<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. acts as the Fund's Investment Manager.
National Capital Management Corp. of Taiwan, acts as 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 that of 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's weekly NAV is also
available by calling (800) 933-3440 or (201) 915-3020.
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 (011-852) 2521-0166, or to the Fund at (800) 426-5523 or
(781) 575-2000. Inquiries concerning your share account should be directed to
the Fund at the latter numbers noted immediately above. 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 Fund shares through the State Street Bank
and Trust Company (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 (781) 575-2000, or by writing to The Taiwan Equity Fund, Inc., c/o State
Street Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-8200.
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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July 15, 1998
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, 1998.
STOCK MARKET REVIEW
The Taiwan Weighted Index ("TWI") declined 7.8% from 8,187 to 7,548 during
the first six months of 1998. During the same period, the New Taiwan Dollar
(TWD) depreciated from TWD 32.64 to 34.35 against one US dollar ("USD").
Consequently, the TWI lost 12.4% in USD terms during the period.
The Taiwan stock market tumbled 10% in early January 1998 due to a worsening
of the Asian financial crisis led by Indonesia and the accompanying plunge of
most stock markets in the region. However, both bargain-hunting interest and
gradually stabilizing Asian currencies helped the market bottom out in the
second half of January. A rebound in the US market and better-than-expected
corporate earnings of major Taiwanese high-tech companies also enhanced
investors' buying interests. Following the rebound in late January, the market
surged 13.8% to close at 9,202 in February 1998 mainly due to: 1) abundant
foreign funds inflow and the strong rebound of most Asian markets; and 2)
optimism about the electronics sector as a result of increasing demand for
Pentium II PCs and sub-$1000 PCs.
However, earnings warnings by Intel, Motorola and Compaq in early March,
plus sharply declining DRAM chip prices, hurt overall sentiment and generated
huge selling pressure for high-tech shares since March. The Asian financial
crisis continued to reverberate in the first half of 1998. Worsening financial
conditions and much lower economic growth in several Asian countries continue to
impact both currency and equity markets in Taiwan. The market continued to
decline in the second quarter as a result of both internal and external factors.
Internal factors include a weakening TWD-induced capital outflow, sluggish
export and import figures, tight market liquidity due to the Central Bank's
intervention to support the TWD, as well as worse-than-expected PC and
semiconductor demand. External factors include continuing depreciation of the
Japanese yen, worsening economic conditions across Asia, and sharply lower
equity markets in the Asia-Pacific region.
ECONOMIC REVIEW AND OUTLOOK
TRADE
During the first six months of 1998, exports declined by 7.1% year-on-year
("YOY") to USD 54.5 billion, while imports declined by 3.5% to USD 53.3 billion.
This resulted in a trade surplus of USD 1.2 billion, a 65% decline when compared
to the previous year. Exports posted negative growth (especially in textiles,
petrochemicals, and steel products) mainly due to sluggish demand from the
Asia-Pacific region and the relatively strong TWD compared to other Asian
currencies. Fortunately, exports to Europe and America continued to grow because
of their better economic conditions. Imports also posted negative growth as a
result of decreasing domestic demand in view of the bleak economic conditions.
Export orders during the first five months of 1998 declined by 3.3% YOY,
which signaled that exports in the third quarter would be weak. The decline also
stemmed from the Asian financial crisis, which started in mid-1997. Demand from
the rest of Asia will most likely remain contracted for the remainder of 1998.
However, the Fund's management believes that exports may improve slightly over
the second half of the year considering
2
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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that period is usually the peak season for computer products. Overall, due to
the sluggish economic conditions in Asia and deceleration of US demand growth,
the Taiwanese government revised its negative projections for 1998 export growth
to -3.4% YOY and import growth to -1.5% YOY.
INFLATION
The Consumer Price Index rose 1.6% YOY during the first six months of 1998.
Excluding the food component, which rose 3.6% YOY as a result of crop damage,
inflation rose only 0.9% YOY during that period. Despite the TWD depreciation,
inflation was much lower than the Taiwanese government's forecast of 3.1% YOY
for the year because of falling international raw material prices. In 1998,
inflation will not be a concern considering the weakness in most global
commodity prices, which is contributing to a general reduction in inflationary
pressure.
