China Steel completes GDR

Taiwan''s largest GDR completed at a tighter than expected discount.

The Taiwanese government scored a second success with its privatization programme yesterday (Thursday) following the pricing of a 1.1 billion share issue for China Steel.

Mirroring a strategy used to success with Chunghwa Telecom earlier this summer, joint leads Citigroup and UBS plus Nomura went out with a wide discount range in a bid to build momentum and progressively drive pricing in. Any they succeeded after the transaction was priced at a tight 3% discount to the stock's NT$27.20 close.

Raising $815 million pre greenshoe, a 52.4 million unit deal was priced at $15.56. This also represented a 1.5% discount to the existing GDR.

The offering has a ratio of 20 shares per GDR and the leads originally marketed a 41 million unit deal, with the leeway to lift it by 30% if demand warranted. Post shoe, the total deal will amount to 60.1 million units, raising $936 million and reducing the government's stake by roughly 12% to 24.2%.

After setting out with a price range of zero to a 10% discount, the leads were able to narrow the discount to 5% and then tweak it a further 2% in the last 24 hours ahead of pricing. This last adjustment surprised some observers who had expected a steeper discount because of the large issue size and the stock's outperformance.

Year to date it is up 42.31%. And indeed, back in May when the government last sold a 2.58% stake, the 11.98 million unit deal was sold at a wider 4.73% discount, raising $132.5 million.

This time round the transaction was helped by vastly improved market conditions, a lengthy roadshow that managed to re-awaken investor interest in what is often described as Taiwan's forgotten stock and a POWL (Public Offer Without Listing in Japan).

The POWL led by Nomura was allocated 15% of the deal after amassing a $450 million order book and its presence undoubtedly helped the leads to leverage pricing down. Its inclusion also makes China Steel's deal the first ever GDR to incorporate a retail component.

About $70 million of the Japanese book was said to have been price sensitive above a 3% discount. Where the main book was concerned, oversubscription reached 2.5 times at the wide end of the discount range and 1.8 times at the 3% discount. Observers say there was little order inflation by investors, although 10 orders topped the $50 million mark.

About 130 investors were counted in total, with a rough geographical split of 40% Asia, 30% Europe and 30% US. The Asian book is said to have been dominated by hedge fund demand, with fundamental investors predominating in Europe and a mixture of the two in the US.

China Steel is Taiwan's largest non FIG, non tech stock. Part of the deal's success can therefore be seen as a natural corollary to a recent re-weighting of investment portfolios towards Taiwan and QFII de-regulation.

But it is also testament to managements' skill in positioning the company as Asia's most efficient and profitable steel company. "It doesn't matter where the steel cycle is," says one observer. "China Steel still makes money. But unfortunately it has been Posco, which has grabbed investors' attention in recent years."

Similar to Chunghwa Telecom before it, China Steel also drew investors because of its high dividend yield. The stock currently yields around 9.5% and based on forecast earnings for its December year-end is en route to achieve a 10.6% yield in 2004.

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