Powerchip prices as ProMos launches

The Taiwanese DRAM manufacturers decide to plough ahead with their GDR deals despite sharp share price corrections.

Under Deutsche Bank's lead, Powerchip completed a 350 million new share offering a day later than scheduled yesterday (Thursday), while ProMos Technologies launched roadshows for a 300 million new issue.

Powerchip was particularly unlucky with the timing of its deal since its stock price has dropped from a roughly NT$25 level as roadshows began to NT$17 at yesterday's close. For a sector as cyclical as DRAM, swings of such a magnitude are not uncommon and in this instance, the company was hit by a double whammy since the overall market has also shed over 1,000 points over the past week or so. Most of the 30% downturn in Powership's share price can be attributed to uncertainties about Hynix, whose board recently rejected Micron's proposed buy-out and opened up the possibility that the company would flood the market with cheaper chips in a bid to stay alive.

It means that Powerchip has raised just over $100 million less than initially anticipated. However, observers say that the company was conscious of a large pipeline behind it and also wanted to secure funding for its new 12" fab.

It consequently raised $148.68 million after pricing its deal at an 11.76% discount to close. One GDS unit equals 10 shares. Observers say that books closed about 1.2 times covered with a geographical breakdown, which saw 40% placed in Asia, 30% in the US and 30% in Europe.

Rival DRAM manufacturer ProMos, meanwhile, began roadshows yesterday for a deal which will raise $180 million based on Thursday's NT$20.7 close. Originally the deal was to have been jointly led by Deutsche Bank and Goldman Sachs. However, Deutsche is now believed to have been removed, since the company felt that it was conflicted by its lead management of Powerchip's rival deal. Pricing is scheduled for May 16.

But despite the short-term downturn, most analysts have confident mid to long-term projections. "We're still positive on the DRAM industry even though sentiment has been negative because of the second quarter's traditionally soft seasonal demand," says Nomura analyst Rick Hsu. "But by the third quarter, we think that there'll still be shortages on the supply side and demand will start pick up around this time again. The next major growth driver should kick in around this time as corporates enter the next PC replacement cycle."

Analysts say that both Powerchip and ProMos have been towards the forefront of the industry jump from 8" to 12" fabs. ProMos has a slight lead in terms of timing having entered mass production in March, while Powerchip is scheduled to begin production in June. Over the longer-term, however, Powerchip is said to have an advantage since its new fab has an output capacity of 30,000 wafers per month against 18,000 for ProMos.

And as one analyst explains, "Despite the investment risks of the 12" fabs, both companies need to be aggressive because they have to make up for what they lack in market share with an improved cost structure. For example, Powerchip and ProMos, each have a roughly 4% global market share, against 20% plus for the likes of Samsung Electronics and Micron.

"Now," he adds, "by utilizing a larger wafer size and smaller process geometric of 0.13 micron, DRAM operators should be able to improve profit margins."

But the estimated 30% cost saving once yields ramp up is balanced by the huge cost of the 12" fabs, which average about $2.5 billion each (including equipment supplies).

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