Sunny Optical seeks $132 million from IPO

The Chinese optical components manufacturer banks on its broad range of products and high growth to attract investors to the offering.
Sunny Optical Technology kicked off the roadshow for the institutional portion of its initial public offering earlier this week with the aim of raising up to HK$1.03 billion ($132 million).

The company is the biggest optical components producer in China with a 40% share of the market and will be the first of its kind to list in Hong Kong.

The manufacturer is offering 27% of its enlarged share capital, or 270 million shares, at a price between HK$3 and HK$3.82. Of the total, 200 million shares are new, while 70 million, or around 26%, are existing shares. A 15% greenshoe made up of existing shares could increase the deal size to approximately $152 million. BNP Paribas is the sole bookrunner.

The offer comes as the most recently listed Mainland company, Sichuan Xinhua Winshare Chainstore, fell 4.3% in its Hong Kong trading debut yesterday (May 30), underperforming a broadly declining market as well as the 2% drop in the H-share index. At one point during the day, the bookstore operator, which raised $274 million, was down more than 12%.

Aside from Sunny, there are two other Chinese companies tapping the market this week including drug maker The United Laboratories International and motorcycle battery manufacturer Tianneng Power International. They are seeking to raise up to $105 million and $74 million respectively. TUL launched its institutional roadshow earlier this week, while Tianneng Power has opened its retail books as well.

According to sources, the institutional portion of Sunny's deal is already fully covered, however.

ôWhile [Sunny] is well-positioned in China, investors are mostly attracted by the companyÆs unique business model,ö says one source close to the deal, referring to the company's broad range of products.

Investor confidence is likely also helped by the fact that Thomas Lau Luen-hung, the managing director of Hong Kong-listed retailer Lifestyle International Holdings, is a cornerstone investor in the IPO. Lau will pay US$10 million for a stake of about 2% of the company.

Sunny manufactures optical components, optoelectronic products and optical instruments, including various lens sets, mobile phone camera modules and microscopes as well as surveying instruments and other analytical instruments.

The price range values the listing candidate at about 18-23 times its 2006 earnings on a fully diluted basis, although the source says there are no direct comparables to relate this to as products within the industry are very wide-ranging and most companies tend to focus on one specific part of the market.

For instance, Taiwan-listed Largan Precision specialises in producing lenses and shutters for cameras, scanners and liquid crystal display (LCD) projectors, while another Taiwan-listed company, Asia Optical, focuses on making electro-optical products such as optical components, cameras, fax machines and contact image sensors (CIS).

Between 2004 and 2006 SunnyÆs net profit surged 1.86 times to Rmb166 million ($22 million). Last year the gross and net profit margins were 30% and 13% respectively. Total revenues amounted to Rmb900 million ($118 million) in 2006, of which 34%, 52% and 14% came from optical components, optoelectronic products and optical instruments respectively.

The increasing popularity of 3G mobile phones in China is a primary earnings driver with revenues generated from optoelectronic products (including mobile phone camera modules) rising 11.7 times between 2004 and 2006 to Rmb468 million last year. And as Sunny will expand its camera modules production capacity by 83% this year and another 100% in 2008, this segment will be a key growth engine for the next few years.

According to IDC, a global provider of market intelligence and advisory for the IT, telecom and consumer technology markets, worldwide mobile phone camera shipments will increase at a compound annual growth rate of 18.5% from 2005 to 2010.

ôIt wonÆt be a problem for the company to see net profit growth of 30% per year,ö the source adds.

Like any other high-growth industry, the optical components manufacturing industry is a competitive one as more and more newcomers want to get their hands on a share of the pie. However, as an experienced producer in the industry the company argues that it is capable of a prompt response to market trends and has the ability to adjust its product range accordingly.

The manufacturer has 160 domestic and 80 overseas customers, including Panasonic, Samsung, Konica Minolta, Lenovo, Olympus and Huawei, to name but a few.

Sunny OpticalÆs share offering has the usual structure with 90% going to the institutional tranche and 10% earmarked for retail investors. There is also a clawback mechanism that could increase the retail tranche to as much as 50% in case of heavy oversubscriptions.

Of the net proceeds, Rmb275 million ($36 million) will go towards the expansion of production capacity. Using 2006 as a base year, the companyÆs target is to double and triple its lens and lens set production capacity by 2008. It will increase its capacity of optical instruments by 58% within the same period.

Sunny will also spend Rmb120 million on research and development, Rmb130 million on repaying outstanding bank loans, Rmb25 million on upgrading its IT systems and Rmb28 million buying some land and buildings.

As much as 40.8% of the company will be controlled by its employees after the IPO, as a tactic to retain staff in this skill-intensive industry. The venture capital arm of SwedenÆs largest investment holding company, Investor AB, and VC firm Chengwei Ventures will own a combined 24%, while Chairman Wang Wenjian and other initial investors will hold 1.5% and 6%, respectively.

The final price is expected to be determined on June 9 and the trading debut is scheduled for June 15.
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