Taiwanese business st up shop on the mainland early, but opportunities to enlarge are restricted,

When Hon Hai, the world’s largest electronics contract manufacturer, spun off its China – based handset operations and took them public in Hong Kong as Foxconn International Holdings in early 2005, the move was seen as a beacon for other Taiwanese business.

Little more than a year later, a dozen Taiwanese- owned China-based companies have followed FIH and opted for a Hong Kong IPO to support further growth in China. A far larger number, however , have started restructuring in preparation for going public but are keeping their options open as to where a future IPO could take place.

“There is a clear trend among larger Taiwanese businesses in China to establish a more sophisticated management structure. mostly centered on a holding company, which can eventually serve as the vehicle for taking the whole China business public,”

Says Thomas Liu, president of Friendly Group, which offers consulting, legal and accountancy services to Taiwanese businesses on both sides of the Strait .

With more than 60,000 businesses registered on the mainland, the Taiwanese are among the largest foreign investors in China, Mainland investment approved by Taipei stands at a cumulative $50bn, roughly equal with US and Japanese foreign direct investment in China. But the Mainland Affairs Council, Taiwan’s top China policy body, estimates that the real figure might be as high as $150bn.

Although Taiwanese investors benefited from setting up shop in China much earlier than international rivals . some are now becoming victims of their own success.

“Many of these companies set up factories all over China in order to bag the maximum local tax benefits and other incentives,” says Mr. Liu “That has left them with extremely messy structures.” Taipei also continues to cap mainland investment by the island’ s companies at 40 per cent of their net worth. For many businesses, that means that unless they dilute their ownership in mainland units or cut those units loose from the Taiwan- based parent, they are barred from expanding on the mainland.

A listing in Hong Kong or in China’s A– share market is considered the natural way to achieves such a spin-off. However China-based Taiwanese Companies emphasize that they would prefer a mainland listing to a Hong Kong one, and Beijing’s decision earlier this year to resume taking applications for A-share IPOs under new set or regulations was seen as a promising move.

“First, the time for preparation has been greatly shortened and might now be even shorter than in Hong Kong or in Taiwan, and we have clear revenue and profitability requirements for the first time, ”says Mr. Liu. “Second, the ban on related-party transactions, a special problem for many Taiwanese companies, is gone.”

However, the biggest hurdle remains. Even under the new rules, China rejects IPO candidates that are in competition with related companies in the same industry – a widespread phenomenon among Taiwanese businesses, which tend to have each mainland factory incorporated separately.

Uni-president, Master Kong and Want Want, Taiwan’s biggest food and beverage groups, al l suffer from the same problem. “That is one reason why Uni-president has been planning an IPO for ever, but has still not made a move,” says the Shanghai representative of a Taiwanese brokerage.

The only way to achieve a satisfactory A-share listing would be to combine all independent companies on the mainland in one corporation. That, however, would destroy many unit of their favourable tax treatment

The alternative would be to put the different companies under an investment holding company also based in China. But so far Beijing has not allow such holding companies to go public.

Given these difficulties, only three Taiwanese – backed businesses in China are awaiting approval for an A-share IPO under the new rules – one of the mainland factories owned by Chunghwa Picture Tubes, A Taiwanese flat-panel maker; a mainland unit of Gem Year, the world’s largest screw making group; and seagull, a bathroom equipment maker.

Taiwanese business leaders are honing for change, ”We believe market regulator will be ready for some interesting experiments sooner or later.” says an executive at Uni-president.

The China Securities Regulatory Commission has indicated to Taiwanese businesses that it would like to see more high-profile Taiwanese IPOs in China and is ready to accept an application from an investment holding company. People close to the matter say that this would be handled as a special case which, if successful could become a precedent for others.

Taiwan’s larger businesses have already started preparing. Far Eastern Textile and Asia Cement – both part of the Far Eastern Group, a conglomerate with interests in textiles, retail, telecoms, construction, financial services, petrochemical, and transport – have started to restructure their mainland operations and plan to put them under an investment holding company.

“We are looking to list the operations in Hong Kong or, preferably, on the mainland, around 2008,,” says Douglas Hsu, Far Eastern chairman.

The Yuen Foong Yu Group, a conglomerate with operations in paper production, financial services and technology, is doing the same. Paper manufacturing in China is being split into three segments under separate holding companies.

Ruentex is planning to restructure its retailing business on the mainland, also with a view to taking it public. The group’s RTMart is China’s second-largest hypermarket operator with revenue of T$80bn ($2.4bn) expected on the mainland this year.