DC Chemical block changes hands at 8% discount

An institutional investor reaps $364 million from the sale of a 4.7% stake in the Korean polysilicon producer.
An undisclosed institutional investor has sold W379 billion ($364 million) worth of shares in DC Chemical, taking advantage of a 15% gain in the past six trading days and positive sentiment surrounding the solar power sector that it supplies.

The Korean company makes about 40 different chemicals and in 2006 made a move into the production of polysilicon, which is the raw material used to make semiconductor wafers for solar cells. According to DC ChemicalÆs website, only seven other companies in Germany and Japan produces this high-value chemical which is in short supply and has been responsible for creating bottlenecks in the solar power value chain. Consequently, solar power companies are scrambling to secure sufficient supply and DC Chemical has been signing a series of long-term contracts with various major solar power companies, boosting both its revenues and the investor interest in its stock. DC Chemical has said it will deepen its pioneering investments into polysilicon to make it a core business.

In the past 12 months, the share price has soared 282% to yesterdayÆs record high close of W435,000, making the stock a tempting target for an investor who wants to secure some profit. According to a source, the seller will still own shares in the company after this transaction and will be locked-up for 90-days.

The deal comprised 947,000 shares, which is equal to about 4.7% of the company or 2.5 trading days worth of volume. The shares were offered at a price between W400,200 and W417,600. The range represented a discount of 4% to 8% versus yesterdayÆs close and given the sharp gains over the past week, it was no huge surprise that the price was fixed at the bottom for the maximum 8% discount. However, the price sensitivity wasnÆt that much different to most other Asian placements this year, which have also seen most of the orders come in towards the bottom of the range û whatever the discount on offer.

Perhaps because of the sharp share price gains and the fact that DC Chemical is trading at 45 times this yearÆs earnings, demand wasnÆt overwhelming, but the deal was covered and attracted just under 50 accounts. The deal was arranged by UBS and kept open for about five hours.

According to the source, the demand was predominantly Asian, but with some good interest from the US, where many investors are familiar with the solar power sector and would have been well up-to-speed with the recent strong recovery in share prices. There was also good demand from Korean investors, which may have been driven by the fact that KoreaÆs leading brokerage firms have aggressive target prices on the stock. Samsung Securities leads the pack with a W738,000 target, which implies another 70% upside from current levels.

The wide discount attracted some hedge funds, but most of the stock went to fundamentally driven investors who like the equity story.

DC ChemicalÆs first polysilicon plant, which was completed in November last year, has an annual capacity of 5,000 tonnes, and in the 18 months to mid-2009 it will invest an additional W700 billion ($670 million) to boost this capacity to 15,000 tonnes. After signing supply contracts with numerous key players in the solar power sector, including Sunpower, Yingli Green Energy, Suntech Power, Taiwan-based Green Energy Technology and KoreaÆs Nexolon, DC Chemical has accumulated an order book worth $3.8 billion and analysts estimate that this will increase to between $5 billion and $6 billion by the end of this year.

Many of its supply contracts are very long term. In March, for example, it signed an agreement with Suntech Power worth $631 million to supply it with polysilicon over an eight-year period starting from 2009.

This was only the second placement in a Korean company this year after the $1.1 billion sell-down in LG Display by Royal Philips Electronics in mid-March. That deal, which was jointly arranged by Citi and Credit Suisse, was also priced at the bottom of the range for a similar discount of 8.1%.
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