Chunghwa and FarEasTone push forward ADRs

As FarEasTone enters final selection procedures for a debut ADR, the Taiwanese government is said to be on the verge of deciding whether to re-engage investors with Chunghwa Telecom via a non-deal roadshow.

Lead managers for Chunghwa Telecom's stalled $3.15 billion ADR - Goldman Sachs, Merrill Lynch and UBS Warburg - are awaiting a final decision from the company and Ministry of Transport & Communications (MOTC). After nearly a week of growing speculation, a decision that will likely favour embarking on a non-deal roadshow is said to be imminent, with investor presentations set to begin a couple of weeks after.

For all market observers, such a course of action is felt to mark the most sensible option for the government and for some, its only option. A domestic sale of any magnitude has been ruled out because of the disappointing take-up to the company's initial IPO and its trading record since then.

So too, an exchangeable bond structure enabling the government to sell stock to foreign investors at a premium is also thought to present too many hurdles. Taiwan's existing securities laws make conversion into Entitlement Certificates and then stock, a cumbersome and difficult procedure, while the small size of the company's float would leave its price at the mercy of delta hedgers. 

Even as the first attempt to sell Chunghwa via an ADR format faltered on January 30, bankers argued that it represented the only meaningful way for the government to privatize a large chunk of the company. Most bankers believe that without the pressures of having to generate momentum and build a sustainable book, the company will have a strong platform to present its story for the first time.

Going forwards, its two main challenges will then be to find a market window in a clogged telecoms pipeline that investors have resisted all year and to avoid competing against the two other Taiwanese telecoms companies that are also planning to come to market before the end of the year, Taiwan Cellular Corp (TCC) and FarEasTone.   

As one banker comments: "Chunghwa is not at all well understood by general investors and if nothing else, at least a non-deal roadshow will keep the momentum going to the benefit of an eventual international sale."

Like many former state-owned monopolies fighting to maintain market share in an increasingly competitive environment, Chunghwa has an intrinsically negative undertone it needs to dispel. Those close to the company believe that it is well positioned to do so.

Pre-marketing at the beginning of the year, saw the company and leads embark on a deliberate strategy of presenting investors with a completely honest picture of Chunghwa. The leads, in particular, were said to be keen to avoid the example of some previous Asian telecommunication privatizations, where they felt promises had been made to investors that subsequently proved impossible to deliver.

In return, they reported positive feedback from investors who had been impressed by the dynamism of the Taiwanese market. "Worldwide, a lot of incumbent telecommunications company have done much better than general impressions would indicate," says one observer. "It all comes down to how dynamically a company can position itself in a changing environment.

"In Chunghwa's case," he continues, "we have a company which managed to grab a 45% market share of the ISP market from the word go off a completely level playing field. It has also been very aggressively rolling out a broadband network and is in a good position to stamp its dominance.

"We are not talking about a bloated organization, but one that is already efficiently operated. It is also not operating in a high tariff environment that will see future margins eroded as they come down, nor does it own an old-fashioned legacy network. Chunghwa operates a high quality, yet cheap service."

In its two main areas of competition - cellular and fixed line - new investor presentations will aim to overturn any 'misleading' impression that the company has been losing customers. In the case of the former, it is likely to be argued that Chunghwa did not lose existing customers, but a waiting list which new entrants were easily able to scoop up once the government initiated its 'big bang'.

In the case of the company's fixed line monopoly, the company's supporters argue that this will not prove so easy. "Household penetration rates in Taiwan stand at 130% and new entrants will find it hard to find areas of growth," one states.

For all of the country's telecommunications players, however, one of the key drivers to future growth will be 3G. For this reason, analysts believe that any company which tries to sell international stock in any size will find it an uphill struggle before the results of the Island Republic's auctions are made clear at the end of the year.

In a report sitting at the Directorate General of Telecommunications, it has been proposed that the government issue four to five licences under a bidding process that will see proposals submitted between July and September, bidding in October and the results announced in December. The report further estimates that each licence will cost between $437 million to $2.2 billion depending on the final method chosen.  

"Taiwan is a fairly mature market and penetration rates are high," an analyst explains. "It's hard to get growth in these stocks, so everyone is hungry to chase the next growth stage which they think 3G technology will provide." 

For this reason, FarEasTone is hoping to launch an ADR before the summer, using proceeds to fund its 3G licence bid. Banks shortlisted for the deal made presentations late last week. They are Credit Suisse First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter and UBS Warburg.