BY ROBYN MAK

After conquering semiconductors, Taiwan Semiconductor Manufacturing, the world’s biggest chipmaker, has a new challenge: kickstarting Taiwan’s stalled green transition. Bureaucracy and red tape have marred the island’s renewable-energy goals. The company’s voracious appetite for cleaner power will offer a much-needed spark.

Referendums on whether to restart a nuclear power plant and whether to change the location of a planned $2 billion liquid fossil gas terminal highlight how politically contentious the island’s energy issues are. President Tsai Ing-wen has pledged to phase out nuclear power and is hoping gas-fired plants will supply half of the $600 billion economy’s electricity needs by 2025. At the same time, she has promised to increase the share of renewable sources to 20%, from 5.4% in 2020.

On paper that’s doable, but in practice it looks out of reach. Covid-19 disruptions held up wind and solar projects, but lengthy and complex approval processes are also to blame. Offshore wind developers, for instance, must obtain consent letters from at least eight different authorities as well as approval from the environmental watchdog even to be eligible to bid for projects. Those that make it to the second round must also detail how they can meet local procurement requirements, often onerous criteria given how new the industry is in Taiwan. According to one 2021 estimate, unfinished wind and solar projects totalled $83 billion, among the highest in Asia.

TSMC is in a unique position. The local behemoth, whose market capitalisation equates to roughly 90% of Taiwan’s GDP, accounts for roughly 5% of the island’s electricity usage, Greenpeace estimates. In 2020, its energy consumption topped 16,900 gigawatt hours – up 18% thanks to water- and electricity-guzzling factories that churn out most of the world’s bleeding-edge chips.

The company, though, wants a greener look – and customers like Apple, as well as investors, are pushing for one, too. In 2020, it missed its water-reduction target but exceeded a 7% renewable-energy goal. As part of a plan to reach 25% by 2030 and eventually 100% two decades later, TSMC signed a 20-year power purchasing agreement with Danish offshore wind developer Orsted – the world’s largest corporate renewables deal. The chipmaker’s rising political clout means it can push for better rules. Taiwan’s green transition depends on it.

First published December 2021

BY SWAHA PATTANAIK

Fairy-tale genies sometimes resist attempts to shove them back into bottles. Global inflation will display a similar tendency in the coming year because of the changing behaviour of policymakers, businesses, and workers.    

Central bankers undershot their 2% inflation targets for years and have been circumspect about slamming the brakes on monetary stimulus even though overshoots have become the norm. And fiscal austerity is less of a fetish than a decade ago, with finance ministers less apt to embrace the policy despite much higher debt burdens. Both groups of policymakers want to ensure economies recover properly from Covid-19 shocks. But that means price pressures will endure for longer.   

True, inflation is practically guaranteed to fall in the coming year, albeit later than Federal Reserve Chair Jerome Powell and his global peers had anticipated.

Its four-decade high of 6.8% in the United States and 4.9% record peak in the euro zone are partly a result of comparisons with depressed 2020 prices. Shortages of goods will also ease up as demand cools and supply- chain disruptions are gradually fixed. Even so, inflation will continue to surpass central bankers’ targets well into the coming year. 

There’s a big backlog of orders. And businesses, scarred by supply shocks, may well shift from a “just-in-time” to a “just-in-case” approach by holding more inventories. Walmart, for example, said in November that U.S. inventories were up 11.5% before its busy festive season. Companies could also be readier to pay more for parts made locally or whose delivery is guaranteed and seek to pass extra costs to customers.   

The longer high inflation persists, the more likely workers are to push for bigger wage rises. They certainly have more leverage to do so than in the past given post-pandemic labour shortages. In the United States, for example, the number of people quitting and the so-called quits rate both hit record highs in September. Euro zone unemployment has been more stable through the pandemic, but some sectors nevertheless face staff shortages as labour force participation rates take time to rebound.    

Central bankers are biding their time in the hope that wage inflation won’t be either too hot or too cold. But that’s another fairy tale altogether.

First published Dec. 10, 2021

BY ROBERT CYRAN

Top-line growth is the surest way to create wealth. But Wall Street has taken the idea too far lately by ignoring the importance of profit and cash flow.

Among top-performing stocks, revenue growth accounts for the majority of wealth creation over a decade, according to consultancy BCG. Take Microsoft, with a $2.5 trillion market value. Over 20 years, revenue grew nearly sevenfold. Net margin improved slightly, so earnings grew by a factor of eight. Investors reckon the company is worth something over 30 times estimated earnings, about what they paid two decades ago. Microsoft’s stock is worth 10 times as much, as of mid-December, largely because revenue grew.

Unlike Microsoft, Amazon.com took years to become profitable in an accounting sense. But like Bill Gates’ firm, it threw off cash early, so it didn’t need additional capital to grow. Sales growth is one key ingredient, but profit and/or cash flow is another.

