985,209 and $33,884,033, respectively.
CONCENTRATION OF RISK
Investments in countries in which the Fund may invest may involve certain
considerations and risks not typically associated with U.S. investments as a
result of, among others, the possibility of future political and economic
developments and the level of governmental supervision and regulation of the
securities markets in which the Fund invests.
CAPITAL STOCK
There are 100,000,000 shares of $0.01 par value common stock authorized. Of
the 4,507,318 shares outstanding at June 30, 1997, DSA owned 7,318 shares.
14
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding during each period is
presented below:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS FOR THE YEARS PERIOD
ENDED ENDED DECEMBER JULY 25, 1994*
JUNE 30, 31, THROUGH
1997 ----------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994
----------- ------- ------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............................. $ 12.09 $ 9.65 $ 14.10 $ 14.05
----------- ------- ------- -------
Net investment income (loss)..................................... (0.16) (0.21) (0.21) 0.18
Net realized and unrealized gains (losses) on investments and
foreign currency transactions................................... 6.21 2.65 (3.94) 0.06
----------- ------- ------- -------
Net increase (decrease) in net asset value resulting from
operations...................................................... 6.05 2.44 (4.15) 0.24
----------- ------- ------- -------
Less: dividends and distributions to shareholders
Net investment income.......................................... -- -- (0.17) --
Net realized gains from investments and foreign currency
transactions.................................................. -- -- (0.13) --
----------- ------- ------- -------
Total dividends and distributions to shareholders................ -- -- (0.30) --
----------- ------- ------- -------
Offering costs charged to paid-in capital in excess of par
value........................................................... -- -- -- (0.19)
----------- ------- ------- -------
Net asset value, end of period................................... $ 18.14 $ 12.09 $ 9.65 $ 14.10
----------- ------- ------- -------
----------- ------- ------- -------
Per share market value, end of period............................ $ 13.750 $10.125 $10.625 $ 11.875
----------- ------- ------- -------
----------- ------- ------- -------
Total investment return:
Based on market price at beginning and end of period, assuming
reinvestment of dividends..................................... 35.80% (4.71)% (8.04)% (15.48)%+
Based on net asset value at beginning and end of period,
assuming reinvestment of dividends............................ 50.04% 25.28% (29.66)% 0.36%+
Ratios and supplemental data:
Net assets, end of period (in millions)........................ $ 81.8 $ 54.5 $ 43.5 $ 63.6
Ratios to average net assets of:
Expenses, excluding Taiwan stock dividend tax................ 2.17%** 2.29% 2.34% 2.12%**
Expenses, including Taiwan stock dividend tax@............... 2.70%** 2.80% 2.72% 2.20%**
Net investment income (loss)................................. (2.22)%** (1.98)% (1.88)% 2.96%**
Portfolio turnover............................................. 52.45% 94.12% 31.75% 9.33%
Average commission rate per share++............................ $ 0.0056 $0.0042 N/A N/A
</TABLE>
- --------------------------
* Commencement of operations.
** Annualized.
+ Total return is calculated exclusive of sales charges.
++ For the six months ended June 30, 1997 and for the year ended December
31, 1996, the average commission rate paid on trades for which
commissions were charged was 0.33% and 0.29% of the principal amount
of the trade, respectively.
@ The expense ratio for the period ended December 31, 1994 reflects
reclassification of certain expenses for comparative purposes.
15
<PAGE>
- -----------------------------------------
BOARD OF DIRECTORS
Shuichi Komori, CHAIRMAN
Masaru Arai
Martin J. Gruber
Christina Y. Liu
Oren G. Shaffer
- -----------------------------------------
OFFICERS
Masaru Arai
PRESIDENT
Daniel F. Barry
VICE PRESIDENT
Lawrence Jacob
SECRETARY
Edward J. Grace
TREASURER
John J. O'Keefe
ASSISTANT TREASURER
Laurence E. Cranch
ASSISTANT SECRETARY
- -----------------------------------------
ADDRESS OF THE FUND
c/o Daiwa Securities Trust Company
One Evertrust Plaza, 9th Floor
Jersey City, New Jersey 07302
- -----------------------------------------
INVESTMENT MANAGER
Daiwa Asset Management (H.K.) Ltd.
INVESTMENT ADVISER
National Capital Management Corp.
ADMINISTRATOR AND CUSTODIAN
Daiwa Securities Trust Company
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company
LEGAL COUNSEL
Rogers & Wells
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
- -----------------------------------------
Notice is hereby given in accordance with Section 23(c)
of the Investment Company Act of 1940 that from time to time the Fund may
purchase shares of its common stock in the open market at prevailing market
prices.
This report is sent to shareholders of the Fund for their information. It is not
a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Fund or of any securities mentioned in the report.
The financial information included herein is taken from the records of the Fund
without examination by independent accountants who do not express an opinion
thereon.
The
Taiwan
------------------------
Equity
------------------------
Fund, Inc.
------------------------
[ART]
Semi-Annual Report
June 30, 1997
----------------------------------