EXCHANGE RATE
In the first half of 1998, the TWD depreciated from 32.64 to 34.35 against
one USD. After sharp depreciation in the fourth quarter of 1997, the TWD stayed
between 32 to 33 against one USD for the first four months of 1998. The TWD then
gradually devalued to 34.35 because of Taiwan's weak exports and the
depreciation of Asian currencies during the period. For the second half of 1998,
the TWD may move in line with the Japanese yen and other Asian currencies. As
long as the yen and other regional currencies remain firm, the TWD may
strengthen and stay below 35.0 against one USD.
MONEY SUPPLY
Growth in the M2 money supply trended downward to an average of 8.6% YOY
during the first five months of 1998. M2 growth was slow due to an overall
slowdown in expansion of loans and investments. M1b money supply growth declined
from 11.5% YOY in January to 2.1% YOY in May, with an average of 5.6% YOY.
Growth in the M1b declined because of the bleak economic outlook and worry over
TWD depreciation, which induced investors to shift their funds from demand
deposits to time deposits or foreign currency deposits. Despite the weak demand
from Asia, in the second half of the year the Fund's management expects that M2
growth will continue to stay between 8.0 to 9.0% YOY due to increasing loan
demands in Taiwan to finance several big infrastructure projects. The M1b may
rebound slightly considering Taiwan's more actively trading stock market,
boosting measures from Japan to support the yen and its accompanying positive
view of TWD currency, which may reverse the capital outflow trend.
INTEREST RATES AND MONETARY POLICY
Short-term rates have come down from 7.5% in February 1998 to about 6.7% in
June. Several major Taiwanese banks reduced their short-term deposit rates but,
at the same time, raised their 1 to 2 year deposit rates due to concern over
longer-term liquidity. Despite poor economic conditions, Taiwan's Central Bank,
at its June 1998 Policy Meeting, had been reluctant to further ease monetary
policy further due to depreciation pressure on the TWD.
Looking forward, the Central Bank's top priority in monetary policy in the
second half of 1998 will be to maintain stability in the foreign exchange
markets while keeping consumer prices under close watch. As long as the Asian
currency crisis persists, devaluation pressure on the TWD will significantly
reduce the Central Bank's ability to lower interest rates and expand the money
supply. However, we believe the Central Bank may likely have to relax its
monetary policy later this year when it sees stabilization of Asian currencies,
reduced
3
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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inflationary pressure, increased capital demand and perhaps still slower
exports. Furthermore, in the longer term, the Central Bank may continue to
adjust reserve requirement ratios downward to improve the competitiveness of
Taiwan's banks.
ECONOMIC GROWTH
First-quarter 1998 GDP growth of 5.9 % was lower than the year 1997's rate
of 6.8% due to weak trade figures, lower domestic demand growth and
down-trending industrial production growth (4.1% YOY in the first five months,
as compared to 8.5% YOY in the fourth quarter of 1997). Considering the sluggish
demand from most Asian countries (with exports to Asia declining by 16% YOY in
the first half), declining leading indicators and lower private consumption
caused by stock price deflation, GDP growth in the second quarter of 1998 is
estimated to have been around only 5.0%.
Looking forward, the sharp decline in Asian demand has called for a
conservative forecast of Taiwan's economic growth for the second half of 1998.
The currency turmoil in Asia and sharp fall of Taiwan's equity market may slow
private consumption growth and corporate investments. A combination of weak
external demand and the depreciation in regional currencies has resulted in
severe pricing pressure in many of Taiwan's export industries. The whole
region's demand should remain weak throughout 1998. Taiwan's economic growth
will probably be lower due to negative export growth and the negative
wealth-effect on private consumption and private investment. Nonetheless, the
Taiwanese government will continue to speed up investment through land
development and infrastructure construction. Domestic demand will serve as an
important driving force for GDP growth. The GDP growth forecast is 5.5% in 1998,
which is better than that forecast for most of its Asian neighbors.
