Gintech surprises with GDR roadshow

The solar cell manufacturer could raise about $150 million based on current prices, but bookbuilding will start only if early feedback is positive.
The management of Taiwanese solar cell manufacturer Gintech Energy Corp has embarked on a roadshow with the aim of selling global depositary receipts corresponding to 20% of its existing share capital. Based on yesterdayÆs share price, the company could raise about $150 million.

The timing of the roadshow, which started in Hong Kong on Wednesday, is surprising given the current turmoil in global equity markets and the seeming preference among financial institutions to reduce their market exposure in favour of holding more cash. However, sources say Gintech feels that it has a compelling story, including projections of strong earnings growth for the next 12-18 months, that it is keen to share with international investors as part of its long-term funding plans. Also, the order books will only be opened if the response during the early part of the roadshow is positive.

If the feedback suggests investors are not interested in investing at this time, the fundraising exercise will be called off, the sources say.

The current plan is for the management to do a nine-day roadshow, visiting Hong Kong, Singapore, London, New York, Boston and possibly also Switzerland and the US west coast, with a one-day bookbuilding at the end. While it is unusual for a first-time issuer of GDRs not to have the books open during the entire roadshow, these are clearly unusual times that may well require some innovative measures in order to get deals done. This year has been all about grabbing the window of opportunity as it opens and at present there is really no way of telling what the market will look like a week from now. The company received regulatory approval for the deal in mid-August that is valid for three months.

One banker calls the move ôinterestingö, and another notes that even if the deal isnÆt launched by the end of the roadshow, the fact that the company has already met with investors could put it ahead of the crowd in terms of raising equity once the markets open up.

To sell a GDR based on a moving price in the underlying common stock û especially if the bookbuilding is concentrated to one day û is also a bit more palatable than to complete an initial public offering where you have to set a price range weeks before the actual pricing, leaving the issuer at the mercy of share price movements of its peers. In theory, a follow-on GDR should get done in any market environment, as long as it comes at a reasonable discount to the underlying shares. This assumes, however, that investors like the company and that they want to put money to work in the first place.

In reality, this is a bold move by Gintech and its joint bookrunners ABN AMRO and UBS. For one, there is a large possibility that there will be no deal if the global market environment remains shaky and there is always a risk that calling off a planned deal will have negative repercussions for future attempts to raise money (even if the books werenÆt actually opened). There is also a risk that investors interpret GintechÆs decision to come to market now as a sign that it desperately needs the money, which could put further pressure to its share price.

Since the deal was launched on Wednesday, GintechÆs share price has dropped 9.5% to a close of NT$162 yesterday. However, this has obviously been a difficult week for most stocks, and the decline on Wednesday and Thursday was smaller than that seen on Monday and Tuesday. On the week as a whole, Gintech has lost 21.4% (compared with a 10.6% decline in the Taiwan benchmark index) and in the past two weeks close to 25%. On May 11 it reached a closing high of NT$311 û a record since it began trading on the Taiwan Stock ExchangeÆs main board in early November 2007 û which led to earlier expectations that the company might be able to raise upwards of $300 million from the GDR issue.

However, the companyÆs intention all along has been to sell 30 million GDRs (each equal to one common share) which means that when the share price comes down, so does the deal size.

While sources say the company is in no urgent need of cash, it will clearly need more capital in the near future to fund its expansion plans and to procure raw materials û as is the case for most companies in the capital-intensive solar power industry. Gintech is telling potential investors that it plans to spend a total of NT$5 billion ($155 million) on capital expenditure in 2008 and that $76.2 million of that was spent in the first half of the year. Much of that money is going towards the addition of six new production lines by the end of this year with a total capacity of 300MW. This will more than double the 260MW production capacity that it has at its existing six lines.

Gintech also has $8.8 million of debt coming due within the next nine months, out of total long-term Taiwan dollar-denominated borrowings of NT$5.48 billion ($180.5 million), as per the companyÆs balance sheet on June 30. According to the companyÆs own assessments, the cash and cash-equivalents of $2.8 million that it held on June 30, together with the anticipated cash flow from operations, the ability to draw down from existing loan facilities, other lines of credit and the proceeds from the GDR sale should give it sufficient working capital for the next six months.

Sources say it is planning to spend about $127 million of the GDR proceeds to buy raw materials, including silicon wafers, while the remainder will be used to repay the first tranche on each of two outstanding loans.

Gintech has grown rapidly since it began commercial operations in August 2006, partly thanks to the growth in the solar power industry as a whole, and partly because of its scalable operations and the fact that it is able to produce solar cells cost effectively and on a large scale. In the six months to June 2008, it made a net profit of NT$1.1 billion ($36.3 million) on revenues of NT$7.5 billion. This is already more than double the net profit of NT$487 million and revenues of NT$6.8 billion that it generated for the full year 2007.

The company says it has already secured an adequate supply of silicon wafers to meet its anticipated production needs for the rest of 2008, as well as ôa significant portionö of what it will need for 2009. It buys about half of its wafers from MEMC Electronics Materials, which is also one of its largest shareholders with a 6.8% stake.

This should be comforting to investors as it offers more certainty with regard to earnings visibility. However, the silicon wafer bottleneck that has plagued the industry for the past 18 months is easing somewhat and the industry is getting increasingly competitive.

Against that background, Gintech is looking to expand both upstream and downstream on the value chain. In December last year it took a stake in Taiwanese silicon wafer producer Eversol Corp (it currently holds 8.6%) and it is also in the process of setting up its own brand and subsidiary to sell solar modules.

The company has also set up an original equipment manufacturing business to process silicon wafers into solar cells for some of its customers as a way of making use of excess production capacity. In the six months to June, Gintech sold about 80MW of its own solar cells.

So far this year, there has been only $1.2 billion worth of DR sales (GDRs and American depositary receipts) by Asian issuers, based on Dealogic data tracking deals greater than $50 million. This compares to a record $26.1 billion of issuance in 2007 and $16.9 billion in 2006. Taiwan has seen two GDR issues year-to-date û from Asia Cement and laptop and LCD panel manufacturer Wistron û raising a combined $144 million. Credit Suisse acted as sole bookrunner on both deals.
¬ Haymarket Media Limited. All rights reserved.

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