STOCKS TO WATCH

HSBC James Capel forecasts that listed Taiwan companies will post strong 19% growth in earnings per share in 1998, on top of the 45% recovery last year from a dismal 1996. Taiwan stocks are currently selling at a pricey 23 times this year's earnings, but fund managers say that is still cheap given the earnings prospects. Of course, not everything is rosy. Exports of chemicals, plastics and textiles are falling because of the Asian slump. But surging electronics exports -- with 13%-14% growth expected this year -- are more than compensating. While many investors worry East Asia's slowdown will eventually hit Taiwan's personal computer and peripheral makers, Rick Hsu at Capital Securities in Taipei says such concerns are overblown. "Our companies are world class suppliers and they depend mainly on [sales to] North America and Europe, with Asia being a small portion of the market."

Acer, Taiwan's best-known personal computer maker, is a turnaround story. Last year the company's memory chip joint venture TI-Acer lost a bundle as prices fell. Now, as memory prices firm, the venture is bouncing back and Acer is benefiting. Losses from Acer America are also down sharply. Still, given the consolidation at the top end of the global PC industry as seen in the merger of U.S. giants Compaq and Digital, Acer faces stiffening competition. But Hsu says: "Acer has shown before it can catch up fast. It has the products, it has cut costs and it has a good marketing strategy in place." And even if similarly small brands may find the going tougher, Acer is still a top contract manufacturer with big revenue streams from peripherals and components -- its own-brand PCs account for just 40% of total sales.

Better bargains can be found among Acer's lesser known rivals such as Compal Electronic, which makes notebook PCs for Dell and Hewlett-Packard of the U.S. "Compal will see 60% sales growth and 55% earnings growth this year. It is an extremely well-run and focused company," Hsu says. Another notebook maker coming from the minors into the big league is Inventec, which supplies half of Compaq's notebook PC requirements worldwide. Compaq is increasing its notebook offerings and Inventec is revving up its production lines to meet new orders. Hsu says Inventec, which so far has been a pure notebook PC maker, is also likely to produce desktop PCs, which would add to the bottom line.

But don't just focus on electronics. Analyst K.C. Kao at Merrill Lynch in Taipei says good buys can be found in less favored sectors, pointing to Formosa Plastics and Nan Ya Plastics, the two flagships of billionaire Wang Yung-ching which are expanding and moving into upstream and downstream products. Despite the regional overcapacity in petrochemicals and plastics and the slump in Asian demand, Kao says the prices of the two blue-chips are still in the range where investors can accumulate and reap gains in the medium to long term. "Investors understand that you cannot just keep increasing capacity without having a market," says Kao. "Taiwan producers have a strong local market and are globally competitive. The crisis will prove Taiwan producers can not only survive but prosper."