The first simultaneous listing in Korea and the US was completed late New York time on Thursday when LG Philips LCD (LGP) raised $1.008 billion from its IPO. But for lead managers LG Securities, Morgan Stanley and UBS it proved to be a doleful and dispiriting end to a 15 month listing process, which should have resulted in a blow-out deal by one of Asia's few truly global stars.
In a bid to get both the domestic and international tranches done, the secondary share offering was withdrawn and pricing fixed right at the bottom of an indicative range pitched far below the valuation originally hoped for. And it is not yet over. The domestic IPO does not close until Tuesday and has been hard underwritten by the three leads, which now have to face up to an investor base used to receiving stock at a significant discount to fair value.
Most agree LG Philips LCD fell victim to a complicated dual listing process, which developed a life all of its own and a timetable that diverged from the notoriously volatile cycle of the TFT-LCD sector. To achieve the pricing it was looking for, the company needed to complete its IPO by the end of the first quarter of 2004.
However, this would have meant dropping the Korean listing, which the LG Electronics half of the joint venture was determined to complete. And while a first quarter New York listing would have caught the top of the current cycle, investors would have ended up sitting on large secondary market losses, much as they have with SMIC following its $1.8 billion IPO in March.
This left LGP in a difficult position. Postponing the deal until the fourth quarter of 2004 would expose it to market risk because of the looming US presidential election. Postponing it until the first quarter of 2005 was also not very appealing given the company's desire to raise equity funding for its 7G plants.
Some non-syndicate bankers believe LGP should still be congratulated for getting a deal done in the face of market conditions that were clearly set right against it. All agree the current timing could hardly have been worse. The sector appears to have peaked and there is as yet no clarity on how long or how deep the downturn will be.
With very little near-term visibility, or the prospect of much upside, it became very difficult for the leads to generate momentum. Investors were consequently able to leverage pricing to the extent that LGP has been priced at a discount to far smaller competitors such as Au Optronics and Chi Mei Optoelectronics on a 2005 basis.
One day before pricing, the international order book was said to have been about 75% to 80% covered. Coming into the last day of pricing, the two vendors, LG Electronics and Koninklijke (Royal) Philips Electronics, decided to scrap the secondary share sale and the book went on to close one-and-a-half times covered at the reduced offer size.
Initially, the flotation was to have encompassed the sale of 43.9 million shares, of which 34.3 million would go into the international tranche and 9.6 million into the domestic tranche. The domestic tranche was purely primary shares, while the international tranche had a split of 24 million primary shares and 10.3 million secondary.
Since the removal of the secondary sale would weigh the deal heavily in favour of the domestic IPO, the numbers were re-configured slightly so that 24.96 million shares went into the international tranche and 8.64 million into the domestic tranche: a 74.3% and 25.7% split between the two.
Pricing of the domestic tranche was set at Won34,500, while the ADR was set at $15. One common share equals two ADRs. There is only one greenshoe in the international tranche and if this is exercised, it will bump total proceeds up to $1.12 billion.
Alongside the three leads, co-leads in the international tranche were ABN AMRO, JPMorgan and Lehman Brothers, with CLSA as co-manager. In the domestic IPO, Dongwon Securities joins the three bookrunners.
Pre-greenshoe, the company will have freefloat of 10.4%, just above the 10% minimum stipulated by the Korean Stock Exchange. Post greenshoe, it will rise to 13%. The two vendors will consequently be diluted to a stake of either 44.3% each post shoe.
Specialists report the participation of about 100 accounts, with five investors placing orders for more than $80 million.
By geography, about 40% went to the US, 40% to Europe and 20% to Asia. US retail accounted for about 10% of the international tranche and specialists say there was surprisingly little interest from hedge funds.
Most demand was said to have come from long-only accounts, prepared to sit the cycle out. "We got the impression most accounts had owned the TFT-LCD sector, but all the smart ones sold out a few months ago," comments one observer. "They came back to LGP's IPO because they thought pricing gave them an attractive entry point to build a position in size."
