Taiwan networking products maker to list in Hong Kong

Delta Networks prices at the top, but demand is less convincing than for the average Hong Kong listing and no clawback is triggered.
Delta Networks, a Taiwan-based original design manufacturer of networking products, has raised $180 million from a Hong Kong initial public offering which showed some signs that investors are beginning to get choosy about where to put their money after two very busy months in terms of new listings.

Delta, which is a spin-off from well-known electronic components maker Delta Electronic, saw modest, but entirely sufficient, demand from both institutional and retail investors and was able to price the Goldman Sachs-led offering at the top of the HK$3.25 to HK$4.50 range.

The company sold 313.6 million shares, three quarters of which were new, that will give it a freefloat of 25% when it starts trading on July 6. There is also a 15% greenshoe that could lift the total deal size to $208 million if fully exercised.

According to sources, the 90% institutional tranche was about 14.7 times covered, while the 10% retail portion attracted orders for 12.3 times the amount of shares available. This meant that retail investors failed to trigger a clawback and had to settle for a 10% allocation. Had the order amount exceeded 15 times, the retail tranche would have been increased to 30%.

Observes say Hong Kong retail investors in may have been less keen on the company since it was a Taiwan technology name û a sector that they tend to be less familiar with on the grounds that there are not that many of these companies listed in Hong Kong. According to brokers, many retail investors were also ômaxed outö after participating in the wave of other IPOs that have come to market in the past couple of months, including several highly popular consumption plays and a heavily oversubscribed $272 million offering from China High Speed Transmission, which closed just three days before Delta and offered exposure to ChinaÆs growing wind power sector.

ôThere is a bit of emerging deal fatigue which could make it difficult for the last couple of deals in this wave,ö one banker not connected to the this offering said before the final outcome of the Delta offering became known.

Delta was the second Hong Kong IPO since mid June to see no clawback at all, following a $288 million offering by RREEF China Commercial Trust that was less than two times covered on the institutional side and close to three times covered by retail investors. Thanks to limited price sensitivity, that deal too was able to price at the top, but since its trading debut on June 22 the stock has fallen 8.7%. Deutsche Bank and HSBC were joint arrangers for RREEFÆs offering, which saw it become the seventh Real Estate Investment Trust to list in Hong Kong.

Among the other three deals that priced last Friday and Saturday, shoe manufacturer Stella International also saw a below maximum clawback although the retail tranche was boosted to 30%. StellaÆs offering was also led by Goldman Sachs.

However, bankers say the overall subscription of $2.7 billion for DeltaÆs smallish offering was not that bad, especially since three quarters of that demand was totally insensitive with regard to pricing. However, on the other end of the scale there were also investors who were very sensitive to the final price.

The institutional investors ranges from emerging markets funds and Asia funds to technology funds and funds focusing on small- and mid-cap companies. The demand was pretty broad-based with about 55% coming from Asia and the rest split quite evenly between Europe and the US. Investors from Asia and the US were said to have been the most valuation sensitive.

The people who came into the deal did so partly because the Taiwan market has been performing well recently, which allowed it to finish the first half of the year with a 13.5% gain. By comparison, Hong KongÆ Hang Seng Index is up only 9%. But sources note that the networking space is also considered to be quite hot and exciting at the moment because of the growth of broadband and products like WiFi and Wimax.

ôThere is a lot of talk about it and a lot of desire to play this sector, but the issue really is how much they are prepared to pay for it and what sort of growth they envisage,ö one source notes. ôThe CEO, Sam Liang, who was at D-Link before is also one of these gurus in the industry. A lot of people like and follow him and are interested in what his strategies will be for the company now that it has a listing of its own.,ö he adds.

Delta is expected to continue to see a net profit compound annual growth rate of about 15% - as it has over the past five years - or indeed slightly higher. The growth will come from the addition of new customers, including telecom equipment manufacturers, the sale of more products to existing customers and from making use of its design capabilities to be ahead in the product cycle.

Delta focuses on Ethernet switches (78% of the revenues last year came from these products), broadband access products, wireless adaptors and routers, and, according to the listing document, it has established a reputation as a quality manufacturer with strong in-house product design. As of the end of 2006 it had six customers, including Alcatel-Lucent, Dell, H3C and Nortel Networks.

Given that it has a strong relationship with these customers, the fact that there is only six of them wasnÆt really a concern. Instead, investors were said to have focused more on the potential for growth, the sustainability of margins and its ability to keep ahead of the product cycle.

IPO price values Delta at 15.2 times its 2008 earnings, which puts it at a marginal premium to the average 2008 price to earnings multiple of 15.1 times for its Taiwan-listed ODM peers. Among companies that are active within the same space, but make products under their own brand name, D-Link Corporation trades at 16.6 times next yearÆs estimated earnings. The estimates are all calculated on a post employee share option basis, to account for the fact that such options are expensed in Hong Kong, but not in Taiwan.

¬ Haymarket Media Limited. All rights reserved.
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