Nam Tai Electronic & Electrical starts roadshows for IPO

Shenzhen-based contract manufacturer to price at discount to comps.

Contract manufacturer Nam Tai Electronic & Electrical Products (NTEE), a unit of New York-listed Nam Tai Electronics, is planning to raise between $91 million and $108 million from its Hong Kong IPO, which began roadshows yesterday (Tuesday).

The offer comprises the sale of 200 million old shares and will have the standard 90%/10% split between institutional and retail investors. The indicative range has been set at HK$3.55-4.20 per share, representing a P/E range of 11 to 13 times 2004 earnings according to one fund manager. The freefloat will amount to 25% of the company's existing 800 million share capital, or slightly more if the 15% greenshoe is exercised.

Book building is scheduled to finish on April 21, followed by a main board listing on April 28. HSBC Securities is sole book-runner and global co-ordinator, while BNP Peregrine Paribas and Nomura are co-leads.

Where the valuation is concerned, specialists say the deal has been priced to sell. "The lead and the company have learnt the lesson of recent IPO's from China Resources People's Phone and SMIC," says one. "They recognise investors are not willing to pay sky high valuations and this deal will leave something on the table for investors."

At 11 to 13 times 2004 earnings and taking into account the standard IPO discount, Nam Tai is being pitched flat to marginally below locally listed comparables such Variatronics, which trades at 13 times 2004 earnings.

"The company has three major attractions," says one observer. "It's growing fast, it has a top-of-the-range client base, and the valuation isn't too aggressive."

NTEE's parent, Nam Tai Electronics, is also a contract manufacturer but trades at a more lofty valuation of 21 times 04 earnings. This partly derives from its exposure to the rapidly growing LCD module market via other wholly-owned subsidiaries.

The parent has three other main subsidiaries, one of which - JIC - is also listed in Hong Kong. This is currently trading at 23.3 times 2003 earnings, again a function of the fact it makes LCD panels. Nam Tai's other two main subsidiaries are contract manufacturer Zastron Electronic and Shenzhen Nantek, which is engaged in software design and consultancy.

Says one specialist, "The parent eventually wants to list all its units to make them transparent and accountable, while at the same time allowing them to leverage off the marketing strength of its own marketing strength."

NTEE derived 38% of its revenue during 2003 fom mobile phone add-ons such as wireless headsets, phone cameras and moible phone flashes. Home electronics devices such as add-ons to video games consoles contributed a further 23% and educational toys such as electronic dictionaries and calculators contributed 35%. The remaining 4% was contributed by other optical devices.

The company's financial results reflect its success with its clients, say observers. Turnover jumped 32% in 2003 to $128.8 million from $94 million the previous year, while net earnings have soared from $4 million in 2001, to $8 million in 2002 and then $22 million in 2003. The fund manager adds that 2004 earnings may top $30 million.

Last year, parent company's Nam Tai Electronics' net profit doubled to US$43.8 million for the year ended December, from US$20 million in 2002. Revenue soared to US$406.3 million from US$236 million.

In terms of the asset quality investors will receive, one specialist highlights that NTEE was the fastest-growing unit of the Nam Tai group in 2003, representing 50% of group profits last year and 30% of revenue.

In contract manufacturing, a good client base if important he adds. If the client is satisfied, it is likely to rapidly increase the volume and value of the business entrusted to the contract manufacturer, as well as invite the company into a closer partnership where the contract manufacturer can increase its technology level.

NTEE clients include Sony Ericsson Mobile Communications, Sony Playstation, Canon, Seiko and Texas Instruments.

Specialists also conclude that the Hong Kong listing has the advantage of allowing the company to tap capital from funds that aren't mandated to invest in US stocks. "It will raise the group's profile in Asia, thereby helping to attract managerial talent; and the listing will enable stock options to be issued to staff," says one.

In any event, with its manufacturing base so close to China, it made sense to have local coverage, he adds.

The future listco says in the prospectus that it has no need to raise cash thanks to its strong cash-flow and minimal debt. However, the future listco will receive a $10 million from the parent to cover the cost of reorganizing the group on the day it lists.