Taiwan unleashes international equity avalanche

Companies line up to raise $2.5 billion over the next month as Siliconware Precision Industries; Benq Corp; Realtek Semiconductor; Macronix; ProMos Technologies; Chunghwa Picture Tubes and either TSMC or UMC launch deals.

In preparing to raise over half the entire issuance volume of 2001 in the space of just one month, Taiwanese companies are hoping to successfully ride a turn in the tech cycle and take advantage of the better valuations traditionally on offer at the beginning of the year.

The Acer group kicked off the pipeline this Tuesday with a $56 million GDR for subsidiary Ambit Microsystems via Goldman Sachs and may also be second in the market with the sale of a $250 million GDR for Benq Corp (formerly Acer Communications & Multimedia). Led by Nomura, this deal is currently being soft marketed to investors, as is a $200 million convertible for Silicon Precision Industries led by Morgan Stanley and a $250 million GDR for Realtek Semiconductor via Salomon Smith Barney, which will begin roadshows on Monday.

TSMC or UMC?

Most interest, however, is already beginning to focus on the two foundry giants, both of which are ready to hit the market with sizeable government sell-downs. Although the government has not yet made its final decision, most market observers report that TSMC is almost certain to be first, not least because it has already considerably outperformed UMC on the upside.

At current prices, some $994.5 million will be raised (excluding the greenshoe) from a 51 million ADR sale led by Goldman Sachs with Merrill Lynch as joint-lead and Bank of America, Credit Suisse First Boston, Deutsche Bank and JPMorgan as co-managers. Unlike the two most recent National Development Fund sell-downs of June and November 2001, the new TSMC offering will be fully marketed and roadshows are being primed to start late next week.

Alongside the NDF, which currently owns 10.58% of the stock, there will also be a sell-down by the National Stabilization Fund, which owns 1.12% and TSMC management, including both Harvey and Morris Chang, who own 0.93%. Pre-greenshoe, these shareholdings are scheduled to fall to 9.9% for the NDF (21.8 million ADRs) 0.32% for the NSF (26.8 million ADRs) and 0.86% for TSMC management (2.4 million ADRs).

Some observers contend that management's desire to sell stock now must reflect a belief that the current rally may be running out of steam. TSMC's share price, for example, has more than doubled in the space of four months, having traded at NT$45 back in September 2001 and NT$90.5 at yesterday's close (Thursday). The ADR also opened yesterday at $19.50, a 33.8% premium to the underlying. One unit equals five shares.

Others, however, point out that the sell-down has been planned for some time and argue that the stock is still trading on a compelling valuation. As one banker puts it, "If you look at the p/e levels of US tech companies you'll see that many stayed flat or even went up, because earnings plummeted faster than stock prices did. In Taiwan, on the other hand, many tech companies were able to maintain earnings growth, but their stock prices fell very sharply bringing p/e's right down. Now they're back to slightly more sensible levels."

And a second adds, "The Taiwanese market is up 70% over the past three months and it does feel as if it may have run away with itself. But if you chart back to a year-and-a-half ago or more, valuations still look cheap."

A number of country experts report that much of the buying to date has been by local investors, with the foreign shareholding limits of the internationally better-known stocks not really increasing very dramatically. As a result, a number add that it will only become apparent whether there is a bigger wave of buying on the horizon after the completion of the first couple of deals.

"It's possible that international investors may just think that they've missed the boat and stay on the sidelines to see how firm the tech re-bound really is," one banker cautions.

Others disagree. As one Asian ECM head comments, "Investors seem to be more worried about missing out on the upside rather than protecting themselves against possible downside at the moment. It's January and this is the month when funds always look to start putting money back to work."

If the government decides that TSMC won't go first, then there is likely to be a roughly $400 million ADR sale for UMC led by Lehman Brothers. Back in January 2000, the US investment bank was awarded a mandatory exchangeable mandate for a group of US tech companies hoping to sell down equity stakes in the semiconductor company, but the transaction had floundered by the middle of the year after the company's stock price began to slide and the Taiwanese authorities were reluctant to allow the structure through.

At yesterday's close, the company was trading at NT$48.9, down 4.12% on the year against a 5.765% rise in the TWSE.

Siliconware Precision Industries

In the meantime, Morgan Stanley is preparing to formally launch a $200 million convertible for IC packager Siliconware Precision Industries. Indicative terms are believed to comprise a five-year final maturity on a premium redemption structure, with a zero coupon, 15% to 25% conversion premium, two-year hard no call thereafter subject to a 125% hurdle, three-year put at a yield of 3.75% to 4.25% and re-sets in years one and two subject to an 80% floor.

One of the most notable features of the deal is the put option, which has been pushed out to three years. Of Taiwan's 14 equity-linked deals last year, only one issue - Premier ImageÆs ING Barings-led deal of September - managed to do so within acceptable pricing parameters.

Bankers believe that although investors were unwilling to accept duration during 2001, they are now actively looking to benefit from greater time value to play through the upturn in the tech sector and further want to extend the duration of Taiwanese portfolios, which now average about a year.

CB experts also comment that a number of Taiwanese convertibles are trading at discounts to parity for the first time since 1997. For example, Quanta Computer and Chunghwa Picture Tubes, both of which want to launch new CBs, have outstanding deals with discount 'conversion premiums' and bond components trading below the value of the shares. At yesterday's close, this meant that Quanta was bid at 120%, with parity at 144.65% and the conversion premium at -14.3%, while Chunghwa Picture Tubes was bid at 109%, with parity at 156.95% and the conversion premium at -29.9%.