POLITICAL REVIEW AND OUTLOOK
In the first half of 1998, both Taiwan and China called for the reopening of
the cross-strait talks, but no progress has been made. China would like to jump
directly into political discussions with the goal of setting a firm plan for
reunification. Taiwan is aiming for a slower approach that would, in the early
stages, focus on discussions regarding technical matters, such as cultural and
academic exchanges. Although President Clinton's visit to China in June caused
some concern, this visit was concluded with no change in US policy toward
Taiwan. At the same time, President Clinton urged that reunification should be
achieved peacefully and encouraged further contact between China and Taiwan.
After a three-year interruption, China, after the Clinton-Jiang summit, invited
Taiwan's representative to resume talks in September 1998 and the invitation was
accepted by the Taiwan side. If negotiations go smoothly, economic cooperation
between Taiwan and China could be enhanced. This improved cooperation would be
viewed as a positive for Taiwan's stock market.
On the domestic front, legislative and Taipei and Kaohsiung mayoral
elections will be held in December 1998. The ruling Kuomingtang Party will face
pressure to maintain its majority in the Taiwanese congress. This election may
bring more uncertainty for the bourse for the fourth quarter of 1998. As for the
results, they are expected to be neutral to the market no matter which party
wins.
STOCK MARKET OUTLOOK
The sharp devaluation in Asian currencies since late 1997 has weakened
purchasing power and hurt local businesses. Several cyclical industries, such as
textiles, plastics, steel and DRAM chips, have suffered from weak demand and
stiff competition in the export market. The weak demand may persist into the
second half of 1998.
4
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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Economic and corporate earnings growth are projected to be lower in 1998 than in
1997. In the short-term, the Japanese government's restructuring and yen
stabilization may help a rebound in the Asia market and Taiwan. However, the
Taiwanese market may remain volatile, given the high selling pressure and
still-unstable regional economic conditions. As Japan's medium-term economic
outlook remains uncertain, the yen may further depreciate to reflect Japan's
weak economy. In turn, this may affect the direction of the TWD and Taiwan's
stock market sentiment. However, on the downside, the market has historically
found floors at prospective price-to-earnings ratios of 18 times, which would be
around the 7,200 level. Considering the still good corporate earnings and
reasonable valuations in the market, the Fund's management expects that the
7,200 level should be a good support.
The IMF forecasts that economic growth in Asian countries will be much lower
in 1998 than in 1997. Taiwan's GDP is estimated to grow at 5.5%, much lower than
last year's 6.8%. However, Taiwan looks relatively sound as compared to the
countries hard-hit by the financial turmoil. Given its relatively sound
financial condition, relatively healthy economic growth, and expected moderate
12% earnings growth in 1998, Taiwan should remain an attractive market in which
to invest. In addition, newly approved equity funds amounting to TWD 70 billion
may start to invest in the market in July, which may enhance liquidity.
Stabilization of Asian currencies plus the expected better earnings prospects of
the electronics sector may attract buying from investors. Increased liquidity
plus the electronics sector's coming peak season may push the market higher in
the third quarter. Nonetheless, due to the moderate liquidity condition, slower
economic growth and moderate earnings growth, the 8,800 level could provide
strong resistance. In December, the legislative elections will be held. The
election results will influence Taiwan's economy as well as its China policy.
Uncertainty on the bourse will emerge again, which may cause the bourse to slide
in the fourth quarter of 1998 before the congressional election.
FUND PERFORMANCE AND STRATEGY
As of June 30, 1998, the Fund's total assets were USD 56 million, equivalent
to USD 12.36 per share. For the year-to-date, the NAV decreased by 9.4% in USD
terms, whereas the TWI decreased by 12.4% in USD terms. Thus, the Fund
outperformed the Index by 3.0%.
In terms of strategy, the Fund's management plans to overweight the
electronics and computer sectors. The second-quarter 1998 sales and earnings of
some electronics companies were down dramatically due to inventory correction
among their US clients. However, the Fund's management expects these to rebound
from the third quarter before the peak season. Unit shipments have been rising
due to the end of the inventory adjustment, as well as due to Intel's recent CPU
price cuts and the launch of WINDOWS 98. The 15% PC growth in 1998 forecasted by
the electronics research company Dataquest will probably be achievable.
