QIC Inside Investor Relations Volume 34: Can micro-cap stocks attract FINI investors? A case study.

lrene Wu 2022-01-14

Picture Source: InvestorPlace

Generally speaking, FINI investors prefer to invest in large cap (market cap >US$10 billion) and mid-cap (market cap between US$2-10 billion) stocks when it comes to the Taiwan stock market, because compared with micro- and small-cap stocks, these mid- and large-cap stocks often have more transparent investor communication mechanisms as well as better liquidity, allowing FINI investors to track these companies in the long run. This phenomenon is observed through the factual data (Figure 1) that, for all listed stocks in Taiwan, the median FINI holding of large-cap and mid-cap are 32.9% and 26.3% respectively, while that of small-cap is only 8.6%, and of micro- and nano-cap are in the low single digits.

However, among all listed companies on the Mainboard and Emerging Stock Board of TWSE and TPEx (Table 1), more than 90% has a market cap of less than US$2 billion; moreover, 70% has a market cap of less than US$300 million. Can these micro- and small-cap stocks attract FINI investors and let their valuation reflect their shareholder value? Yes, absolutely. In this issue of QIC Inside Investor Relations, we share our observations with the following case study.

Figure 1: FINI holding % of listed companies in the Taiwan stock market

Source: QIC Research, TEJ; based on public information (as of Dec 7, 2021), including all listed companies on the Mainboard and Emerging Stock Board of TWSE and TPEx

Table 1: Overview of Taiwan listed companies

Source: QIC Research, TEJ; based on public information (as of Dec 7, 2021), including all listed companies on the Mainboard and Emerging Stock Board of TWSE and TPEx

Case Study: Company A, its original market cap was about US$100 million

Company A was a micro-cap stock. Due to fierce competition, Company A’s revenue had been stagnant for years, and even went into decline at times. However, with continued improvement in operational efficiency, it had delivered stable or an increase in net profits. In addition, it consistently offered high dividend payouts, and its management team was dedicated to business operations. Company A wanted to bring in FINI investors to increase its shareholder value.

The common perception in the capital market is that FINI investors only prefer those with high revenue growth potential as they aim to generate high alpha. In reality, global FINI investors have a variety of investment styles. The key lies in how a company shapes its communication style, how accurately it positions itself in the capital market, and whether the company uses the most efficient way to find the right investors.

Between time T to T+10M (as shown in Figure 2), Company A’s revenue declined by single digit year-on-year, and net profit increased by single digit, which was not very impressive. However, starting at time T, Company A re-shaped its way of communication to become more transparent and began to clearly present its strategic plans to investors. Even though its financial performance wasn’t very strong between T to T+10M, quarter by quarter the company delivered what they had communicated, and this had helped the company successfully earn the recognition of FINI investors in the capital market. Since Company A began to transparently communicate with investors about its new strategic plan, its stock price had gradually increased by 40% by T+10M, and its FINI holding had gradually increased by 11 percentage points.

We refer to this stock price performance and FINI holding change as “micro-cap stocks’ process of being “discovered."

Figure 2: Company A’s share price performance and FINI holding %

Source: QIC Research, TEJ

Many micro-cap stocks in Taiwan have a strong global position in their niche fields. As long as they can accurately position their mid-to long-term business strategies and transparently communicate with the right investors, they have the opportunity to “be discovered” by global FINI investors and maximize their shareholder value.

Detailed, transparent, and accurate communication with foreign investors about the company’s mid to long-term development strategy is one of the keys to maximizing shareholder value. QIC advisors consist of experienced professionals that have worked in major sell-side and buy-side companies for many years. We help companies to formulate their strategies through our understanding of the industry and in-depth interviews with the management team. We also help facilitate the meetings with various types of investors. If you are interested in learning more about our services, please reach out to us.

Contact: yvonnehuang@qtumic.com

lrene Wu

Irene has focused on the Technology Hardware and Software & IT Services sectors since joining QIC in early 2015, providing comprehensive capital market advisory to clients. During her tenure at QIC, Irene has accumulated extensive experience working with both public and private clients. For public clients, Irene has worked closely with clients' management teams to raise their profile in the global capital market. She has assisted clients to reshape capital market stories and attract high-quality global institutional investors, helping her clients optimize their shareholder structures and create long-term shareholder value. Irene has served a diverse range of Taiwanese listed companies, including global leaders in various fields such as GaAs foundry, PCB, CCL, computer peripherals, connectors, industrial PCs, server chassis, acoustic, and camera modules. For private clients, Irene has assisted clients in fundraising and facilitated exits for existing shareholders. Additionally, for those clients with subsequent listing plans, she has tailored a series of promotion activities to enhance clients' exposure in the capital market as well as facilitate smooth communication with potential institutional investors and sell-side analysts. A classic case is assisting an Asia-leading cloud-managed service provider to complete fundraising and bring in well-known global institutional investors when it was listed on the Emerging Stock Board, creating shareholder value.