To meet the interest, joint bookrunners Lehman Brothers and Morgan Stanley attempted to convince the companyÆs existing shareholders to sell more shares than initially planned, but found that they preferred to hang on to their holdings as they believe the company has strong upside potential. And deeming from the trading debut last night, it seems they are right û at least in the short-term.
The stock finished 13.9% above the IPO price, having been up as much as 21% on a couple of occasions intraday. The performance would have come as a relief for general China and emerging funds which last month saw a wave of new issuance within the solar power space that proceeded to trade down in the aftermarket despite solid interest during the IPO stage.
The bookrunners were able to drum up a modest number of additional secondary shares that allowed them to increase the base deal size by 2.6% with two days left of the roadshow. Following that adjustment, the company sold 9.0 million American depositary shares (ADS), of which 89% were new. A small number of additional sales shares were also added to the greenshoe to keep it at 15% after the increase to the base deal size. If fully exercised, the shoe will boost the total deal size to $144.8 million.
The base deal accounts for 19% of the company on a fully diluted basis, rising to 22% if the greenshoe is exercised. Each ADS accounts for three common shares.
The final price was fixed at $14, which represents a 7.7% premium to the top end of initial $11 to $13 range. After the first day of trading it was quoted at $15.95.
The deal, including the slight upward adjustment, ended up close to 20 times covered with over 250 investors buying in, according to sources. In terms of order amounts, more than 60% were said to have come from US investors, while the remainder was split fairly equally between Europe and Asia. The largest portion came from global funds that each submitted orders through several sub-funds focusing on, for instance, China or technology. The second group of keen investors were China and emerging markets specialists, followed by the dedicated tech funds.
While thee company designs and markets semiconductors, its focus on mobiles means that its business operations can be tied in with the consumer spending cycle as well, which helped attract demand for more generalist funds.
The IPO price values Spreadtrum at 18.9 times its 2008 earnings, based on blended syndicate estimates and US GAAP. This puts it at a slight premium to MediaTek, which is considered its closest comparable, given that it too makes base-band processor solutions for mobiles and targets the Chinese market. Base-band processors are among the most critical semiconductors in a mobile handset as they are responsible for coding and decoding wireless transmissions and also serve as a platform for the operating system and the multimedia applications that allow the device to conntect to various multimedia players.
Taiwan-listed MediaTek is currently quoted at a 2008 price-to-earnings multiple of about 18.5 times if adjusted to US GAAP to make it comparable to Spreadtrum. Both companies are fabless, meaning they let contract chip makers manufacture the chips they design and sell.
For Spreadtrum, the greatest growth opportunity is seen to come from ChinaÆs pending launch of 3G mobile services, which analysts now believe may happen in late 2007 or in 2008. The company designs semiconductors for a broad range of wireless communications, including GSM, GPRS and ChinaÆs home-grown TD-SCDMA standard.
According to global research firm International Data Corporation, the number of shipped 3G handsets should reach 475.8 million by 2010, up from 66 million last year. Being based in China, SpreadtrumÆs low operational costs puts it in a good position to benefit from this growth, it notes in the listing document.
ôInvestors are recognising that this is an opportunity to get into this market (China 3G) now and gain a foothold before the actual launch,ö says one observer.
ôIn addition, our geographic proximity to a significant portion of the wireless handset supply chain enables us to maintain close relationships with industry players, provide effective service and support to our customers, and strategically position ourselves in the high-growth wireless market in China,ö the company says.
The company became profitable in the first quarter 2006 and posted a net profit of $14.4 million last year. In the first quarter 2007 it managed a $2 million profit. The syndicate research projects 34% year-on-year revenue growth in 2007 from $07.1 million and another 20% the following year.
The money raised from the IPO will be used for general corporate purposes, although a portion of it may be set aside to acquire new businesses, products or technologies that it believes will complement its existing business.
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