Harry Potter spells magic for Sunplus GDR

Breaking a six month hiatus in the depositary receipt market, Taiwanese tech companies are back, with offerings for Sunplus Technology and Compal Electronics, plus a convertible for Gigabyte.

Taiwan's largest consumer IC design company, Sunplus Technology, will price a 17.5 million unit issue later today (Thursday), while notebook manufacturer Compal Electronics is scheduled to decide whether to follow up pre-marketing with the formal launch of a 170 million share offering.

Few would deny that the primary market for straight equity offerings is anything but tough and particularly for tech companies. Difficulties predicting the bottom of the tech cycle, poor visibility in the supply chain for manufacturers and high volatility on the Nasdaq and Taiwan Stock Exchange, have all led investors to demand high discounts to par from prospective issuers. As a result, most of last year's lengthy Taiwanese pipeline have switched focus from DR to CB structures, with 15 potential issuers currently said to be awaiting market windows.


Since moving from the OTC to the main board at the beginning of 2000, Sunplus has been a consistent outperformer and proved a favourite of both domestic analysts and investors. Few international accounts have traditionally been large holders of the stock, however, and observers comment that should a GDR be successfully completed, it will, in no small measure, result from the company's aggressive investor relations push.

Since it last tried to complete a GDR offering in September 2000, Sunplus is said to have placed heavy emphasis on improving its profile and that of the IC design sector as a whole. As one banker puts it, "The IC design sector is not one that’s been that well known among the international investment community. But Sunplus is very investor-focused, very friendly and makes sure it is always available to meet fund managers visiting Taiwan."

Its UBS Warburg-led offering was quietly soft-launched on Monday and will price later today with Barits Securities as senior co-lead and SG Securities as co-lead. Terms remain exactly the same as last September, when the company offered 17.5 million units on a ratio of two shares per unit, with a 2.5 million unit shoe. There is also a 50/50 split between primary and secondary shares, which will, on full exercise of the greenshoe, see the major shareholders drop from 52% to 41%.   

Observers report strong demand for the deal, despite a temporary disruption to the sales effort following snowstorms on the US East Coast. Similar to last September, the company is pitching the deal at a 0% to 10% discount to par, although this time investor demand is said to be falling within the range.

The company's share price, which closed Wednesday at NT$175, is also now back above early September levels when the deal was first pre-marketed. By the time it came to pricing at the end of the same month, however, the stock had fallen from an NT$170 level to around NT$155 as the Weighted Index crashed to 18 month lows. Year-to-date, the stock is now up 33.08%.

"Investors are looking for companies with good stories and Sunplus certainly has one," an observer argues. "The key to completing a deal in the current environment is a good story and a belief in the management's ability to carry it through. Investors are looking over a 12 to 18 month outlook and are not overly impressed with historical data that shows, for example, how great a company's profits or sales were over the third or fourth quarters of last year."

For most tech companies, analysts say that visibility is particularly poor, with few companies able to provide supply/demand projections beyond a couple of weeks let alone months. IC designers, on the other hand, are said to operate under less of a constraint, because they do not have to make massive capital outlays to construct new Fabs and can move quickly to take advantage of new product ideas. Indeed, because consumer IC applications have such short life cycles, a broad portfolio of technology applications remains a key determinant of a company's likely success.

And as Prudential Bache's Abraham Leu puts it, "Sunplus has an incredibly well regarded management team and is highly diversified, with well over 250 different products lines."

So too, the company has recently been given a big boost by unconfirmed rumours that it has been contracted to manufacture integrated circuits for Hasbro subsidiary Tiger Electronics, which holds the merchandising rights for toys to accompany the first Harry Potter film, scheduled to be released later this year.

Compal Electronics

Lead manager Goldman Sachs has spent the past week pre-marketing a roughly $260 million DR offering for Compal Electronics. Taiwan's second largest notebook manufacturer after Quanta Computer is hoping to sell 170 million shares, of which 70 million will comprise secondary shares.

Last year, the company had hoped to complete a DR issue as part of a combined financing package with a convertible bond. In the end, however, it opted for just the convertible, successfully raising $130 million from a rolling put structure in mid October, again via Goldman. Proceeds for the deal, which includes ABN AMRO and JP Morgan as co-leads, have been earmarked for plant expansion.

As one analyst comments, "It's brave of the company to consider a deal, but it has already raised funds from a convertible and needs more money to invest in next generation flat screen technology."

Company officials are said to be poised to make a final decision today and may be swayed by a sales report from the Taiwanese government Central News Agency, which predicts that domestic notebook manufacturers will record an industry-wide 25% increase in sales during 2001 as US companies outsource more production.

The news pushed Compal past the NT$50 mark to close at NT$52.5 and has helped make its ambitions to price a DR flat to NT$50 a more achievable proposition. Analysts, however, have divided views on a stock that ranked as one of Taiwan's worst performers in February. On what proved to be unfounded rumours that it was about to lose one of its most important customers, Toshiba, the stock fell 16.5%. It has since recovered and is now up 17.71%. 

Deutsche Bank's Teresa Chen holds a positive view. "We have a buy recommendation on Compal and a target price of NT$57," she says. "We think shipments will grow 38% year-on-year and have been encouraged by the fact that shipments started to show some recovery in February, increasing 10% month-on-month from January."

Other analysts, however, paint a gloomier picture. "Compal has four major clients - Toshiba, Dell, Fujitsu and Hewlett Packard," a second comments. "These are all G2 country clients and, therefore, likely to be heavily impacted by a global slowdown. Compal operates in a low margin sector and the fact that its clients are lowering prices to clear inventory will pressure margins further.