Pricing at $15 values the company at $9.7 billion. At this level, it has been priced at 4.8 times 2004 earnings and 4.2 times 2005. The average Asian tech PE multiple stands at 14 times.
On a price to book basis, it has been priced at 1.76 times 2004 book and 1.24 times 2005. It had originally been pitched on a wide range of two to three times 2004 book.
Its major valuation comparable is Taiwan's AU Optronics (AUO), the world's largest listed TFT-LCD producer with a current market capitalization of $6.61 billion. Unfortunately for LGP, the stock fell throughout the marketing process and is now down 43% from its NT$75.71 year-to-date high in mid-April.
At current levels, analysts value AUO at roughly 1.5 to 1.7 times 2004 book and 1.2 to 1.3 times 2005 book. Chi Mei Optoelectronics, which has a market cap of $4.8 billion, is currently trading at about 1.8 times 2004 book and 1.4 times 2005.
Specialists say it was very difficult to get investors past AUO's valuation. "It was impossible to bring any sophistication to the marketing process," says one. "Investors simply latched onto where AUO was trading on a price to book basis and wanted LGP at a discount. They argued that since all Korean companies trade at a discount to their regional and international peers, so should LGP."
The leads' counter arguments that LGP is a global exporter with virtually no exposure to the domestic market seemed to cut it little slack. Nor did analysts' forecasts, which predict how much bigger and more efficient the company will be on a 2005 basis.
In 2003, LGP recorded net profit of $876 million compared to $465 million for AUO. By 2005, co-manager CLSA forecasts profit of $2.83 billion for LGP and $1.52 billion for AUO. The former has already reported unaudited net profit of $609 million for the first six months of 2004.
At the same time, CLSA believes LGP will be able to maintain an operating margin in the low 30's. It predicts a 2005 operating margin of 22% for AUO.
Analysts believe LGP will be able to withstand margin compression from a cyclical downturn because of the 40% cost reductions promised by its Gen 6 plants, which will produce 30" to 37" panels. Ramp up is scheduled to begin at the end of this year and analysts believe Gen 6 should account for about 39% of total production within a year.
How the industry will cope with the current round of capacity increases is one of the main variables governing the length of the present downturn and the margin compression, which will ensue if panel prices fall too rapidly. In particular, there is much debate concerning the likely inflexion point when the long fabled consumer demand for flat screen TV's will finally kick in.
If there is an uptick in consumer demand, LGP should be the biggest beneficiary since it is the most highly geared to the TV market. At the end of the first quarter of 2004, for example, it had a 23.8% global share of the TV market, compared to 21.2% for monitors and 18.3% for notebooks.
By contrast, Sharp had a slightly lower 23.6% share of the TV sector, followed by Samsung on 16.6%, Chi Mei 12.3% and AUO 9.1%. Taking all sub sectors together, Samsung leads the industry with a 23.5% global share, followed by LGP on 20.8%, AUO on 13.2% and Chi Mei 10%.
"The consumer sector is the one weak spot of the TFT-LCD industry at the moment," says one tech specialist. "If it comes back once we start heading towards Christmas, then the bears are going to have to cover their shorts pretty quickly."
Many industry specialists believe the current downturn will be short-lived because global growth remains strong. "The last downturn was sparked by huge increases in capacity as well," the banker adds. "But it also co-incided with a slow-down in corporate tech spending. This time round, tech spending is at a historical high."
But he also argues that high Average Selling Prices (ASP's) have choked off demand particularly for monitors, where the panel is the major cost component.
"Falling ASP's are no bad thing because they will re-ignite end user demand," he continues. "Flat panel producers will have less pricing leverage during the third and fourth quarter, but there will be more certainty about end-user demand and this should support share prices."
During LGP's marketing period, arch rival Samsung suggested panel prices will fall up to 20% during the second half of the year and helpfully re-iterated the point on the day the IPO priced. "As usual Samsung was up to its tricks talking down the market in order to trash a rival," notes one observer.
Syndicate research spans ASP falls of zero to 15%.
IPO proceeds are being used to fund LGP's Gen 7 plants. The company has said it plans to spend $21 billion in capex over the next 10 years.