Taiwan wafer manufacturer starts marketing of GDR

Sino-American Silicon Products (SAS), a Taiwan manufacturer of wafers and ingots for use in the production of solar cells and other things, will go on the road today to market the sale of global depositary receipts (GDRs). The deal is expected to be completed before the end of this week.

Based on the current price of the company’s Taiwan-listed stock, the deal could bring in between $160 million and $203 million, depending on whether the upsize option is exercised or not, according to a source. However, the final price will be set at a discount of up to 10% versus the Taiwan-listed stock, and if the share price trends lower over the next few days – as is typically the case when a company issues new shares – the deal size is likely to be slightly smaller.

This will be only the second Taiwan GDR above $50 million this year, following a $122 million offering by Wintek in April. The lack of issuance comes after a relatively busy 2009 when 10 deals raised a combined $2.3 billion, according to Dealogic data. Each of those deals was quite small however, and while the number of deals was high, the issuance volume lagged well behind the record year of 2007 when eight Taiwanese companies raised $4.65 billion in the GDR market.

The large number of deals last year came as the regulators temporarily changed the maximum discount allowed on GDR sales to 20% versus the Taiwan-listed stock from 10% to make it easier for companies to get necessary financing as banks were still tight on liquidity in the wake of the financial crisis. The maximum discount returned to 10% from the start of this year and the GDRs sold by Wintek, a maker of small- and medium-size liquid crystal display (LCD) screens for mobile phones, digital cameras and MP3 players among other things, were priced at a 5.4% discount after being offered in a range between 3.7% and 7.4%.

However, that deal, which was brought to market by J.P. Morgan, was done as an accelerated bookbuild after the market closed, rather than as a fully marketed transaction over several days and against a live market price. By comparison, SAS and its sole bookrunner, Nomura, will spend four days on the road while building the order book. They will start in Hong Kong today, move to Singapore tomorrow and then on to Frankfurt and Zurich on Wednesday and end in London on Thursday. The plan is to price late Thursday.

According to a source, SAS has chosen to sell Luxembourg-listed GDRs not only because they enable it to raise proceeds in dollars, but also because it wants to broaden its investor base to include more foreign investors. At present, the company is primarily held by domestic investors, which isn’t that strange, given that it is listed on the over-the-counter GreTai market. However, the share price has risen 77% from the most recent trough in late May on the back of positive news related to the solar power industry – including the extension of subsidies to the solar power industry in Germany for another quarter -- a positive first-half earnings report and the company’s favourable positioning in the market. The stock is up 28% in the past three weeks alone, although did ease back from a record high of NT$112.50 on Tuesday last week as investors digested the upcoming GDR sale. As of last Friday it closed at NT$106.50.

The company will look to sell 48 million GDRs, with an option to increase the deal up to 61 million GDRs. Each GDR is equal to one common share. All of the underlying shares are new and the deal will account for between 15.2% and 19% of the existing share capital.

The company makes three different kinds of wafers – wafers for use in solar cells, semiconductor wafers and high-quality sapphire wafers for use in the production of LED (light-emitting diodes) products. The production for the solar cell industry is the largest, accounting for approximately two-thirds of revenues, while the business focused on specialty semiconductors makes up close to one-third and is a bread and butter kind of business that ensures a steady cashflow. The sapphire wafer business is the latest one to start commercial production (in 2007) and it still accounts for less than 10% of revenues.

The company is planning to ramp-up its solar wafer manufacturing capacity to 800MW per year by the end of 2010 from 700MW as of the end of June; boost its semiconductor wafer manufacturing capacity to 320,000 six-inch equivalent pieces (from 240,000 in June) and an additional 1.4 million four-inch equivalent pieces of non-polished wafers per month; and increase its sapphire wafer manufacturing capacity to between 60,000 and 100,000 two-inch equivalent pieces per month, from approximately 60,000 at the end of June.

The proceeds from the GDR sale is officially going towards the procurement of raw materials, although analysts believe that the company is also beefing up its coffers to become more of an integrated player in the solar power industry -- perhaps by expanding into the manufacturing of solar cells.

The company already have strategic investments in several other companies throughout the solar power value chain, including Taiwan-based Sunrise Global Solar Energy, which makes monocrystalline solar cells, Japan-based Clean Venture 21 Corp and Taiwan-based Accusolar Power, both of which manufacture solar modules, and Italy’s Silfab, which builds and operates solar farms in Italy.

Across its three different business lines, the majority of its sales go to other Taiwanese companies, followed by companies in Japan, Korea and Europe. China is viewed as a potential growth market. With regard to semiconductor wafers, its biggest market is the US, followed by Asia and Europe.

In the past two years, SAS has increased its revenues by 64% to NT$11.902 billion ($372 million). However, in the same period its net profit declined by 74% to NT$475.6 million. The bulk of this decline came in 2009 when most companies in this industry suffered a loss due to the financial crisis. In the first half of this year, the net profit increased significantly to NT$1.03 billion from NT$135.3 million in the same period the previous year.