Chi Mei prices debut GDR

The largest tech GDR of the year achieves the tightest discount.

Sole bookrunner JPMorgan priced a debut GDR for Taiwanese TFT-LCD manufacturer Chi Mei Optoelectronics yesterday (Tuesday) at a relatively slim 4.2% discount to the stock's NT$45.1 close.

Raising proceeds of $573.3 million, the company sold 450 million primary shares, the maximum number it had filed for. With the inclusion of greenshoe for 50 million secondary shares, the overall deal size could be bumped up to $637 million.

Based on a ratio of 10 shares per GDS unit, some 45 million GDS units were sold at $12.74 each. Co-managers were BNP Paribas Peregrine and KGI Securities.

Daiwa also acted as lead manager of a POWL (Public Offer Without Listing) in Japan and this portion of the deal was given a 12% allocation.

TFT-LCD transactions usually have a heavy preponderance of arbitrage driven accounts and Chi Mei tried to break the norm by undertaking a lengthy roadshow through Asia, Europe and the US. Observers calculate that roughly 85% of investors who bought the deal are new to the stock, although a number also hold the company's two main rivals, AU Optronics and Samsung Electronics.

"The company's reward for undertaking a full roadshow across three continents and nine full business days was to get much better pricing than it would have otherwise done and a higher quality order book," one observer concludes.

The final order book is said to have closed four times covered, with participation from 80 accounts and three orders for more than $50 million. By geography, the deal had a split, which saw 40% placed into Asia and 30% each into Europe and the US.

As a result of the deal, Chi Mei expands its freefloat from 40% to 49%, with the Chi Mei group holding the remaining 51% through Chi Mei Chemical and Lien Chi Investments.

Many believe the overhang of the deal has held the stock back over the course of roadshows since it remains at the level it was at the beginning of October despite upwards movement by the rest of the sector since then. Year-to-date, Chi Mei is up 77.05%, although it is slightly off its mid-September high of NT$45.8.

The company has historically traded at a premium to all other Taiwanese TFT-LCD producers and continues to do so on both a 2003 price to book and P/E basis. It is, for example, trading at 2.6 times price to book compared to 2.2 times for AUO and on a P/E basis at 33.4 times 2003 earnings compared to 20.3 for AUO.

On a 2004 basis, however, it lags AUO, which is currently trading at 21.6 times compared to Chi Mei's17.3 times.

Company supporters argue this is one of the main reasons why the stock still has value, since the market has not yet fully factored in an earnings stream, which is coming through slightly later but stronger than AUO.

All analysts have outperform ratings on Chi Mei and AUO and most believe the two companies will soon revise up their guidance for FY2003. But questions have started to be raised about how much upside is left in the notoriously volatile sector.

In a research report published earlier this week, CSFB said that if, "semiconductor investing is like a roller coaster ride, then TFT-LCD must be bungee jumping."

But it went on to say that the current cycle may be different as the industry is developing product breadth across all panel sizes, which will shift bargaining power to panel makers.

Companies are currently benefiting from large monthly increases in shipments and at the moment, there are no corresponding concerns about oversupply. In September, Chi Mei recorded consolidated sales of NT$8.143 billion, compared to NT$7.556 billion in August and NT$5.7 billion in January.

Many believe consumer uptake of LCD TV will be the key to the sector's fortunes in 2004. Earlier this week, industry consultant DisplaySearch estimated that LCD TV will witness CAGR of 88% through to 2007 compared to 28% for monitors and 16% for notebooks.

Chi Mei has been at the forefront of this market sector in Taiwan and management have said they are determined to maintain their advantage. The company wants to increase TV revenues from 5% to 15% by the end of 2003 and also stands poised to unveil its first 47" TV.

CSFB concludes that, "flat panel is the killer application of this century. It's as important as paper and will be ubiquitous we believe."