Hon Hai's precision GDR

Computer giant returns to DR market for the first time since 1999.
Founder and Chairman Terry Guo divested a 1.8% stake in Hon Hai Precision Industries yesterday (March 17), raising $258.5 million from a 29.366 million unit deal. Under the lead management of Goldman Sachs, the deal was marketed at a fixed priced of $8.8017, which represented a 3% discount to the stock's spot close of NT$141 in Taipei. Two shares equal one unit.

Hon Hai has been one of the strongest performers in Taiwan's tech universe over the past year, rising 50% since last August. Year-to-date it is down 4%, although it hit a high of NT$147 at the very beginning of January and after a retracement during the first month of the year, has been on an upward climb again since then. On the day of pricing, however, it slipped 1.4% in line with the market.

Given the difficulties experienced by recent block trades for SMIC and Sinopec, Goldman decided to adopt a cautious approach and went out to the market with a deal size of $200 million. The issue was then upsized one-and-a-half hours in to the bookbuild.

The deal went on to close three times covered with participation by 70 accounts. By geography, Asia took 45%, the US 35% and Europe 20%.

The deal equates to just eight days trading volume and is likely to have little impact in the secondary market given that both the freefloat and market cap are sizeable - 60% and $15 billion. Chairman Guo will retain a 16.5% stake.

For investors the key question now is whether Hon Hai is fully valued at current levels. The EMS (Electronic Manufacturing Services) is currently trading around 3.7 times 2005 price to book and 11 times 2006 earnings.

Some analysts still have a buy recommendation on the company, while others believe that the company's strong growth prospects are already priced in. The company has said that it hopes to deliver 30% year-on-year sales growth in FY05 and 20% growth in net profit.

Analysts conclude that it continues to expand its grip on the EMS sector through its huge economies of scale and vertical integration. Its market share of the global desktop market, for example, is now creeping up to 20% and it remains the largest supplier for Hewlett Packard. It is also believed to be the main supplier of Apple's Mac Mini.

Through its 85% owned subsidiary Foxconn International, it is also building up a strong presence in the handset market. Hong Kong listed Foxconn is estimated to contribute about 17% of Hon Hai's 2005 EPS.

Investors' strong reception of the new GDR may go some way to reassuring investors after a slow start to the Taiwan primary market in 2005 and evidence of a nervous secondary market. Bankers report that foreign investors turned net sellers a few days ago after providing the market with the considerable support over the past two months in the face of domestic selling pressure.

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