Bank of China International and Goldman Sachs, which are leading the offering, initially planned to take the company public one year ago when it first received the go ahead from the stock exchange, but postponed the IPO due to a slowdown in the industry cycle.
Fast forward a year and they now believe the market situation is looking more favourable. And while lowered profit guidance by Texas Instruments and Intel over the past few weeks has prompted some industry watchers to warn that the sector is peaking, other analysts argue that a drop in average selling prices in January was in line with the industryÆs seasonal pattern.
ASMC has also gone through a period of heavy capital expenditures during which it migrated some of its capacity from five-inch to six-inch wafers, which resulted in 2005 being a loss-making year. According to analysts the Shanghai-based company is in a more favourable position in the cycle now, which should make the IPO more attractive to investors.
ASMC is offering 406.7 million shares, or 27.5% of the company, at a price between HK$1.36 and HK$1.85, according to fund managers. There is the usual Hong Kong split with 10% of deal earmarked for retail investors and 90% for institutional investors, barring any clawbacks. Pricing will take place on April 1, with trading scheduled for April 7.
About 91% of the shares are primary and 9% secondary. There is a 15% greenshoe that could boost the total amount raised to HK$865.3 million ($111.5 million).
According to fund managers, the company is forecast to at least break even in the first half of 2006 and report a net profit of about Rmb110 million ($13.7 million) for the full year. It should see a further improvement to Rmb180 million in 2007. That would compare with an expected loss of Rmb75 million in 2005.
Based on those projections, the price range would value the company at about 18.3 to 24.9 times 2006 earnings, or 1.2 to 1.5 times on a price to book basis.
This will place the company at a premium to the mainlandÆs largest chip maker Semiconductor Manufacturing International Corp (SMIC) which trades at about 0.9 times book. However, observers say the comparison is not that valid since SMIC is forecast to make another loss this year and is suffering from a fairly unique set of problems.
ASMC is known as a trailing-edge tech firm since it makes the kind of chips the big three - TSMC, UMC and Chartered Semiconductor - have migrated away from. It has a particular niche among Chinese manufacturing companies towards the lower end of the electronics food chain, but few benchmarks for valuation purposes.
UMC and Vanguard Semiconductor currently average price to book multiples of 1.5-1.7 times - towards the low end of their historical averages. By this measure, ASMC is offering a 20% discount, which some fund managers believe to be quite narrow considering the need for a 10% to 15% IPO discount.
What does make it attractive, analysts say, is the fact that it is one of the few listed players to specialise analogue chips and higher bi-polar content-based mixed-signal semiconductors, which it produces on a contract basis for other chip companies. It will be the largest listed analogue foundry in the world when it comes to market.
Contrary to SMIC, which was set up only in April 2000 and has been primarily loss-making aside from a $89.7 million net profit in 2004, ASMC is an established business with a track record dating back to 1988 when it was first set up as Philips Semiconductor Corp of Shanghai. It changed names to ASMC in 1995, although Royal Philips Electronics, the Dutch electronics manufacturer, still owns 36.9% of the company.
The analogue chips produced by ASMC are primarily used for power management in devices that require a continuous power source, such as mobile handsets and camera phones. But according to investors, the company is also one of two mainland foundries licensed to produce eight-inch chips for smart cards - a business that is expected to see good growth given the potential customer base of more than one billion people.
The company is expecting to raise net proceeds of about $70 million, half of which will be used to repay short-term debt. The rest will go towards capital expenditure, with about $25 million set aside to increase the overall capacity of eight-inch wafers to 14,000 per month by the end of 2007 (depending on demand) from the current 12,000 per month.
Another $7 million will be employed to increase the flexibility and yield of the eight-inch wafer production.
At the end of 2005, ASMC also had the capacity to produce 28,000 five-inch wafers and 51,000 six-inch wafers per month. The six-inch capacity has been upgraded from 35,000 wafers per month in 2004, while the five-inch capacity has been reduced from about 44,000.
Some international investors will be wary of the smallish size of the offering, however, and the fact that the company will have a market capitalization of only HK$2.01 billion ($306 million) at the mid-point of the indicated price range. This compares with UMCÆs $11.7 billion and Chartered SemiconductorÆs $2.20 billion.
SMIC has a market cap of $2.76 billion after its share price has declined 57% since its listing in March 2004.
Standard & PoorÆs projects, however, that most chip stocks will outperform the S&P 1500 index over the next 12 months.
ôWe believe chipmakers exposed to the high-end analogue, power management, NAND flash memory, graphics and other chip categories that serve a broad range of end markets have the best prospects,ö the ratings agency said in a research note published over the weekend.
It projected that worldwide chip sales will increase by 12% in 2006, compared with a modest sales growth of 7% in 2005.
ôWe see lean chip inventories, high levels of chip plant capacity utilization, plus steady demand combining to spark chip sales for many logic makersàChip makers serving broadband communications markets and handheld electronic goods markets are experiencing particularly brisk business,ö the agency said.