PROMos returns to GDR market

DRAM manufacturer takes advantage of soaring share price to raise funds for new 12" fab.

PROMos Technolgies raised $271.3 million from a 57.5 million GDR issue yesterday (Monday) via JPMorgan and joint global co-ordinator ABN AMRO. The all new share deal was priced at $4.72 per GDS. This represents a 9.7% discount to the stock's NT$17.4 close and a 13% dilution to existing investors.

The discount is relatively steep in comparison to Taiwanese GDR issues priced during the fourth quarter of last year. However, the issue size is correspondingly large for the DRAM sector and the stock has had a very good run so far this year. Based on a 15-day average, for example, the discount is a much tighter 1%.

Year-to-date PROMos is up 48% compared to about 20% for the TWSE and the stock is currently trading on a forward price to 2004 book valuation of 1.7 times. This places it at a discount to its nearest comparables - Powerchip and Nan Ya Tech - which are trading at respective forward book valuations of about 1.8 and 1.9 times.

Throughout 2003, PROMos traded at a steeper discount to the other two because of problems with its former technology partner Infineon. The fall-out left the company in limbo for much of the year and after months of negotiation with Elpida, PROMos finally settled on an arrangement with Korea's Hynix in December.

As a result, specialists say fund managers have once again started to focus on the positive rather than negative aspects of the equity story. Together with Hynix, PROMos plans to build a second 12" fab in Taiwan, moving from trench to stack technology and up to the next process technology of 90nm. The plant will cost about $2.5 billion, with a 50/50 debt/equity split.

The tie-up with Hynix, which is expected to be formalised later this month, has co-incided with a re-bound in DRAM prices and most analysts have instituted buy recommendations across the entire sector. Industry specialist DRAMeXchange has seen its DRAM index rise from 990 to 1,108 since the beginning of the year.

PROMos saw the order book for its new deal close just under two times covered, but because it embarked on a week-long roadshow specialists say it was also able to draw in long-only money from Europe that would have otherwise not participated in a sector that normally attracts mainly hedge fund interest.

The order book comprised about 60 investors, with a geographical split that saw 60% participation from Asia, 25% from Europe and 15% from the US.

PROMos is currently trying to turn itself into an own brand manufacturer and expects to turn out 100% own brand chips by the end of the second quarter compared to 20% last November. It also says it wants to concentrate on the contract rather than the spot market and while the latter is currently delivering higher prices than the former, this is expected to reverse over the next six months.

By the second half of the year it is hoping 70% of its output will be contract deliveries to tier 1 clients, 5% will be placed in the spot market via sister company Mosel Vitelic and 25% will be to foundry clients. As it fully ramps up its first 12" fab, it plans to use its other 8" fab for foundry production.

At the end of 2003, 60% of output was tier 1 clients, 30% spot and 10% foundry.

Prior to PROMos, the most recent equity issue from Taiwan was a $132 million share issue for Chunghwa Picture Tubes last Thursday. ABN AMRO led a six-hour accelerated bookbuild for one of the company's two majority shareholders, Tatung. The group sold 200 million common shares at NT$22, which represented a 3% discount to spot.

The GDR issue follows a spectacular upturn in the company's share price, which has spiked 45% over the past three weeks. The whole TFT-LCD sector began to rebound strongly after industry specialist Displaysearch said that Taiwan will outstrip Korea as the world's biggest manufacturing base this year.

Books for CPT's deal also closed about two times covered, with participation by about 60 accounts.