Foxconn rules the roost

Foxconn prices at top end of the range as investors bet the company will replicate the success of its parent Hon Hai Precision Industries.

Telephone handset manufacturer Foxconn International Holdings priced its IPO at the top end of the range on Friday raising $432 million from a deal led by Goldman Sachs and UBS. And in a further sign that the Hong Kong equity markets remain buoyed by liquidity, both the retail and institutional order books closed with a healthy oversubscription multiple.

The retail order book closed 41.5 times covered, prompting clawbacks to 30% of the overall deal, while the institutional order book closed 10 times covered at the top end of the range. About 70% of the institutional order book came from funds, with 30% from corporate and high net worth investors. A total of 250 accounts participated in total, of which more than 20 placed orders in excess of $50 million.

Specialists commented that the quality of the order book was extremely high, with one-on-one meetings generating an 80% hit rate and nearly three quarters of institutional demand coming from long-only accounts. By geography, Asia accounted for 40%, the US 40% and Europe the remaining 20%.

Many of the Asian accounts do not hold Nasdaq-listed Flextronics, which is viewed as Foxconn's main comparable. However, a vast majority do hold its parent Hai Hai. Many accounts are said to have taken a favourable view of Foxconn thanks to the positive returns generated by Hon Hai as it has moved up to the top of outsourcing chain for PC production.

At HK$3.88 per share, Foxconn has been valued at 14.3 times 2005 earnings. Pre greenshoe the company has offered 12.7% of its enlarged share capital, with the Hon Hai group dropping from 85.1% to 74.8% and company employees from 15% to 12.5%.

At the time of pricing, the parent was trading at about 10 to 12 times 2005 earnings and has been fairly flat during the whole marketing period. Flextronics, on the other other hand, dropped 7% throughout roadshows only to bounce on the final day, thanks to positive fourth quarter results. It ended 5% up over the entire period and is currently valued on a 2005 P/E multiple of about 17 to 18 times earnings.

Foxconn's main selling point is the growth of outsourcing in handset manufacturing by global OEM's such as Nokia, Motorola, Sony Ericsson, Samsung Electronics and Siemens. Flextronics main client is Sony Ericsson, while analysts say Foxconn derived just under 60% of its 2004 sales from Motorola and about 30% from Nokia.

Traditionally, Nokia has kept much of its production in-house. However, some analysts believe this will change in 2005 and CSFB is predicting that Foxconn could double its sales from Nokia. Partly this is because it has built a big manufacturing site in Beijing next door to Nokia's Xing Hwang park site.

Since Hon Hai established a handset manufacturing arm in 2001, growth has been exponentially high. Between 2002 and 2003, revenue grew from $272 million to $1.09 billion and net profit from $35 million to $101 million. Between 2003 and 2004, syndicate analysts are forecasting net income growth of about 78% to $180 million, with a further jump of 25% or so to $235 million in 2005.