Chi Mei heralds return of panel producers to equity markets

TFT-LCD manufacturer returns to the GDR market for the first time since October 2003.

Taiwan's Chi Mei Optoelectronics raised $751 million from a GDR offering via lead manager Morgan Stanley after New York's close on Thursday (June 10). The company issued 50 million units including the greenshoe, which was exercised in full.

Pricing came at $15.02 per unit, equating to a local share price of NT$47. In turn, this represented a 4.7% discount to the stock's NT$49.40 close in Taiwan earlier the same day. One unit equals 10 shares.

Alongside the lead, Daiwa SMBC ran a POWL (Public Offering Without Listing) in Japan, which was allocated 13% of the deal after attracting an order book that closed twice covered. JPMorgan was also a co-lead, with Bank of America, HSBC and Paribas as co-managers.

The new transaction is almost a mirror image of a similar deal in late October 2003 when Chi Mei first accessed the GDR market via a 45 million unit deal (pre shoe) that raised $573 million via JPMorgan. This deal was priced at $12.74 per unit, representing a slightly slimmer 4.2% discount to spot.

However, market conditions and sector fundamentals are currently nowhere near as strong as they were in October 2003, when Chi Mei achieved an oversubscription ratio of four times. This time round, the order book is said to have closed just under two times covered with participation from just over 100 accounts.

By geography, the book split 40% Asia, 40% US and 20% Europe.

Balancing this, Chi Mei has come at a cheaper valuation than it did in 2003 when it priced at 2.6 times book. The new deal has priced at roughly two times book on a pre-money basis and 1.5 times book on a post money basis. This latter valuation also factors in a preferred share offering the company recently completed.

Year-to-date, the flat panel manufacturers have beaten the TWSE and Chi Mei is currently up 15.4% year-to-date. However, it has slipped 0.1% since the beginning of roadshows two weeks ago and is also down from a year-to-date high of NT$53 in late April.

Many analysts are now becoming more bullish on the TFT-LCD cycle, although some houses believe valuations may remain stuck in prolonged mid-cycle and do not expect Chi Mei's earnings to turn positive until the fourth quarter. Investor sentiment towards the sector began to pick up in early November last year, after the stock bottomed out around the N$35 level.

As usual, this preceded a turnaround in sector fundamentals, with prices continuing to drop during the first few months of 2005. Chi Mei recorded a net loss of NT$1.97 billion during the first quarter, but achieved quarter-on-quarter sales growth of 11.9%. This figure combined 25% shipment growth with a 10% decline in ASP's (Average Selling Prices).

Prices of larger panels used for LCD TV production continued to show the sharpest declines of any in the first quarter, with the ASP of 27" to 20" panels dropping 15%. Chi Mei has always been one of the market leaders in TV panel production and the crux of its eight-day roadshow presentation was the company's outlook for the sector.

Management argued that the long fabled inflexion point for flat screen TV's may have finally arrived. Using data prepared by industry consultants DisplaySearch, they said that TV panel shipments and revenues should show a CAGR of 50% between 2003 and 2008.

Chi Mei is now deriving 38% of its revenues from the TV sector compared to 5% two years ago. The company is ranked the world's second largest player with a 22% market share compared to 25% for Korea's LG Philips LCD.

Management said they believe panel prices and retail margins have now fallen far enough to allow flat screen TV's to start retailing below $1,000 by the end of this year. Analysts have long held up this price point as the one that should really kick start mass-market sales.

In turn these sales tend to be back-end loaded, with almost half of yearly sales concentrated during the fourth quarter in the run up to Christmas. Analysts believe Chi Mei could achieve shipments of 21 million LCD panels in 2005, up from four million during the fourth quarter.

The company also argued that players will remain focused on panel sizes of 32" to 37". As such, capex has been directed towards increasing these production lines. The company is currently doubling the capacity of its existing 5.5 generation plant from 90k mother glass per month to 180k by the end of 2006, as well as building a new 90k 5G plant.

Proceeds from the new equity issue are also being used to fund a 7.5G plant, which is scheduled to begin production of 42" to 47" panels in 2007.

The company also said it intends to spend NT$70 billion per annum on capex during 2005 and 2006. The new equity deal should top and tail this spending plan and specialists believe the stock is well positioned to perfom now fears of an equity overhang and dilution have been removed.

The new deal represents 15% of the company's total share capital. Proceeds of NT$23.5 billion will be added to the NT$15 billion raised from the preferred stock issue and NT$87 billion in syndicated loan facilities that have yet to be drawn down.

Chi Mei believes it can fund the NT$22 billion balance of 2005/2006 capex through operating cash flow. In 2004 it generated NT$25 billion in operating cash flow.

To emphasize its intention to stay away from the equity market, the company also agreed to a 120-day lock up compared to the standard 90-day lock-up.

Chi Mei is only the sixth Taiwanese company to access the straight equity markets this year, but all the TFT-LCD producers stand right behind it in the issuance queue. Indeed, bankers say one of the reasons why it chose to access the market now is to gain a first mover advantage over the competition.

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