Following the analysts meeting last Friday, syndicate positions for the group's ADR have now been finalised, with roadshows provisionally scheduled to start at the very beginning of December.
Alongside global co-ordinator Goldman Sachs and joint bookrunners Merrill Lynch and UBS Warburg, there will be three co-leads and four co-managers. Credit Suisse First Boston and Deutsche Bank, both of which were shortlisted for the original mandate, win two of the co-lead slots, with the company's financial advisor ABN Amro gaining the third. Co-managers number CLSA, Daiwa, ING Barings and Soc Gen.
Bankers say that because of the deal's highly compressed launch schedule, analysts will be given two weeks rather than the customary month to write their reports and will be subject to a 10 day research blackout for pre-marketing from about November 20. Whether the deal actually launches or not after this remains to be seen.
"Market conditions are obviously not ideal for a telecommunications company at the moment and we'll be coming right up against Christmas and year end," says one banker. "The headlong rush imposed by the government really doesn't help, but officials remain very keen for quick completion because they don't want Chunghwa's overall privatization schedule disrupted. Yet, realistically, to get the deal done under this timeframe is pushing it."
Under the confidential filing submitted to the US SEC, Chunghwa is now proposing to issue 1.331 billion shares representing 13.8% of its equity. Previously, the company said that it was planning to issue 1.15 billion shares or 12% in ADR form, but has increased the amount slightly because of the dismal subscription rates to its domestic IPO. But bankers say that the final issue size will be highly dependent on market demand, with the government intent on showing flexibility towards upsizing or downsizing the deal.
At the group's current NT$87 share price, some NT$115.79 billion ($3.61 billion) stands to be raised. Since listing on October 26 at NT$104 per share, Chunghwa has been limit down on all but two days and most observers believe that the stock has further to drop yet. Market consensus assigns the company a DCF valuation of about NT$75, at which level it stands to raise about $3.11 billion, some $1.19 billion less than it would originally have hoped.
PR disaster
Since the government first announced it was setting a target price of NT$104 earlier in the summer, the privatization has been a public relations fiasco. In fairly quick succession, Chunghwa has seen its chairman suddenly resign citing exhaustion, a senior employee commit suicide, retail investors purchase only 2.8% of 1.83 billion shares offered and a secondary market collapse.
For international observers, opinion remains split between those who believe the negative momentum propelling the deal so far will also undermine the ADR and those who argue that international investors will show Taiwan's hugely influential retail investor base how to properly value their first telecommunications stock.
"There is a decent story to be told here, but the point is that it needs to be told," one banker states. "The company desperately needs to overturn a very negative PR image and a get some good wind behind it before it confronts international investors. The main problem has been that Taiwan's retail investors are used to punting their money on mid-cap technology companies, not a state-owned monolith like Chunghwa."
Key to investors' view of the company will be their analysis of how it is likely to withstand competition. To date, Chunghwa's track record in the wireless sector has not been good, with Taiwan Cellular Corp overtaking it in terms of subscriber numbers in less than three years. Some observers have consequently transposed that situation to the fixed line sector, currently in the process of being opened up, and they do not see where future growth will come from.
"We think Chunghwa is very vulnerable to competition in its domestic long-distance and international services which make up about 40% of revenue," says one analyst. "Three new fixed line operators will roll out 150,000 lines next year and they will do so in the cities, where it is least costly to build infrastructure and usage is high."
However, as one fund manager replies, "We really like this company. Arguments about erosion of monopoly position, high capex spending and bureaucratic inertia have all been heard before when Korea Telecom (KT) listed last year. At the time, everyone complained that a W25,000 ($22.05) initial local issue price was too high for exactly the same reasons. The stock then soared to about W180,000. Even now, it still stands at W70,000."
And he adds, "Should the government sanction an increase in local tariffs and customers' base month charge, then there will be a great deal of growth potential. Because it's always been a government company, Chunghwa has heavily subsidised local services to the extent that Taiwanese users only pay about two cents per minute and haven't seen their base charge alter in five years. Korea made adjustments prior to KT's ADR to give it a push and there's every good reason to think that Taiwan will follow suit."
Most agree, however, that the company is particularly vulnerable to cost-cutting in international call charges. The government is proposing to open the market up to international competition next year and analysts believe that charges will fall faster than overall demand rises. "I think we could see a 50% drop in international tariffs by the end of 2001," says one.
Yet as one ratings analyst concludes, "Chunghwa has very strong and conservative financial ratios. It has no net debt and runs EBITDA margins of 50%. It may have spent NT$63 billion on capex over the past 15 months, but it has been able to completely fund it from internal cash flows.
"Obviously the company faces quite serious challenges improving its cost efficiency and currently has a wire lines/employee ratio of 34 based on 12 million installed lines and 35,000 employees. But we are confident it will maintain satisfactory profitability and a conservative balance sheet going forward."
To the Financial Year Ended June 30 1999, total revenue stood at NT$192.91 billion ($6.25 billion), or NT$16 billion aggregated by month. The company is currently moving its Financial Year to December 30 and in the 15 months to September 2000, revenue stood at NT$230 billion, or NT$15.3 billion on an average monthly basis.