"During the fourth quarter," the analyst adds, "gross margins fell from 10.3% to 8.8% and we don't see demand really picking up until the end of the year. We don't think there will be a V shaped recovery at all, but a U shaped one.  The company is moving into the wireless market, merging its PDA (personal digital assistant), handset manufacturing and notebook manufacturing into a cohesive whole. It's a good idea, but this is probably not the year to do it."

Nonetheless, at 13 times 2001 earnings, the company is trading at a lower multiple than Quanta, which stands at 17 times. The sector average is currently said to be 12 times.

Gigabyte Technology

Motherboard manufacturer, Gigabyte is planning to begin pre-marketing for a $100 million convertible at the end of this week. The Nomura-led deal, which will have a rolling put structure, also has a $15 million shoe.

Currently quoted at NT$96, the company's share price has risen 77.78% so far this year. The sector has massively outperformed the market, partly because strong demand continues to be registered from Europe and partly because the Taiwanese government has recently given its approval for domestic companies to expand operations in Mainland China, a move that should lower costs by about 5% according to analysts.

"We have Gigabyte at market perform at the moment and the company is trading at about 12 times 2001 earnings," Deutsche's Chen notes. "The company posted strong sales in January and February, because 70% of sales come from core markets and these core markets are China and Europe."

But other analysts believe that it may not last. Prudential Bache's Leu argues, "We think this is a short-term phenomenon as Europe will certainly be affected by a global slowdown. Perhaps not as much, but it will still be affected."

Ritek and CMC Magnetics

A second favoured sector covers CDR (Compact Disc Recordable) manufacturers, with industry leaders Ritek and CMC posting respective stock gains of 72.27% and 73.22% so far this year. Although the manufacturing price of a CD slid from US$0.60 to US$0.22 during 2000, analysts expect both companies to perform well as the market for recordable CD's flourishes.

CMC has mandated JP Morgan for a convertible, while ABN AMRO is long believed to have held a mandate from Ritek. The former had initially hoped to raise $180 million from a GDR offering that was to have been packaged with a convertible bond. Similar to Compal, however, it ended up raising $125 million from a convertible via Lehman Brothers last June.

The pipeline

The TSWE closed Wednesday at 4,739, up 21.9% on the year. From a long list of companies hoping to raise international equity this year, the following have made public their plans:

1. Taiwan Semiconductor Manufacturing Company (TSMC). The world's largest foundry manufacturer is said to be looking to raise new cash to fund its capex programme. It has also been reported that shareholders Cathay Life Insurance and Shin Kong Life Insurance want to sell NT$3.1 billion ($95 million) in ADR format.

2. Macronix. The non-volatile memory chip producer is hoping to raise $600 million to $700 million from a Deutsche Bank and Merrill Lynch-led ADR offering. Planning a second quarter launch date, the company will sell between 40 million and 50 million ADR units, where one unit equals 10 shares.

3. Via Technologies. The world's second largest chipset manufacturer behind Intel is planning a debut $300 million ADR, scheduled to be launched during the third quarter. It has yet to announce which shortlisted banks will lead the deal.

4. Chunghwa Telecom. The government-owned telecoms operator is set to embark on a non-deal roadshow over the coming three weeks in advance of a $3.15 billion ADR offering, postponed in late January. Goldman Sachs, Merrill Lynch and UBS Warburg are lead managers.

5. Taiwan Cellular Corp. Taiwan's largest mobile operator by subscriber number is said to be hoping to raise circa $500 million from a debut ADR via Salomon Smith Barney.

6. FarEasTone. Taiwan's third largest mobile operator is hoping to raise up to $500 million from a debut ADR to fund 3G expansion. It has yet to announce the winners from a shortlist comprising: Credit Suisse First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS Warburg.

7. Powerchip. The memory chip manufacturer has mandated Deutsche Bank for a $230 million convertible, scheduled for a May/June launch. Proceeds will be used to fund a 12-inch Fab currently under construction and the company may also issue 180 million shares in either the domestic or international market. Shares are up roughly 36% so far this year.

8. ChipMOS Technologies. The semiconductor testing and assembly company has mandated Deutsche for a Nasdaq IPO that should raise about $50 million.

9.Bank SinoPac. Merrill Lynch holds the mandate for a 220 million share offering that was initially intended as a GDR. The company has said that it will not come to market until its share price breaks the NT$20 mark. It closed Wednesday at NT$17.5 per share, up 15.13% on the year.

10. Taishin International Bank. Salomon Smith Barney was mandated last year for a $100 million DR offering. The bank's shares are up 24.13% on the year.

11. Universal Scientific Industries. Merrill Lynch was mandated last year for a $120 million DR or CB issue. The company’s shares are up 46.52%.

12. Wintek. ABN AMRO is still believed to hold a $100 million to $150 million CB mandate for the LCD manufacturer. Shares are up 28.26% year-to-date.

13. Fubon Insurance. Salomon Smith Barney holds a $250 million mandate for a 283.5 million share issue. Shares are up 45.32%.

14. ProMos Technology. Deutsche is said to hold a $200 million CB mandate. Shares are up 12.2%.

15. Accton Technology. The computer and peripheral manufacturer is said to be considering a GDR offering. Its shares have surged 83.44% year-to-date.

16. Lite-On Electronics. Originally planning a GDR offering. Shares up 101.79%.

17. First International Computer. Originally planning a $125 million GDR. Shares up 63.75%.

18. Silicon Integrated. Originally planning a $250 million GDR. Shares up 46.17%.

19. D-Link. About to launch a $30 million convertible via Grand Cathay Securities. Shares up 71.82% year-to-date.

20. Yang Ming Marine. Planning a $150 million convertible. 

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