AUO brings ADR

Taiwanese panel producer jumps into equity market ahead of Korean rival LG Philips LCD.

AU Optronics returned to the ADR market for the first time in a year after New York's close on Monday with a 30 million unit deal via Goldman Sachs. The group's latest transaction mirrors a similar 30 million unit deal in June 2004 when AUO raised $480 million also via Goldman.

This time round it raised $460.5 million after pricing its deal at $15.35 per unit. This represented a 1.9% discount to the ADR's $15.65 close on Monday and a 2% discount to the stock's close the previous Friday in Taiwan. There is also a 10% greenshoe.

In 2004, the group priced its deal at a 4.6% discount to the ADR's close and a 1.8% premium to spot. The main difference between the two trades is the lack of a consistent ADR premium in the intervening period.

During the early part of 2004, AU Optronics' ADRs averaged a 15% to 25% premium to the group's local share price. During the second half of the year, this crumbled to roughly 5% and for parts of 2005 the local shares traded at a premium instead.

"We've seen a balancing in the supply/demand equation between Asia and the US," says one specialist. "A lot more funds are now able to play the Taiwan market directly and it's quite natural to see the home market trade at a slight premium towards the bottom of the cycle when international demand would be at its lowest. Now the cycle is turning upwards, we might see a bit of a swing back to a slight US premium again. But it may not go back to the level it was before."

This was also clearly reflected in the distribution statistics. After a 12-hour bookbuild, the order book closed twice covered with participation by about 100 accounts. By geography demand was very balanced, with about 45% of the deal placed in Asia, 45% in the US and the remaining 10% in Europe.

Over the course of the bookbuild, the ADR traded down 4.28% as investors got their shorts in place. Other Taiwan stocks, however, were also down, with TSMC dropping 1.5% during New York's trading on Monday.

The local shares, however, had not traded on Monday because a typhoon had closed the local stock exchange. Nevertheless, AUO remained keen to plough ahead with a deal since it wanted to clear the market before a jumbo $2 billion offering by arch rival LG Philips LCD scheduled to price this Thursday.

Timing also seemed propitious as the company's share price had risen every day of the previous week and the shares had gone ex-dividend on the Thursday. Year-to-date, the stock is up 17.07% to trade on a pre-money price to book valuation of roughly 1.8 times.

The new deal will expand the ADR float by about 25% and dilute existing investors by 6%.

In its registration statement, the company said it believes the cycle is turning and expects break-even figures for its operating income when it reports its second quarter financials in August. As such, the NT$2.13 billion ($66.7 million) net loss of the first quarter should represent the bottom of the last cycle.

Proceeds are being used to fund capex at its 6G and 7.5 fabs. The former is currently producing 30K in mother glass for 32" and 37" screens, while the latter is scheduled to begin mass productions of 42" and 47" screens towards the end of the year.

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