AU roadshows ADR

Presentations began in Hong Kong yesterday (Monday) for the fourth Taiwanese company hoping to list on the New York Stock Exchange.

AU Optronics, Taiwan's largest manufacturer electronic flat screen panels is hoping to ride out the current volatility besetting the Taiwan Stock Exchange with lengthy three-week roadshows, which will wrap up by Thursday May 23 when its 500 million share deal is provisionally scheduled to price.

With Salomon Smith Barney as lead manager, the company is offering a 50 million unit deal of all new shares, with a seven million unit greenshoe of secondary shares. Representing 17% of the company's outstanding share capital, the deal will raise $688 million based on Monday's closing share price of NT$47.6.

Presentations continue again today in Hong Kong, moving to Singapore Wednesday and Thursday, then Tokyo Friday. The following week will see two teams continue in Europe and the US. Alongside the lead, there is also a syndicate comprising ING Barings and UBS Warburg as joint-leads and CLSA, Daiwa and Lehman as co-managers.

To date, five Taiwanese companies have achieved full listings in New York, with TSMC, UMC and ASE all listed on the NYSE, while Macronix and Siliconware Precision Industries are quoted on Nasdaq. AU's transaction marks the first time a Taiwanese company has tried to achieve a full NYSE listing since September 2000 when both UMC and ASE completed their deals in the space of a few weeks of each other.

Key for AU will be whether it can achieve a premium to its local share price. So far, the only Taiwanese company to have done so is UMC, which priced its debut ADR at a 15% premium to spot. By contrast, TSMC, the first Taiwanese company to achieve a full listing in 1997, came at parity to its underlying share price, while ASE, which followed UMC, came at a 6% discount.

UMC, however, was able to achieve its premium because TSMC had already established a track record of trading at a huge premium to its underlying share price. AU should benefit likewise, since UMC has averaged a 30% premium over the past year and TSMC a 45% to 50% premium.

Against it will be the fact that it is initially reating a less liquid ADR float than either UMC or TSMC. But in its favour, the company is likely to appeal to a wide US audience since its business is considered one of the sexiest of the whole tech sector and it represents one of only two listed pure plays. The other, HannStar, is also listed in Taiwan, while the world's two largest manufacturers, have not yet been spun off from their parents, Samsung Electronics and LG Philips.

More importantly, at current trading levels long-term investors are likely to view the stock as an attractive buy. The company itself, for instance, is believed to have set an internal price target for the deal of NT$70, but since its share price has retreated steadily from a mid-February high of NT$62.5, it is now settling for considerably less. Year-to-date, the stock is up 27.27%, against a 1.644% rise for the TWSE.

Over the past week or so, AU has fallen in line with the TWSE, which has shed just over 1,000 points to close yesterday at 5642.48. Traders attribute the drop to a combination of international factors - a softening of US tech stocks - and local factors - retail investors who account for up to 80% of turnover have created a selling spiral because of the negative sentiment arising from Taiwan's drought.

Prior to this, the share price was also said to have been weighed down by the prospect of a UMC exchangeable into AU, which was completed late last week and a realisation that there would be heavy dilution from the ADR and a previous convertible issued last December at NT$15.8 per share. Together the local equity-linked deal, which becomes convertible in June, and the ADR will potentially expand AU's existing share capital by up to 38%.

But over the long-term, analysts and tech specialists are unanimous in pointing out that both AU and the TFT-LCD (thin film transistor- liquid crystal display) sector have considerable upside. Based on a 2002 book value of NT$16.98 per share, the company is currently trading at 2.8 times against a year-to-date high of 4.1 times. Using the DRAM sector as a comparable, many analysts believe that AU will not approach full valuation until it hits these levels again.

Some also believe that the current cycle is capable of breaking the price-to-book peaks of the previous cycle because it is based on longer-lasting fundamentals. A number of analysts have argued that whereas the past cycle was supply led, the current one is demand led. Given that the sector turned round about six months ago and industry participants only started to turn a profit again in the first quarter, there is said to be at least another year yet to run.

Having shipped 4.3 million units last year, AU was already up to 65% of 2001's total by the end of April. Its 2.8 million units also easily surpassed rival Chunghwa Picture Tubes' 1.58 million and Chi Mei Optoelectronic's 1.47 million. All the Taiwanese manufacturers are also now operating at full capacity, but still filling only 85% to 90% of orders placed by monitor manufacturers.

AU has said that it will install equipment next month to increase capacity as its current 4G plant and has already completed phase one for its 5G plant, which is due to come on stream in 2003 and will increase production of the larger 17-inch panels used for the fast growing flat screen monitor market. While, for example, all notebooks use TFT-LCD screens, only 13% of LCD monitors had a TFT screen at the end of 2001.

At $1.2 billion per 5G plant, TFT-LCD has become an exceptionally capital intensive industry and one in which tech specialists believe only a handful of the larger and more diversified global players will survive. And although AU is some way behind the Koreans in ramping up to 5G, it is nevertheless some way ahead of its domestic rivals.