China Strategic's acquisition of American International Group's Taiwan unit, Nan Shan Insurance, stimulated the company's share price to hit nearly HK$1 earlier last week.

However, Webb sees a 70 percent downside risk from the price of the stock, which closed Friday at 58 HK cents.

He noted that a consortium between China Strategic and private equity fund Primus Financial Holdings has agreed to pay US$2.15 billion (HK$16.77 billion) for AIG's 97.57 percent stake in Nan Shan.

On a generous assumption of price- earnings ratio of 1.5 times, Webb said the insurer would be worth US$3.88 billion. Therefore, a 97.57 percent stake should fetch US$3.79 billion - US$1.64 billion or 76 percent more than what the consortium is paying.

Now shockingly, China Strategic announced it plans to sell 30 percent of its Nan Shan stake to Taipei-based Chinatrust Financial for US$660 million.

The decision to sell the stake to Chinatrust came after the China Strategic-Primus consortium failed to win the Taiwanese regulators' approval for the original stake purchase from AIG.

There has been a lot of difficulty in completing the acquisition, as the Nan Shan employees have gone on strike and the deal has to be vetted by some 16 authorities in Taiwan before final approval.

Last year, when Country Garden Holdings (2007) chairman Yeung Kwok-keung was proposing to spend more than HK$10 billion in his eventual failed bid to acquire control of Television Broadcasts Ltd (0511), Taiwanese legislators were alarmed because TVBS is a major channel in Taiwan.

Although there is no clear restriction on Hong Kong money coming to Taiwan to buy assets, Taiwanese people are very sensitive in interpreting the current deal, even if China Strategic management has assured that none of the funds are coming from the mainland.

The relationship between mainland China and Taiwan has warmed somewhat since the Kuomintang became the ruling party on the island, but this doesn't mean its populist politicians wouldn't hinder the Nan Shan approval process.

What I believe is that as Chinatrust is an existing listed financial institution, the approval process will have to pass through the insurance authority, as well as the Securities and Futures Bureau.

Nan Shan is Taiwan's second- largest life insurer with more than four million customers and 35,000 sales agents.

Chinatrust's investment will allow it to take advantage of Nan Shan's customer base, while helping Nan Shan challenge the island's largest insurer, Cathay Financial Holdings.

There are also concerns in the market whether politicians from the opposition parties will seize on the Nan Shan sale to attack the ruling party for allowing firms with mainland backgrounds, such as China Strategic, a battery product maker, and Primus to take over such a sensitive asset. As everyone knows, insurance companies usually possess a great deal of private information on individuals.

The Taiwanese harbor reservations on whether their government should adopt an open mind on the Nan Shan sale.

Whether the controversial deal wins approval or not, China Strategic will continue to grow by acquiring strategic and sensitive assets in Taiwan.

I believe that the group will focus on taking over assets related to the financial sector and then surely expand to telecommunications, media and petrochemical industries.

Buying Nan Shan Insurance marks China Strategic's first foray into the Taiwanese market. The group will use whatever means necessary to get its foot in the door that was previously closed to China for political reasons.

Although Hong Kong-based firms are trying to list in Taiwan by means of Taiwan Depository Receipts, and China has also signed a memorandum of understanding with Taiwanese authorities on the mainland's Qualified Domestic Institutional Investor scheme, the cross-strait relationship in terms of financial cooperation is not really that tight.

Early last week, when China Strategic announced the appointments of Ma and Or as chairman and chief executive, respectively, the company's share price jumped to nearly HK$1.

As an investment rule, people should take profit when good news is released rather than waiting for another surge.

China Strategic's stock - as we expected - has dipped below 60 HK cents, but it is still overpriced. The premium cannot be justified at present.

* Timothy Kwai is an investment strategist at Quam Securities

E-mail: timothy.tkkwai@quamgroup.com