E-Ton Solar postpones GDR sale

Second company linked to alternative energy to suffer in two days as investors are becoming more focused on valuations.
TaiwanÆs second largest manufacturer of solar cells, E-Ton Solar Tech, called off its $150 million Citigroup-led GDR offer early Friday after failing to attract enough demand within the allowed price range.

A source close to the company said E-Ton Solar, which designs and manufactures photovoltaic (PV) solar cells that convert sunlight directly into electricity, plans to return for another attempt once the market is in a better condition.

The Taiwan-based company was the second issuer linked to the alternative energy and fuel sector that was forced to cancel a share offering last week, throwing some doubt on what has so far seemed to be an insatiable investor interest in companies involved in the development of more environmentally friendly energy sources.

On Thursday, Brisbane-based Global Ethanol delayed its A$500 million IPO after investor concerns about the economic environment and the poor performance of recent new listings in Australia left the order book a bit short.

Ironically though, one of the reasons why E-Ton Solar's share sale stumbled was that its share price gained about 6.5% during the two-week roadshow, which pushed the range where the shares could be priced away from the absolute levels that potential investors had indicated would be acceptable to them.

Follow-on share sales by Taiwan-listed companies - whether domestic or ADR/GDR issues - must be priced at a discount of no more than 10% to the common shares. To increase the flexibility somewhat, however, the reference price can be either the closing price or the VWAP on the day of the GDR pricing or the previous day, or the average price over the previous five or 10 days.

According to the source, it might have been possible to accommodate investors if the GDR price had been fixed in relation to the five-day moving average of the Taiwan-listed common shares rather than the most recent close, as that price was a bit lower. But the issuer was worried that this might lead to complaints in the home market that the shares were sold too cheaply to international investors.

"Essentially the book wasn't there at the price the issuer was looking for," one observer says, adding that many investors had wanted to hold off on placing orders until the Taiwan market closed on the final day of the offer last Thursday (August 10) to see where the share price ended up. This meant there was no momentum in the bookbuilding until very late in the process.

And for the purpose of building a solid order book, that proved to be too late - especially after the news of an averted terrorist attack in the UK attracted attention away from the deal.

With oil prices continuing to hover around $75 per barrel, the medium- to long-term outlook for solar power and other renewable energy sources remains positive. Solar power is also supported by governments worldwide, which are increasingly offering subsidies and tax breaks for solar power producers and users.

However, many investors were said to have been uneasy about the sharp rise in E-Ton Solar's share price since its listing on Taiwan's GRETAI over-the-counter market in March, which has pushed the company's valuation above that of its Taiwan peers. Based on Thursday's closing price of NT$642, the stock was trading at about 20.5 times its projected 2007 earnings, which compares with about 17 times for larger Taiwan-listed competitor Motech.

E-Ton Solar, still trades at sizeable discount to US-listed Suntech and Sunpower, however, which fetch 2007 PE multiples of about 28 times and 35 times respectively according to a recent research report by Lehman Brothers.

The share price fell 1.7% last Friday to NT$631 on news of the delayed deal, but the stock is still trading 311% above its IPO price. The original IPO price was NT$218 but after a bonus share issue in July, which increased the number of outstanding shares by 1.42 times, the adjusted IPO price fell to NT$153.52.

Among other potential concerns, according to analysts, is the fact that E-ton Solar and its existing peers are likely to see more competition going forward as more players enter this ôhotö industry where the barriers to entry are quite low. A current shortage of silicon wafers - the raw material for solar cells û is also expected to persist until 2008 and continue to weigh on gross margins. In that respect, it is seen as a positive that E-ton Solar has already secured some supply of 400MW silicon wafers for the next 10 years, although several analysts argue that this contract is likely to meet only 30% of the companyÆs demand in 2007.

The company offered 8 million GDRs û each corresponding to one common share û which based on the market price when the deal was launched would have resulted in a maximum deal size of NT$4.86 billion ($148 million), assuming a zero discount. The shares on offer accounted for about 20% of its existing share capital.

The GDR had attracted attention as it came only five months after the company did a domestic IPO in Taiwan ahead of it switching to the second board. It had been trading on TaipeiÆs Emerging Stock Market û essentially the third board û since March 2005. Having raised only NT$675.8 million ($20 million) in the IPO, the company was still in the need of more cash to finance its ongoing expansion.

E-ton Solar is planning to increase its production capacity to 100MW by the end of this year and to 200MW by the end of 2007 from about 60MW at present.

While the timing of the a potential return to the market will depend on what happens to the share price and the market volatility in the weeks ahead. However, it would be unlikely to see the company come back before September as a great majority of potential investors, especially those based in the US or in Europe, will be on holiday until then, making it more difficult to secure enough interest for any share sale.
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