Contrast that with WeWork. The office-sharing startup was valued at $47 billion based on revenue doubling annually prior to a failed 2019 initial public offering. But the company wasn’t profitable and couldn’t fund itself. When investors got tired of injecting capital, WeWork’s valuation plummeted. It was worth $6 billion in early December.

That lesson seems to have been forgotten. The median enterprise value-to-sales ratio for technology-sector IPOs in the first 10 months of 2021 was 15, according to Jay Ritter at the University of Florida. The only time it has been higher in 40 years was prior to the dot-com

crash in the early 2000s. Already-listed e-commerce firm Shopify is valued at around 30 times estimated revenue, according to Refinitiv data for December. Five years ago, it was valued at just 6 times.

This creep has spread to less established firms, including some with almost no revenue, let alone profit, like Rivian Automotive, an electric-truck maker with a market capitalization above $100 billion.

Shopify, like the growing Amazon, can bankroll its own expansion. But many firms with huge valuations are unlikely to do that for many years. Rivian’s valuation, for example, is based on the promise of uninterrupted future growth combined with a second promise that sufficient profit will eventually materialize. In buoyant markets investors forgive such optimism. But any blows to confidence in 2022, whether economic, pandemic, political or otherwise, should sort the durable Amazon. coms from the hyped-up WeWorks. 

First published December 2021

BY JEFFREY GOLDFARB

The leveraged buyout will be big in Japan. A takeover approach for Toshiba betrayed private equity’s growing appetite in the country. Breakingviews found a few dozen chunky companies that make suitable candidates, in theory. One that stands out among them is Ricoh.

Buyout shops are stockpiling money in the Land of the Rising Sun, where cheap borrowing and corporate resistance to change prevail. Dry powder available to Japan-dedicated funds, which accounted for an unusually high 7% of capital raised in the region in 2020, surpassed $60 billion, per research outfit Preqin, more than twice as much as five years ago.

Sizeable deals are uncommon, though. The Bain-led $18 billion acquisition of Toshiba’s memory-chip business four years ago was Japan’s biggest ever. Second on the list is a property manager taken private in 2007 for about $4 billion. CVC’s $20 billion offer for Toshiba in 2021 heralds a fresh chance for something hefty.

A crude Breakingviews screen of Refinitiv data for Japanese enterprises with market caps between $5 billion and $20 billion, ample EBITDA and low debt spat out a variety of prospects. Many of them could use a shakeup, but look too domestically entrenched for private equity to successfully make their case.

Copier and printer maker Ricoh is different. Although it already has implemented a restructuring to become more of a services provider, new owners could sharpen and accelerate the transition behind closed doors. The nearly $7 billion company isn’t getting much credit for its changes. After investors were initially energised by a strategic update unveiled in March by Chief Executive Yoshinori “Jake” Yamashita, the stock price retreated. Its total shareholder return has been just 4% annually on average over the past five years, less than half that of Japan’s benchmark index.

Ricoh generates more than half its sales overseas and nearly two-thirds of its employees are abroad, adding to the appeal for an international private equity firm.

Yamashita’s extended stints in the U.S. and British divisions also might help make him more receptive to an entreaty. And the company’s biggest shareholder happens to be the same pushy investor, Effissimo, rattling Toshiba’s cage. All that suggests Ricoh could be a tempting target as buyout barons supersize their yen for Japan.

First published December 2021

BY NEIL UNMACK

Vulture funds will need to stretch their wings. Corporate defaults are falling, despite the surprising endurance of the pandemic. Investors that specialise in buying distressed debt like Oaktree Capital Management will have to look beyond the mainstay of public debt markets. 

The last two decades have been a golden era for financial crises, yet life is getting harder for funds who take control of troubled companies by buying their bonds or loans. Covid-19 did trigger some big failures, like rental car company Hertz. But default rates, which reached nearly 14% in 2009, peaked at around half that level in 2021, Moody’s Investors Service data shows.  

It’s part of a longer-term trend. High government debt levels mean central banks need to keep interest rates low, helping even shaky companies raise funds. Barring severe shutdowns from new coronavirus variants, 2022 may be even more stress-free. The proportion of U.S. loans trading below 80% of face value, an indicator of likely default, was just 1.12% in November, according to an index tracked by Leveraged Commentary & Data.  

Yet the business of managing distressed debt funds is far from dead. The sector raised some $40 billion of capital in the first 11 months of 2021, Preqin reckons. That’s on top of the $100 billion of so-called dry powder that was waiting to be deployed earlier in 2021. Oaktree, founded a quarter century ago by Howard Marks, just raised $16 billion for a credit opportunities fund.  