Considering their global comparative advantage in manufacturing, Taiwanese
PC-related producers may benefit from the outsourcing trend of major US
companies. Downstream electronics producers will continue to increase market
share in a wide range of product categories. Therefore, the electronics and
computer sectors remain as the Fund's favorite sectors. The Fund favors selected
shares with stable earnings growth in non-classified sectors. In addition, the
Fund also favors China-related shares in view of good earnings potential from
their China operations. On the other hand, the Fund may underweight the steel,
textile, DRAM chip and plastics sectors because of the fierce price competition
and weak demand in the Asian region. The Fund may also underweight the financial
and property sectors because of their bleak earnings outlook.
5
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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THE YEAR 2000 ISSUE
The Fund continues to review the current status of its exposure to the Year
2000 computer issue. Like other investment companies and financial and business
organizations, the Fund could be adversely affected if the computer systems used
by the Fund's service providers do not properly address this problem prior to
January 1, 2000. After analysis of these issues, the management of the Fund does
not anticipate that the transition to the 21st Century will have any material
impact on the Fund's operations. In addition, the management of the Fund has
sought assurances from the Fund's service providers that they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the year 2000, and the management of the Fund will continue to monitor the
situation. At this time, however, no assurances can be given that the Fund's
service providers have anticipated every step necessary to avoid any adverse
effect to their respective operations, and consequently to the Fund,
attributable to the Year 2000 problem.
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 Senior 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/ Sadamu Tsuneishi
SHUICHI KOMORI SADAMU TSUNEISHI
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
6
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
- -------------------------------------------
TAIWANESE COMMON STOCKS--92.57%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
AUTOMOTIVE--4.51%
1,800,000 Yue Loong Motor Company............ $ 2,509,971
------------
COMMERCIAL BANKS--2.66%
1,060,970 Chinatrust Commercial Bank......... 1,047,040
234,000 Hua Nan Commercial Bank............ 435,970
------------
1,483,010
------------
COMPUTERS--12.74%
400,379 Acer Inc........................... 480,208
273,600 Acer Sertek Inc.................... 380,719
300,000 Asustek Computer Inc............... 2,454,077
615,613 Compal Electronics Inc............. 1,657,716
518,080 Inventec Co., Ltd.................. 1,643,932
405,000 Twinhead International Corp........ 476,318
------------
7,092,970
------------
CONSTRUCTION ENGINEERING--5.92%
1,396,800 BES Engineering Corp............... 845,781
869,200 Cathay Construction Corp........... 609,814
1,053,000 Chief Construction Corp............ 1,195,511
1,100,000 Goldsun Development & Construction
Co., Ltd.......................... 643,649
------------
3,294,755
------------
ELECTRICAL MACHINERY--5.75%
1,357,164 Phoenixtec Power Co. Ltd........... 3,200,206
------------
ELECTRONICS--18.13%
48,000 Compeq Manufacturing Co. Ltd....... 255,713
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
536,250 D-Link Corp........................ $ 1,209,845
500,000 Delta Electronics, Inc............. 1,673,896
458,230 Hon-Hai Precision Industrial
Corp.............................. 2,321,097
260,000 Macronix International Co., Ltd.... 237,664
1,152,000 Taiwan Liton Electronic Co.,
Ltd............................... 2,313,994
507,000 WUS Printed Circuit Co., Ltd....... 922,462
700,000 Yageo Corp......................... 1,161,538
------------
10,096,209
------------
FINANCIAL SERVICES--4.13%
600,000 Capital Securities Corp............ 520,509
600,000 Mitac International Corp........... 1,170,272
444,600 Yuanta Securities Corp............. 612,197
------------
2,302,978
------------
LIFE INSURANCE--3.12%
207,138 Cathay Life Insurance Co., Ltd..... 633,155
550,000 Shin Kong Life Insurance Co.,
Ltd............................... 1,104,771
------------
1,737,926
------------
MISCELLANEOUS--4.17%
300,000 Janfusum Fancyworld................ 506,535
225,000 Pou Chen Corp...................... 592,778
389,230 Taiwan SECOM Corp.................. 1,223,744
------------
2,323,057
------------
PLASTICS--3.15%
328,000 China Petrochemical Development
Corp.............................. 255,899
</TABLE>
7
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
TAIWANESE COMMON STOCKS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
PLASTICS (CONCLUDED)
