Solomon Systech starts pre-marketing

Hong Kong''s first fabless IC design company could price at premium to Taiwanese comps.

Joining the six mainland foundries clamouring to list in Hong Kong is Solomon Systech, which designs the chips made by the foundries. Pre-marketing starts today (Monday) for a HK$800 million to HK$1 billion ($103 million to $130 million) IPO under the lead of JPMorgan. Pricing is scheduled for March 30.

Because there are no comparables companies listed in Hong Kong, investors' main focus will be Taiwan. The main comps, Novatech, Mediatech and Realtech, are currently trading at a median P/E ratio of 14 to 15 times 2004 earnings.

Solomon Systech is being pitched at wide range of about 12 to 16 times earnings, which spans a discount and premium to the three Taiwanese comps. Premium pricing may derive from the fact that Solomon Systech is growing at a much faster pace.

The company generated revenues of $109 million in 2003, of which 90% came from the 70 million display IC chips it sold world-wide. The company says it has achieved 70% to 80% sales revenue growth every year for the past three years.

However, analysts note that none of the Taiwanese companies are perfect comparables.

"Novotech makes chips for much larger displays than Solomon, although Solomon is keen to expand its product range into that segment," says one. "Mediatech makes chips for DVD players and other consumer electronics and Realtech makes chips for data networks, such as local area networks."

One source said it was wrong to think companies like Solomon needed to be embedded in clusters of companies engaged in similar work - as in Silicon Valley, Beijing's Zhongguancun or Taiwan's famous high-tech parks.

"Solomon is not dependent on components suppliers like many of the companies you find in clusters," one specialist comments. "In fact, as long as you have sufficient computing power, and the right personnel, you can do this job anywhere in the world."

Joseph Ho, senior tech analyst at Vickers DBS says the company could benefit from the Chinese government"s efforts to bolster its IC manufacturing base, and that its proximity to a financial centre would help its capital raising aims.

In addition, given Hong Kong's status as a manufacturing centre, there should be plenty of demand for home-grown chips rather than imported ones, he says.

Bank of China"s Judy Chui warns Hong Kong has not historically paid the high salaries necessary for skilled IC designers, unlike its generosity to financial employees.

On the other hand, the legal environment in Hong Kong would be a major asset in helping the company protect its property rights, she said, which are vital to successful IC design firms.

The company was founded four years by former employees of mobile phone manufacturing giant Motorola, which provides the company with 40% of its total revenue.