Taiwanese solar cell maker seeks $200 million from GDR

Motech Industries is hoping that by adding more international shareholders to its register and diversifying upstream, the company's valuation will be lifted.
While several Chinese solar power companies are raising funds through US listings, TaiwanÆs Motech Industries will seek international capital through an offering of global depositary receipts (GDR). The company is currently on the road trying to drum up support for the deal.

Motech is offering 18 million GDRs, with each unit equal to one new common share, or 12.5% of the company. Based on FridayÆs closing price this suggests a total deal size of up to NT$7.35 billion ($220 million). However, it would be reasonable to expect some discount versus the underlying stock.

The final price is expected to be determined after the order books close on Thursday (May 3).

The deal also contains a greenshoe of 700,000 GDRs which, in accordance with Taiwan regulations, is backed by secondary shares. Even if fully exercised, the shoe will only add another $10 million or so to the total deal size, but sources say the current shareholders were reluctant to sell any more shares at this stage.

The offering, which is jointly arranged by Credit Suisse and Morgan Stanley, comes as the solar power sector is emerging from a volatile first quarter that has been marked by a cyclical downturn. Motech itself, which is the largest solar cell manufacturer in Taiwan, is also planning to diversify upstream by starting to produce its own polysilicon and wafers, which will make it less dependent on market purchases and should eventually add to its bottom line, according to company watchers. Part of the proceeds from the GDR will be used for this expansion.

In the short term though, Motech is faced with the challenge of trying to secure enough polysilicon, which is used as a raw material in solar cells, in light of a continued supply shortage. At present, Motech gets about 70%-75% of its polysilicon needs from five long-term suppliers, but, as one observer puts it: ôhaving to buy even 30% in the spot market is a risk factor when there is a shortageö.

The Motech management, which owns a combined 16.7% of the company, is currently projecting that polysilicon prices will ease by the second half of 2008. AnalystsÆ forecasts of when the polysilicon shortage will cease to act as a drag on the sector do vary widely, however, which means investors have some tough decisions ahead of them if they plan to buy into the sector.

In a research note issued last week, analysts at Taiwan-based Primasia revised down their shipment assumptions for Motech to 210MW in 2007 and 294MW in 2008 to reflect the ôsevereö materials shortages. They also noted that despite record high sales in the first quarter this year, MotechÆs gross margin narrowed to 24.4% from 30.8% in the fourth quarter as it bought solar wafers in the spot market to offset the supply constraint.

But its margins û both at the top and bottom lines û are still better than the industry average and assuming that Motech will be able to continue to secure enough raw material to operate at full capacity, this together with its scale and strong management puts it in a good position to benefit from the expected growth in the solar power sector, bankers close to the offering say.

An added attraction is that it currently trades at a significantly lower valuation than its international peers, which is seen to be related partly to the fact that Taiwan stocks in general are quite depressed. Stocks that trade at high absolute NT dollar levels also tend to be less favoured by domestic investors.

As MotechÆs international ownership increases û from about 19% before the GDR to around 31.5% - there could be room for a re-rating, the observer says.

The volatile stock has been on a declining trend since March 23, when it closed at NT$482. It finished at NT$408.50 on Friday and is down 27% from a year ago. However, the stock hasnÆt moved much since the bookbuilding started last Thursday, which suggests domestic retail investors who dominate among its shareholders are no longer keen to sell despite the pending dilution. Market sources say there is a lot of support at NT$408.

Based on FridayÆs closing price, Motech trades at about 21.2 times its 2007 earnings on a US GAAP basis and assuming that the GDR goes ahead. This compares with 34 times for Suntech Power, 44 times for Q-Cells and 68 times for Sun Power, all of which manufacture either solar cells or modules. It does, however, pitch Motech at par with Taiwan-listed E-Ton Solar Tech and at a slight premium to Chinese players Canadian Solar and JA Solar, which have listed in the US over the past five months and currently trade at 2007 P/E multiples of 18-19 times.

ôDifferentiation within the space is important,ö says a source close to the offering, noting that Suntech is a leader in terms of quality, customer base and scale while E-Ton is a leader in the sense that it is poised to take advantage of the next generation technology.

ôMotech is up there because in terms of what people are doing now in this part of the chain, Motech is doing it the best - they have low-cost production and at the same time the highest margins, but because of the trading fundamentals in Taiwan it is an undervalued stock.ö

As Motech moves upstream and becomes a more integrated company, it should potentially be able to capture a higher valuation. The company has bought a 10% stake in US-based greenfield operation AE Polysilicon with an option to increase to 30% in the future. It is also planning to set up its own polysilicon plant with the aim to start commercial production by the end of 2008.

ôWhile it is too early to assess the viability or cost-competitiveness of such a plant, it will no doubt ease MotechÆs silicon constraint, albeit at a time when the market is likely to have eased,ö notes Morgan Stanley in a recent research report.

In the same report, the Morgan Stanley analysts argue that the fact that MotechÆs strategy is driven by cost advantages from scale and vertical integration, rather than technology differentiation means ôit may be prone to severe competitive pressures from other Chinese companies and changes in technology.ö

Motech is also planning to begin producing its own wafers from raw silicon at a new plant in Suzhou, which according to Morgan Stanley estimates could satisfy up to 30% of the companyÆs raw wafer requirements in 2009.
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