1,106,310 Nan Ya Plastics Corp............... $ 1,500,802
------------
1,756,701
------------
REAL ESTATE--6.29%
1,680,000 Bao Chen Construction Corp......... 738,494
625,000 Delpha Construction Corp........... 818,753
1,000,000 Kindom Construction Co., Ltd....... 1,528,340
402,590 Sun Splendor Co., Ltd.............. 419,572
------------
3,505,159
------------
RETAIL--2.12%
266,400 Chun Hsin Co., Ltd................. 223,351
300,000 President Chain Store Corp......... 956,304
------------
1,179,655
------------
SEMICONDUCTORS--14.16%
561,376 Advanced Semiconductor Engineering
Inc............................... 956,027
660,000 Holtek Microelectronics, Inc....... 518,762
1,360,000 Siliconware Precision Industries
Co., Ltd.......................... 1,975,605
1,595,000 Taiwan Semiconductor Manufacturing
Co................................ 3,296,702
989,900 United Microelectonics Corp........ 1,138,280
------------
7,885,376
------------
SHIPS & SHIPPING--3.97%
1,000,000 Wan Hai Lines...................... 1,149,894
1,700,000 Yang Ming Marine Transport Corp.... 1,064,016
------------
2,213,910
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
STEEL--0.97%
880,000 China Steel Corp................... $ 537,976
------------
TEXTILE--0.78%
560,000 Far Eastern Textile Ltd............ 433,641
------------
Total Taiwanese Common Stocks
(Cost--$55,579,959).......................... 51,553,500
------------
</TABLE>
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SHORT-TERM INVESTMENTS--7.64%
- -------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
- ----------
<C> <S> <C>
NEW TAIWAN DOLLAR SAVINGS ACCOUNT--6.73%
$129,896 International Commercial Bank of
China, 1.50% (Payable on
Demand)........................... 3,752,316
------------
U.S. DOLLAR TIME DEPOSIT--0.91%
506 Bank of New York, 3.6% due
7/1/98............................ 506,263
------------
Total Short-Term Investments
(Cost--$4,263,161)........................... 4,258,579
------------
Total Investments--100.21%
(Cost--$59,843,120).......................... 55,812,079
Liabilities in excess of other
assets--(0.21)%.............................. (119,539)
------------
NET ASSETS (Applicable to 4,507,318 shares of
capital stock outstanding; equivalent to
$12.36 per share)--100.00%................... $ 55,692,540
------------
------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
JUNE 30, 1998 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- ----------------------------------- ----------
<S> <C>
Electronics........................ 18.13%
Semiconductors..................... 14.16
Computers.......................... 12.74
Real Estate........................ 6.29
Construction Engineering........... 5.92
Electrical Machinery............... 5.75
Automotive......................... 4.51
Miscellaneous...................... 4.17
Financial Services................. 4.13
Ships & Shipping................... 3.97
</TABLE>
TEN LARGEST COMMON STOCK
POSITIONS HELD
JUNE 30, 1998 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ----------
<S> <C>
Taiwan Semiconductor
Manufacturing Co................. 5.92%
Phoenixtec Power Co. Ltd........... 5.75
Yue Loong Motor Company............ 4.51
Asustek Computer Inc............... 4.41
Hon-Hai Precision Industrial
Corp............................... 4.17
Taiwan Liton Electronic Co.,
Ltd................................ 4.15
Siliconware Precision
Industries Co., Ltd.............. 3.55
Delta Electronics, Inc............. 3.01
Compal Electronics Inc............. 2.98
Inventec Co., Ltd.................. 2.95
</TABLE>
9
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost--$59,843,120)....................... $ 55,812,079
Interest and dividends receivable.......... 81,019
Deferred organizational expenses........... 18,011
Prepaid expenses........................... 59,896
------------
Total assets............................. 55,971,005
------------
LIABILITIES
Payable to investment manager.............. 63,393
Payable to administrator................... 10,788
Accrued expenses and other liabilities..... 204,284
------------
Total liabilities........................ 278,465
------------
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..... 58,365,691
Accumulated net investment loss............ (727,283)
Undistributed net realized gain on
investments and foreign currency
transactions.............................. 2,040,473
Net unrealized depreciation on investments
and other assets and liabilities
denominated in foreign currency........... (4,031,414)
------------
Net assets applicable to shares
outstanding............................. $ 55,692,540
------------
------------
NET ASSET VALUE PER SHARE............ $ 12.36
------------
------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$30,767).................................. $ 123,069
Interest (net of withholding taxes of
