Solomon Systech unfazed by SMIC trading debut

MD Humphrey Leung says Hong Kong IPO will be a success.

At a press briefing last Friday Leung said Solomon Systech was not affected by the disappointing IPO performance of mainland foundry Semiconductor Manufacturing International (SMIC), which raised $1.8 billion last week but saw its price fall 13.56% below issue price within two days of trading.

SMIC's fate appears to shows that the buying frenzy of China-related stocks is over. Internet portal Tom Online's IPO has also fallen to below its issue price. Leung emphasized Solomon Systech has a different business model and had a different geographic bias to these companies.

The flat panel display integrated circuit (IC) company is scheduled to price its IPO at the end of March under the lead of JPMorgan. It specializes in designing IC chips for small displays, such as mobile phones, digital cameras, laptops, as well as emerging display technologies such as e-paper.

According to Leung, the total IC market is around $200 billion worldwide. He said, "The market for chips, and hence the company's growth, is based on two elements: a growing volume of users of electronic gadgets such as mobile phones, MP3s and digital cameras and the increasing sophistication of the gadgets, which requires more powerful and versatile chips with wider profit margins."

The company has around12% to 15% of the mobile phone display market, he added.

With regard to comparables, Leung did not mention Taiwanese fabless design houses Novatech, Mediatech and Realtech, currently trading at a median P/E ratio of 14 to 15 times 2004 earnings.

Instead, Leung said that "given our management of the manufacturing flow, Solomon is more than just IC design, so you can compare us to a global semiconductor company, such as Hitachi, Samsung or Epson,"

Leung also denied that there was a dearth of engineering talent in Hong Kong.

"Although not as high-profile (as the finance industry) IC chip engineering has a much stronger presence in Hong Kong that people realize. Many global companies have set up operations in Hong Kong," said Leung, whose previous employer, Motorola, set up an IC design centre in Hong Kong in 1984.

Regarding the primary/secondary share split, Leung mentioned that 30% of the company's shares are held by the company's staff, but that a lock up clause prevented the sale of shares by company staff for six months.

The company was founded four years ago by former employees of mobile phone manufacturer Motorola. Leung said Motorola withdrew from the design of chips enabling Leung and his colleagues to step in. However, citing confidentiality concerns, Leung did not give details concerning the terms under which Solomon Systech took over the business.

Nor would he confirm previous reports that Motorola provided 40% of the company's revenue, since it was not possible to accurately identify the end users of the 70 million chips the company shipped to distributors world wide last year.

According to Leung, the company achieved net profit margins of 7% in 2001, 11% in 2002 and 20.7% last year. Net profits in 2001 came to $2.7 million, $6.8 million in 2002 and $22.7 million in 2003.

"Net profits have jumped at a compound annual growth rate of 192%," said Leung, but added that profit margins would not likely increase in 2004.

Sales revenue amounted $37.5 million in 2001, $60 million in 2002 and $109 million in 2003.

Leung did not give a forecast for this year, but said 'orders were very strong' in the first part of the first quarter.