Having surpassed Asustek as the Republic's largest motherboard manufacturer during 2001 and watched its stock climb 300% during the latter half of the year, Elitegroup Computer Systems (ECS) decided to cement its improved domestic standing at the beginning of 2002 with a first international equity offering.
UBS Warburg was mandated for a $100 million five-year zero coupon transaction and after spending a few weeks credit marketing, a deal was launched and priced within the space of eight hours on Monday. Part of the reason for the speedy execution was a volatile Treasury market, which made the lead's job particularly difficult since it needed to adjust for a 75bp back-up in two-year Treasury spreads within pre-set indicative pricing ranges already filed with Taiwan's SFC.
However, the lead was able to make a number of small structural tweaks such as shortening the put date by one month from 24 months to 23 months. Final terms comprise an issue price of par, zero coupon and conversion premium of 15% to Monday's close, against an indicative range of 11% to 16%. There are also downward re-sets in years two, three and four.
The deal is puttable at 109.5% after 23 months equating to a yield-to-maturity of 4.8% or 125bp over Treasuries. The deal was marketed on a 108.5% to 110% range. Redemption is at par.
Unusually there is also a three-year call option subject to a 130% hurdle. Most issuers do not like to incorporate call options, which fall after the put option and the only other one to have done so this year has been Macronix.
Joint lead is Barits Securities.
Underlying assumptions comprise a bond floor of 94.5%, theoretical value of 103.5% and implied volatility of 27%. This is based on a credit spread of 375bp over Libor, zero dividend yield, zero stock borrow and a volatility assumption of 35%.
Observers say that pricing levels fall between those achieved by CMC Magnetics at the very beginning of March and Ambit Microsystems a week earlier in February, erring on the side of the former rather than the latter. Based on an implied BB rating, Elite has managed to persuade investors to bid its credit tighter than CMC (425bp over Libor) and at roughly the same levels as Ambit (370bp).
Consequently the deal has a tighter yield and Treasury spread than CMC's 4.833% and 180bp, a slightly more aggressive put price than its predecessor's 110.022% and higher conversion premium (11%). On the negative side, it also gives investors longer call protection than CMC (two years) and more defensive protection through the re-sets.
Observers comment that books closed about eight times oversubscribed, with a geographical split of 75% Europe and 25% Asia.
Despite the huge run up in the stock over the second half of 2001, analysts still predict that the company is about 30% to 50% cheap on a p/e basis relative to its peers and estimate that there is 50% upside in earnings growth this year. The sudden run up is said to reflect the fact that the stock started from a very low base and until 1998 the company itself was unprofitable. A new chairman that same year followed by the acquisition of notebook manufacturer Alpha Top in late 2001 are said to have been the two chief changes which have bought the stock to the attention of domestic investors.
With a market cap of $1.7 billion and trading volume of $90 million per day, the counter is now fairly liquid by domestic standards and specialists hope that the new convertible will start bringing the company to the attention of international accounts as well.
Future upside potential is said to derive from Alpha Top, which is Apple's sole supplier of the iBook and from November, it also started shipping ECS's own line of notebooks called Desk Note. During 2001, ECS also managed to beat a 5% industry downturn in motherboard shipments by beating all its targets, surpassing Asustek and shipping a total of 14.92 million.