$6,729)................................... 33,795
------------
Total investment income.................. 156,864
------------
EXPENSES:
Investment management fee.................. 395,278
Taiwan stock dividend tax.................. 215,833
Administration fee......................... 73,288
Custodian fees and expenses................ 48,092
Audit and tax services..................... 30,399
Legal fees and expenses.................... 29,753
Reports and notices to shareholders........ 29,130
Directors' fees and expenses............... 19,961
Insurance expense.......................... 17,238
Amortization of organizational expenses.... 9,751
Transfer agency fee and expenses........... 6,045
Other...................................... 9,379
------------
Total expenses........................... 884,147
------------
NET INVESTMENT LOSS.......................... (727,283)
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gains on investments.......... 2,796,855
Net realized foreign currency transaction
losses.................................... (277,468)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ (8,104,732)
Net change in unrealized appreciation
(depreciation) on translation of
short-term investments and other assets
and liabilities denominated in foreign
currency.................................. 540,114
------------
Net realized and unrealized losses from
investment activities and foreign currency
transactions................................ (5,045,231)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ (5,772,514)
------------
------------
</TABLE>
See accompanying notes to financial statements.
11
<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
1998 DECEMBER 31,
(UNAUDITED) 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (727,283) $ (1,542,952)
Net realized gain (loss) on:
Investments.............................. 2,796,855 10,104,026
Foreign currency transactions............ (277,468) (313,524)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... (8,104,732) (1,305,920)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 540,114 11,016
------------ ------------
Net increase (decrease) in net assets
resulting from operations................. (5,772,514) 6,952,646
NET ASSETS:
Beginning of period........................ 61,465,054 54,512,408
------------ ------------
End of period.............................. $ 55,692,540 $ 61,465,054
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
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.
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.
13
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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, 1998, 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.
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.
14
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 the Manager a monthly fee
at annual rate of 1.20% of the Fund's average weekly net assets. During the six
months ended June 30, 1998, the Fund paid brokerage commissions of $23,829 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 the respect
to the Fund's assets. The Manager pays 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.
During the six months ended June 30, 1998, there were no commissions paid by the
Fund to affiliates of the Adviser in connection with portfolio transactions.
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
DSTC provides certain administrative services to the Fund. For such
services, the Fund pays 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. However, for
the six months ended June 30, 1998, there were no out-of-pocket expenses
incurred by the Administrator.
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,
1998, DSTC earned $17,963 from the Fund for its custodial services, excluding
the fees and expenses of ICBC.
At June 30, 1998, the Fund owed to DSTC $10,788 and $18,600 for
administration and custodian fees, respectively. The latter amount includes fees
and expenses payable to ICBC totalling $15,961.
During the six months ended June 30, 1998, the Fund paid or accrued $29,753
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,
1998 was $55,579,959, excluding $4,263,161 of short-term investments. At that
date, for federal income tax purposes, the net unrealized depreciation on
investments, excluding short-term securities, of $4,026,459 was composed of
gross appreciation of $6,033,308 for those investments having an excess of value
over cost, and gross depreciation of $10,059,767 for
15
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
those investments having an excess of cost over value. For the six months ended
June 30, 1998, the total aggregate cost of purchases and net proceeds from sales
of portfolio securities, excluding short-term securities, were $20,929,463 and
$21,172,204, 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, 1998, DSA owned 7,318 shares.
