AU Optronics prices ADR

The electronics company becomes the fourth Taiwanese company to list on the New York Stock Exchange.

Taiwan's largest producer of electronic flat screen panels priced its debut ADR yesterday (Thursday). With Salomon Smith Barney as lead manager, the company issued 500 million primary shares via a 50 million unit deal that priced at $11.57 to raise $578.5 million pre-greenshoe. The shoe for the deal, which represents 17% of the issued share capital, potentially bring a further seven million units.

The most significant aspect of the offering was the discount to spot, which was marketed under a range of parity to a 7% discount and came in at a 4.8% discount. On the surface, this might seem a disappointment to AU since it has had to considerably scale back its expectations after its stock price began to fall in mid-February and whole tech sector was hit by renewed volatility in April.

Indeed, in stronger market conditions, few would doubt that the company would have been able to join UMC as one of only two domestic companies able to price at a small premium to the underlying. But in current market conditions, most outside observers believe the discount achieved was fair and conclude that the company made the right decision to execute the deal now rather than wait for the next upturn. The never-ending pipeline of Taiwanese electronic issuers has been repeatedly shown that the company which prices first in its sector always secures the best terms.

AU has achieved its ambition to become the world's first TFT-LCD producer to issue an ADR. Behind it stands every single company in the sector as each rush to secure funding for the migration to expensive 5G fabs. Chi Mei Optoelectronics, for example, has plans for its own domestic listing and ADR, Chunghwa Picture Tubes, wants to raise GDR and convertible funds, HannStar Display has plans for a GDR and Quanta Display wants to achieve a domestic listing and GDR.

By enhancing its investor profile particularly with international accounts, AU will also hope that the deal helps to push its rapid ascent up the rankings of domestic electronic companies. It was only formed in September last year through a merger between Acer Display Technologies and Unipac Electronics. In terms of market capitalization, it currently stands eighth behind TSMC, UMC, Chunghwa Telecom, Hon Hai, Asustek, Quanta and Mediatek.

As one observer comments, "AU isn't quite in the big league yet, but it's getting there. It is still only one tenth the size of TSMC and half the size of Hon Hai. For a smaller portfolio manager, it is, therefore, not yet a must have."

Nevertheless, seven out of the ten largest international fund management houses participated in the deal, which closed just over two times oversubscribed. With about 200 investors, there was a geographical split of 60% US, 20% Asia, 20% Europe, with US retail investors accounting for 15% of the total.

Year-to-date, AU's stock price is still up 11.23% closing Thursday at NT$41.6 and has considerably outperformed the index, which closed the year down 0.023%. Based on one analyst's 2002 book value of NT$16.98 per share, the company is currently trading at 2.4 times, down from a high of 4.1 times.

Where the sector itself is concerned, observers report that not one investor queried the outlook for demand throughout roadshows. While DRAM share prices have been hammered by price cutting in the face of sagging demand and a slower than expected recovery in the US economy, the TFT-LCD sector has remained buoyant. "This is probably the one sector that will record growth for tech investors," says one expert.

The main reason is said to be replacement demand for computer monitors as companies replace LCD monitors with flat screen monitors using a larger 17" panel size. At the end of the first quarter, only 13% of LCD monitors used TFT screens. AU consequently remains confident about future supply and has stated that it intends to increase its monthly output of 17" panels from 200,000 to 300,000.

And as one tech banker explains, "DRAM manufacturers have been slashing chip prices because a much greater percentage of their costs are fixed rather than variable. Where the TFT-LCD sector is concerned, about 65% of costs are variable, so it makes little sense to ramp up production and flood the market with cheaper products since there are less fixed costs to cover."

Syndicate for the ADR comprised ING Barings and UBS Warburg as joint leads, with CLSA, Daiwa, and Lehman Brothers as co-managers.

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