Innolux raises $504 million from upsized GDR

The deal is triggered by obligations under a debt restructuring agreement between the Taiwan LCD panel manufacturer and its lending banks.
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Worries about demand for smartphone displays has affected sentiment across the industry
<div style="text-align: left;"> Worries about demand for smartphone displays has affected sentiment across the industry </div>

Innolux, a Taiwanese TFT-LCD panel manufacturer, has raised NT$14.6 billion ($504 million) from the sale of global depositary receipts (GDRs) that will be used to pay down bank loans under a debt restructuring agreement.

The well-flagged deal was completed after the close of trading yesterday and was well-received by investors, allowing the company to exercise the 13.6% upsize option in full. As a result, it was able to raise the full remaining amount of equity that it was required to raise by the end of January, leaving the management free to focus on running the business.

Innolux, which has been loss-making for the past three years, improved its profitability towards the end of last year and observers say it is on track with its margin recovery. This has contributed to a 30% run-up in its share price since late November. However, the stock has corrected a bit since reaching a high of NT$17.50 on December 20 (at that point it was up 59% from late November) and yesterday it closed at NT$14.15.

Recently, it has also been hurt by various reports that Apple’s iPhone 5 is trailing sales targets and that the company is cutting production. Innolux doesn’t have much direct exposure to Apple products, but the reports have caused concern about the wider smartphone market and affected sentiment for the entire industry, including component suppliers.

The 8.7% decline during the past three sessions may also have been partly due to expectations that the GDR offering was not far off.

However, investors that had previously expressed an interest in Innolux shares through reverse inquiries stuck with it and when the GDR offering launched at about 4pm Hong Kong time yesterday, the base deal was essentially already covered by anchor investors. The company did a two-day non-deal roadshow earlier this week, which allowed the management to properly explain the company’s market position and outlook and that seems to have alleviated any potential concerns related to the reports about Apple and its immediate suppliers.

Innolux, which until November last year was known as Chimei Innolux, offered 99 million GDRs with an option to sell an additional 13.5 million GDRs in case of demand. They were marketed at a price between $4.481 and $4.516 each, which translated into a discount of 7.6% to 8.3% versus the close of the company’s Taiwan-listed common shares yesterday, after adjusting for the exchange rate. Each GDR equals 10 common shares.

The order books were open for only two hours, but the demand was strong enough to exercise the upsize option in full to the equivalent of 1.125 billion shares, or 12.4% of the enlarged share capital. Investors were price sensitive, however, and the final price was fixed at the bottom of the range at $4.481 per GDR, or the equivalent of NT$12.98 per common share. This put the discount to yesterday’s NT$14.15 close at 8.3%, or near the maximum 10% allowed under Taiwan regulations.

However, Innolux’s share price fell from a morning high of NT$15.10 yesterday, which put the discount to the one-day volume-weighted average price (VWAP) at an even wider 11.4%.

The fairly wide discounts and the low-end pricing was no surprise in light of the share price rally in recent months and the large size of the deal. According to bankers, this is the largest GDR by a Taiwan technology company since Innolux’s own $1.35 billion offering in 2007 (the company was then named Innolux Display), and the fourth-largest across sectors behind two deals for China Steel in 2011 and 2003 that raised $826 million and $815 million respectively.

Close to 60 investors took part in the Innolux offering, with the demand skewed towards hedge funds. Some existing shareholders were also among the buyers, which were mostly Asia-based. According to one source, it wasn’t a heavily subscribed deal, but it was tightly allocated with the top-10 accounts getting more than 70%.

In addition to the improving fundamentals, the deal was also supported by the fact that there is around $300 million of short positions in the stock. Some of these are fundamental positions, but sources estimated that hedge funds were responsible for about $200 million worth of shorts and said some of that will likely be covered on the back of this deal.

Innolux has been financing the expansion of its production facilities primarily through bank loans and is a highly leveraged company. At the end of 2011 it ran into financial difficulties when it was unable to meet certain covenants related to its medium- and long-term syndicated loans and in early April last year it reached a debt restructuring agreement that involved all of its 52 creditors.

Under the agreement, the company was required to raise NT$20 billion of equity by the end of September last year, another NT$20 billion by the end of 2013 and NT$10 billion by the end of 2014. The company raised NT$5.4 billion from a rights issue in September, but partly because of the challenging market environment it was unable to raise the full NT$20 billion by the end of September.

However, the creditors agreed to extend the deadline — first to the end of 2012 and then to the end of January this year. If the company had failed to raise the remaining NT$14.6 billion through the GDR issue, the creditors also agreed to let it raise whatever shortfall by the end of this year.

But since the GDR proceeds landed exactly on NT$14.6 billion, that will not be an issue. According to the term sheet, the money will be used to repay bank loans and to purchase raw materials overseas.

Some analysts have argued that the reports of declining iPhone sales are exaggerated and last week analysts at Nomura projected in a research note that Innolux will return to the black this year on an improving supply/demand outlook for displays. A key driver will be the expected increase in LCD TV sizes, but the analysts also forecast an increase in China smartphone shipments to 450 million units in 2013 from 220 million units in 2012 and an increase in China white-box tablet shipments to 70 million from 50 million.

The analysts said they estimate that Innolux has a 20% share of China’s smartphone market and a similar 20% share of the white-box tablet market. Based on these forecasts, Nomura raised its 12-month target price for Innolux to NT$20.20, implying a 43% upside from current levels.

According to DisplaySearch (as quoted in the GDR offering document), Innolux was the world’s second-largest TFT-LCD panel manufacturer in the first nine months of 2012, based on shipment volume. The company said it intends to maintain its leading market position by continuing to develop new products and added that its strong capability in both display and touch technologies gives it an edge over pure-play touch and display manufacturers.

Credit Suisse and Morgan Stanley were joint bookrunners for the offering.

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