16
<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 FOR THE
SIX PERIOD
MONTHS JULY 25,
ENDED FOR THE YEARS ENDED 1994* TO,
JUNE 30, DECEMBER 31, DECEMBER
1998 ------------------------------------ 31,
(UNAUDITED) 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 13.64 $ 12.09 $ 9.65 $ 14.10 $ 14.05
---------- ---------- ---------- ---------- ----------
Net investment loss............................... (0.16) (0.34) (0.21) (0.21) 0.18
Net realized and unrealized gains (losses) on
investments and foreign currency transactions.... (1.12) 1.89 2.65 (3.94) 0.06
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net asset value
resulting from operations........................ (1.28) 1.55 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.................... $ 12.36 $ 13.64 $ 12.09 $ 9.65 $ 14.10
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per share market value, end of period............. $ 9.313 $ 11.375 $ 10.125 $ 10.625 $ 11.875
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total investment return:
Based on market price at beginning and end of
period, assuming reinvestment of dividends..... (18.13)% 12.35% (4.71)% (8.04)% (15.48)%+
Based on net asset value at beginning and end of
period, assuming reinvestment of dividends..... (9.38)% 12.82% 25.28% (29.66)% 0.36%+
Ratios and supplemental data:
Net assets, end of period (in millions)......... $ 55.7 $ 61.5 $ 54.5 $ 43.5 $ 63.6
Ratios to average net assets of:
Expenses, excluding Taiwan stock dividend
tax.......................................... 2.05%** 2.03% 2.29% 2.34% 2.12%**
Expenses, including Taiwan stock dividend
tax.......................................... 2.72%** 2.44% 2.80% 2.72% 2.20%**@
Net investment loss........................... (2.23)%** (2.16)% (1.46)% (1.88)% 2.96%**
Portfolio turnover.............................. 33.75% 74.22% 94.12% 31.75% 9.33%
Average commission rate per share++............. $ 0.0076 $ 0.0060 $ 0.0042 N/A N/A
</TABLE>
- --------------------------
* Commencement of operations.
** Annualized.
+ Total return is calculated exclusive of sales charges.
@ The expense ratio for the period ended December 31, 1994 reflects
reclassification of certain expenses for comparative purposes.
++ For the six months ended June 30, 1998 and for the years ended
December 31, 1997 and 1996, the average commission rate paid on trades
for which commissions were charged was 0.35%, 0.33% and 0.29% of the
principal amount of the trade, respectively.
17
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
RESULTS OF ANNUAL MEETING OF STOCKHOLDERS (UNAUDITED)
- --------------------------------------------------------------------------------
On June 5, 1998, the Annual Meeting of Stockholders of The Taiwan Equity
Fund, Inc. (the "Fund") was held and the following matters were voted upon and
passed.
(1) To elect one Class I Director and one Class III Director to the Board of
Directors of the Fund, to serve for a term expiring on the date on which the
Annual Meeting of Stockholders is held in the year 1999 and 2001, respectively.
<TABLE>
<CAPTION>
NUMBER OF SHARES/VOTES
- -----------------------------------------------------
PROXY
AUTHORITY
NAME OF DIRECTOR CLASS VOTED FOR WITHHELD
- ---------------- --------- --------- -------------
<S> <C> <C> <C>
Sadamu Tsuneishi I 2,152,118 1,147,071
Christina Y. Liu III 3,268,718 30,471
</TABLE>
In addition to the Directors elected at the Meeting, Shuichi Komori, Martin
J. Gruber and Oren G. Shaffer were the other members of the Board who continued
to serve as Directors of the Fund.
(2) To ratify the selection of PricewaterhouseCoopers LLP (formerly, Price
Waterhouse LLP) as independent accountants of the Fund for its fiscal year
ending December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES/VOTES
- -----------------------------------------
VOTED FOR VOTED AGAINST ABSTENTIONS
- --------- --------------- -------------
<S> <C> <C>
3,289,507 6,982 2,700
</TABLE>
18
<PAGE>
- -----------------------------------------
BOARD OF DIRECTORS
Shuichi Komori, CHAIRMAN
Sadamu Tsuneishi
Martin J. Gruber
Christina Y. Liu
Oren G. Shaffer
- -----------------------------------------
OFFICERS
Sadamu Tsuneishi
PRESIDENT
Daniel F. Barry
VICE PRESIDENT
Lawrence Jacob
SECRETARY
Sean J. Peters
TREASURER
John A. Koopman
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 LLP
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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, 1998
----------------------------------
<PAGE>
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