The Chinese property crash could be an opportunity. Dollar-denominated high-yield bonds from the country yielded nearly 25% in early December, according to an ICE Bank of America Asia index. And managers will also need to seek out higher returns by lending in the $1 trillion private credit market, where loans aren’t widely traded.  

New markets bring fresh challenges. Valuing Chinese debt is tricky given uncertainty over how offshore creditors will be treated. And returns in private debt may shrink as more money pours in. Experienced managers may still thrive.

But distressed debt funds on aggregate generated a 13% return in the 12 months after Covid emerged, according to Preqin, less than half the return after the 2008 crisis. With 2022 looking leaner, investors in vulture funds may find future pickings equally hard to come by.

First published December 2021

BY KATRINA HAMLIN

China will gamble on the digital yuan. As Macau’s casino owners prepare to bid for new licenses in the city for the first time in two decades, regulators will be sure to use the opportunity to squeeze more out of them in 2022. Expect them to force operators in the offshore gaming hub to become test beds for the digital yuan.

As current concessions for the $37 billion market expire, companies like Sands China and Wynn Macau will be eager to prove themselves team players. Regulators are already flexing their muscles. A government consultation paper on the rebidding process pitched ideas like appointing government agents to supervise daily operations.

The average high roller lost over $27,000 on each visit to the tables in Macau, Bernstein analysts estimate. It has been a haunt of corrupt officials and businessmen too. In December, junket operator Suncity’s boss Alvin Chan was implicated in an investigation into illegal gaming. Suncity facilitated bets for wealthy VIPs, a market segment worth around $8 billion in gaming revenue the year before Covid-19 struck. Just one month earlier, central bank governor Yi Gang suggested China’s newly developed cryptocurrency could be useful for fighting crime and resolving complex cross-border payments problems, including money-laundering. Macau might have been on his mind.

Migrating the gaming hub to digital payments would complement Beijing’s desire for greater oversight of cash flows and customers. Situated outside Chinese capital controls, Macau is also an ideal place to test the technology before rolling it out more widely on the

mainland. Others are already considering the concept of cashless casinos using traceable funds. Australia’s Star Entertainment, for example, says it is exploring digital payments to assuage its watchdogs.

VIP favorites like Galaxy Entertainment and Wynn Macau might once have worried that big spenders would shy away from such scrutiny. However, high rollers no longer rule income statements. The mass market now accounts for two-thirds of gaming revenue and almost 90% of earnings according to official data and Breakingviews estimates.

The technology is here: Testing is already underway, and pilots have already seen Chinese consumers splurge some $10 billion worth of digital yuan. While watchdogs have much to win, and operators have less to lose, 2022 will be the year the new currency comes to casinos.

First published January 2022

BY RICHARD BEALES

In a merger of buzzwords from 2021, Breakingviews is readying a new metaverse-based buy-now-pay-later digital-asset trading platform. If that’s too much to swallow, here are a few other improbable – if, sadly, not impossible – financial product innovations that could rear their heads in the coming year.

First, how about combining blank-check companies with non-fungible tokens? NFTs are digital certificates that share technology with cryptocurrencies but are unique rather than interchangeable. They can be used, among other things, to authenticate ownership of digital assets. They are also all the rage, perhaps explaining why movie-theater chain AMC Entertainment, whose stock surged over 1,000% in 2021 through mid-December on the back of social-media interest, is offering an NFT to self-identified shareholders of the company.

Public offerings of special-purpose acquisition companies, which raise cash to buy other businesses, hit a record pace early in 2021 but have since run into investor indigestion and skepticism. They typically hand out warrants when they issue shares as a carrot to invest. Adding AMC-like NFTs as well – tradeable, crypto- powered proof that “I own this SPAC” – could be just the ticket to reinvigorate the market.

Another headline-grabber in the past year was Robinhood Markets, the stock and crypto trading platform that went public in July. One controversy that has helped tank its shares since then is its revenue model, dominated by so-called payment for order flow, or PFOF. This means market makers pay Robinhood to direct stock transactions their way for execution.

How could trading firms replace that revenue? Newbie cryptocurrency dabblers who don’t want to lose sleep at night might fancy an account in which their dollars are turned into bitcoin or ether each morning and back into dollars each afternoon. They’d collect the inexorable – right? – daily gains on the cryptocurrency, while the brokerage could rake in fees on those exchanges and avoid the taint of PFOF.

A third idea for a handy financial product in 2022 is what might be called the Tech Triple 12 ETF. Cathie Wood’s ARK Investment Management’s actively managed technology exchange-traded funds made waves in 2021. Passive ETFs, too, can be tailored tightly for specific stock characteristics. In exchange for a fee, this one would bet only on tech companies with a market worth above $3 trillion. By the time you read this, one company may qualify.

First published January 2022