This phenomenon is the result of convertibles being priced off relatively low stock prices in the early to middle part of last year. While the straight equity market subsequently performed strongly during the fourth quarter of 2001, there is always a lagging factor where equity-linked valuations are concerned because of the conversion difficulties inherent in the market.

"The equity market rally is really whatÆs driving the convertibles sector at the moment," says one sector specialist. "Hedge funds want to invest in North Asia, because the Taiwanese and Korean equity markets are highly leveraged to the global economic cycle."

Needless to say, the majority of outstanding Taiwanese convertibles are still trading as bonds with little equity sensitivity since stock prices have fallen so far over the past few years. As a result, bankers are hoping that the large number of deals in the pipeline will inject new momentum into a market, where credit spreads are still not perceived to be widely understood by international investors.

As one CB expert reflects, "Because there's virtually no international debt from Taiwan, understanding of credit subtleties is not all it could be among global investors. But it's encouraging to see bigger deals coming out of the country as this will widen the investor base and give the whole market more depth."

Should Hon Hai Precision go ahead with its planned $690 million convertible, for instance, it will double the size of the previous record holder - itself with a $345 million deal. Goldman Sachs has the mandate for the transaction, which will also include a $600 million straight equity offering - tipped to be one of the most sought-after of the first quarter deals.

Behind Siliconware, Citibank Taipei is also preparing to launch an $80 million convertible for Chunghwa Picture Tubes. Bankers say that the transaction should launch within the next week or so. Slightly behind it is a long awaited offering from Macronix, postponed twice last year because of deteriorating market conditions.

Deutsche Bank, Merrill Lynch and China Development Industrial Bank still hold the mandate for a $250 million convertible, which the company is hoping to launch at the end of January for closure ahead of Chinese New Year in mid-February. Taiwan's largest DRAM manufacturer has been one of the best performing stocks of year-to-date, up 13.01% to NT$30.4. At these levels, it is back to where it was last June when it took the decision to postpone its international fundraising plans.

Other outstanding convertible mandates expected shortly include; a $220 million deal for Taiwan's largest motherboard manufacturer, Quanta Computer, which has mandated UBS Warburg; a $120 million deal from CD-R (compact disc recordable) manufacturer CMC Magnetics via Lehman Brothers; a $150 million deal for Silicon Integrated Systems (SIS); a $150 million deal for motherboard manufacturer Elite Group Computers; a deal for CD-R manufacturer Ritek Corp led by CSFB and a $100 million convertible for ADSL modem manufacturer Ambit Microsystems led by Goldman Sachs.

Ambit leads straight equity charge

Ambit was first off the blocks on Tuesday with a six million GDR sale via Goldman. The $56 million deal represented the sale of a 5% stake in the company by Acer Inc, which owned just under a quarter of the company prior to the offering.

Pricing came at 4.75% discount to a closing share price of NT$170, or a 1.5% discount to a five day average, the tightest GDR premium in three years. At these levels, the stock was also trading at a 52 week high.

Should Acer proceed with the Benq Corp deal, it stands to raise up to $250 million via the Nomura-led GDR (including a 15% greenshoe). The company has a filing (which expires at the end of January) to sell up to 125 million shares, representing 9% of the company. At Thursday's close, the computer peripheral manufacturer was trading at NT$56.5, up 13% on the year.

Realtek Semiconductor launches long planned GDR

Salomon Smith Barney is also preparing to begin roadshows on Monday for a 41 million new share offering and 7.5 million share government sell-down in IC designer and distributor Realtek Semiconductor. At current stock levels, the issue is should net close to $250 million including the greenshoe. It was first mandated last August.

So far this year, Realtek has underperformed the index, down 2.34% to ThursdayÆs NT$167 close, but was one of the star performers of 2001, up 187% on the year. This latter feat has been attributed to strong earnings performance on the back of limited competition and high margins in the network interface card (NIC) sector where it operates. During the third quarter, for example, the company recorded gross margins of 50.4% and increased profit by 22% over the same time period compared to a year previous.

Pricing will take place the week beginning January 21. The start of the following week should see the launch of roadshows for a $300 million plus GDR offering by DRAM manufacturer ProMos Technologies under the lead of Deutsche Bank and Goldman Sachs.

Like most companies in its sector, ProMos has seen its share price climb sharply over the past few months, to close yesterday at NT$38.3. This compares to an NT$14 level in late September. The sale is said likely to incorporate a new share offering and a stake sale by Mosel Vitelic.

Further down the pipeline other outstanding straight equity mandates include; a 500 million share offering for Nanya Technology, which would raise roughly $400 million at current stock levels; a GDR sale for Powerchip Semiconductor; a debut $300 million to $400 million ADR for Via Technologies led by CSFB and; a debut ADR by TFT-LCD manufacturer Au Optronics Corp.

Salomon Smith Barney has won the latter mandate, which stands to raise about $600 million based on a current NT$41.3 share price. Tech bankers regard the flat panel display sector as one of the most potentially rewarding for new business over the course of 2002 and deals are also expected from the country's other major players including Chi Mei Optoelectronics and Toppoly Optoelectronics.