Innolux prices Taiwan's largest GDR

The underlying stock trades up in the wake of the $1.35 billion offering, which was completed at a tight 2.7% discount.
Taiwan-based Innolux Display Corporation has raised $1.35 billion from its first ever sale of global depositary receipts (GDR), which attracted a lot of interest because of the companyÆs unique integrated business model that makes it a sector leader in terms of profitability.

The deal is the largest GDR by a Taiwan issuer, exceeding a $936 million offering by China Steel in October 2003. It is also the largest equity deal by a Taiwanese company this year, aside from the two sell-downs in Taiwan Semiconductor Manufacturing by Royal Philips Electronics in March and May.

The GDR marks the first time Innolux has returned to the equity capital markets since its initial public offering in October last year, which raised NT$8.2 billion ($250 million). In its first year as a publicly traded company, the producer of thin-film transistor-liquid crystal display (TFT-LCD) panels and monitors has grown significantly and now has a market capitalisation of about $10.5 billion. Its share price has risen 278% from the IPO price of NT$41 to yesterdayÆs close of NT$155 and according to research firm DisplaySearch, the company ranks as the worldÆs second largest manufacturer of LCD monitors behind Hong Kong-listed TPV in terms of 2006 shipment volumes.

A clear sign of the investor interest was the fact that InnoluxÆ Taiwan-listed shares actually gained during the roadshow. Typically, the underlying stock will come under pressure when a company issues depository receipts and the fact that Innolux didnÆt until the very last day suggests some investors may have been buying in the local market rather than wait for the completion of the GDR transaction.

And it seems they made the right call as the share price rose 3.3% in yesterdayÆs trading after the deal was priced in the early morning hours.

The gain in the underlying share price, which amounted to 2% over the course of the roadshow but at one point was as large as 9.9%, also meant that even after a discount, the final price ended up only NT$1 below the where the share price was before the start of the roadshow on October 22.

The final price was fixed at $9.02 per GDR, which corresponds to NT$146 for the Taiwan-listed stock. Each GDR is equal to two common shares. The GDR price represents a discount of 2.7% versus ThursdayÆs close of NT$150 and was at the wide end of the NT$146 to NT$150 pricing indication that was given by the bookrunners ahead of the final day of the bookbuild in Europe and the US.

According to one source, however, the discount was still tight compared with other fund raisings in the same sector. Except on occasions where the share price has fallen a lot during the bookbuild û which tends to happen on large deals in particular û most of the discounts are closer to 5%, he says. Earlier in the week, when the stock got to within NT$1.51 of its record close of NT$163.01 from July, investors were told that the deal was likely to price at a discount of between 2% and 7%.

As is common with GDR issues that are priced off a moving target, a majority of the orders included a price limit, but few investors had any objections to remain in the book when the range was tightened on the final day. Sources say more than 80 investors participated in the deal and the book was ôwell coveredö with demand from both long-only funds and hedge funds. Technology specialists were also well represented. The majority of the demand came from Asia.

Innolux, which is controlled by TaiwanÆs Hon Hai Precision, a leading manufacturer of computers and consumer electronics, sold 149.97 million GDRs which each represent two new common shares. The offering was equal to 10.9% of the enlarged share capital.

ABN AMRO Rothschild, Credit Suisse and Morgan Stanley were joint bookrunners for the offering.

According to sources, Innolux has an edge over the other players in the sector through its integrated business model which it uses to keep the capacity utilisation at two fabrication plants (fabs) for TFT-LCD panels at or close to 100% at all times. It does this by making sure the demand for panels at its downstream assembly business exceeds its in-house production capacity.

ôCapacity utilisation is really important for fabs because there is a large proportion of fixed costs,ö says one industry banker. ôThis is a big swing factor. If you can keep a high utilisation rate for the fab portion of your business, you have a competitive advantage.ö

Industry observers are also more comfortable with the outlook for the sector as whole on the back of more disciplined capital expenditures. A few years ago when the industry was still essentially at an infancy stage, as many as eight or nine fabs were added every year, while now there are only two or three. At the same time the LCD sector has grown into a $100 billion industry from only about $25 billion four or five years ago as the product offerings have expanded from PCs and laptops to also include TVs.

ôPreviously, the key thing for the company managements was market share growth, but over the past year or so this has shifted to cost reductions, profitability and vertical integration,ö the banker says. ôItÆs a pretty consistent across-the-board change in thinking, which is appropriate for a maturing industry. The result has been three consecutive quarters of growth in average selling prices for desktops, notebooks and TVs, which is pretty spectacular after years of consistent declines.ö

The money that Innolux raised from the GDR sale will go towards the funding of a new sixth generation (6G) TFT-LCD plant, which is scheduled to begin production in the second quarter of 2009 and will reach a maximum monthly capacity of 90,000 glass substrates by the third quarter of 2010. As a result, the companyÆs total monthly production capacity in terms of the total glass surface area will increase by 160% to approximately 394,772 sqm over the next three years.

The new plant, together with the maintenance of its 4.5G and 5G plants, will demand capital expenditures of about NT$72.6 billion ($2.2 billion) between 2008 and 2010. The company is also constructing a new assembly facility in Vietnam for LCD monitors, which is expected to start production in 2009.

In the nine months to September 30, Innolux reported a consolidated net income of NT$9.66 billion ($294.4 million). This compares with a net income of $86.2 million for the full year 2006. Revenues reached $2.09 billion in the first half this year, compared with $3.22 billion in the full year 2006.
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