Based on the current share price, the well-flagged deal could raise as much as $1.35 billion which will make it the largest equity deal by a Taiwanese company this year, aside from the two sell-downs by Royal Philips Electronics in March and May. It will be the first time Innolux has returned to the equity capital markets since its initial public offering in October last year, which raised NT$8.2 billion ($250 million).
In its first year as a listed company, Innolux has grown significantly, however, and now has a market capitalisation of about $10.5 billion. Its share price has risen 260% from the IPO price of NT$41 to yesterdayÆs close of NT$147.50.
The gains have coincided with a pickup in the entire TFT-LCD sector, which has led to strong organic revenue growth, but analysts say the gains are also due to InnoluxÆs high margins and sector-leading profitability. The latter is at least in part due to the companyÆs vertically integrated business model that is quite unique for the display industry and which means it is involved both in the upstream manufacturing of TFT-LCD panels and the downstream assembly of LCD modules and display systems.
It uses this integration to its advantage by making sure that the demand for TFT-LCD panels by its assembly business exceeds its in-house production capacity, which allows it to keep its capacity utilisation rates at its panel plants close to 100%, even during periods of seasonal demand weakness or over-capacity.
ôIn light of the high fixed costs associated with TFT-LCD panel manufacturing, this factor enhances our resilience to TFT-LCD industry cyclicality,ö the company says in the listing document.
According to research firm DisplaySearch, Innolux is the worldÆs second largest manufacturer of LCD monitors in the world behind Hong Kong-listed TPV in terms of 2006 shipment volumes, and counts eight of the worldÆs top 10 branded vendors of LCD monitors as its customers, including Hewlett-Packard and Dell.
Aside from its mainstream LCD monitors, which range in size from 17 to 22 inches, it also makes small- and medium-sized LCD modules for use in mobile phones, portable DVD players and digital picture frames and is planning to expand its presence in this market by moving into the touch panel market. It is also currently evaluating plans to start assembling LCD-TV systems in 2008.
Despite the fact that the GDR sale has been well advertised, Innolux share price has not been under much downward pressure as yet. The 3.1% drop on Monday, which was the first day of the roadshow, was in line with a broad-based sell-off in Asian equity markets and was reversed yesterday when the stock gained 3.5% to NT$147.50. Sources also note that the initial interest in the offering has been good with a few large orders coming in after the first two days of marketing in Singapore and Hong Kong.
However, some investors are said to be a bit hesitant to get into another deal in the TFT-LCD sector following Royal Dutch Philips $2.2 billion sell-down in KoreaÆs LG.Philips earlier this month, which left them sitting on losses for a couple of weeks. The share price fell to as low as W39,750 at the end of last week, which represented an 11.7% decline from the pre-placement level and an 8.5% drop from the W43,425 placement price itself. Only yesterday did the price return above that level again with a close at W43,900.
Innolux, which is controlled by TaiwanÆs Hon Hai Precision, a leading manufacturer of computers and consumer electronics, is offering 149.97 million GDRs which each account for two new common shares. The offering is equal to 10.9% of the enlarged share capital.
As usual with GDR issues there is no price range as the offering will be priced with reference to the underlying Taipei-listed shares. Consequently, the final deal size will depend on how the stock moves during the roadshow. The books are set to close on October 31 and the price will be fixed after the close of US markets that day. The London trading debut is scheduled for November 1.
ABN AMRO Rothschild, Credit Suisse and Morgan Stanley are joint bookrunners for the deal.
The company is telling investors that its new 6G TFT-LCD plant is scheduled to begin production in the second quarter of 2009 and will reach a maximum monthly capacity of 90,000 glass substrates by the third quarter of 2010. As a result, its total monthly production capacity in terms of the total glass surface area will increase by 160% to approximately 394,772 sqm over the next three years.
The new plant, together with the cost of maintaining its 4.5G and 5G plants, will demand capital expenditures of about NT$72.6 billion ($2.2 billion) between 2008 and 2010. Consequently, the proceeds from the GDR issue wonÆt be enough and the company is planning to issue NT$15 billion ($460 million) of domestic convertible bonds towards the end of this year and potentially also take out a loan to make up the balance.
In addition to that ramp-up, Innolux plans to spend NT$1 billion ($30 million) over the next two years to set up a production facility for 80,000 glass sheets per month of capacitive touch panels and 60,000 sheets per month of resistive touch panels. It is also constructing a new assembly facility in Vietnam for LCD monitors, which is expected to start production in 2009.
In the nine months to September 30, Innolux reported a consolidated net income of NT$9.66 billion ($294.4 million). This compares with a net income of $86.2 million for the full year 2006. Revenues reached $2.09 billion in the first half this year, compared with $3.22 billion in the full year 2006.
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