TSMC completes ADR

The Taiwanese government seeks out new investors to complete an $871 million trade in Taiwan Semiconductor Manufacturing Company (TSMC).

After a four-day bookbuild, an increased 52 million ADR offering was completed after Thursday's close in New York, with observers reporting an oversubscription level of about 1.6 times. At a time when many Taiwanese issuers have had to marginally trim expectations to meet a demanding investor base, the government was felt to have scored a solid success.

Unsurprisingly most of the demand derived from US investors (estimated to represent 85%) and the ADR premium to the underlying stock contracted sharply the day ahead of pricing (42% to 35%). More surprising, was the number of new investors lead manager Goldman Sachs is said to have attracted. Indeed some syndicate members reported that a number of their clients, particularly in West Coast America, had not been aggressively canvassed by the lead, which went on to build a book of just over 50% of new investors. About 25% of paper is said to have been placed with retail.

Having initially marketed a 51 million ADR deal, the National Development Fund (NDF) increased its share of the offering by one million units, selling a total of 22.8 million units. A further 26.8 million units were sold by the National Stabilization Fund (NSF) and 2.4 million units by TSMC management. There is also a 7.8 million unit greenshoe, which could potentially bump issuance proceeds up to $1.001 billion.

Pricing came at $16.75, a 1.3% discount to the last sale ($16.97) and a 35% premium to the stock's NT$87.5 close in Taiwan the night before. Alongside Goldman, Merrill Lynch was joint-lead, with Bank of America, Credit Suisse First Boston, Deutsche Bank and JPMorgan as co-managers.

In the week up to pricing, both the local stock and ADR price had slid slightly every single day until the final day before pricing, when the local stock rose marginally (NT$87 to NT$87.5) and the ADR contracted 4% ($17.67 to $16.97), as investors began to short it more aggressively.

However, because the ADR had not fallen as sharply as the local stock until this point, the premium between the two actually widened. Hence the Friday before pricing, the local stock stood at NT$97 and the ADR at $18.26, a 38.85% premium. The premium then widened to 39% on the Monday, 40% on Tuesday and 42% on Wednesday when the stock closed at NT$87 and the ADR at $17.67.

Pricing day also saw ADR volume nearly double to 9.8 million units against a six-month average of 5.4 million.

The 1.3% discount achieved, was not as aggressive as the two most recent bought deals of November and June 2001, but was considered fair by market participants given the much larger size of the deal this time round. In November, for example, Goldman led a $321 million offering at a 0.743% discount to spot, beating Merrill's record tight 0.86% discount in June 2001 when $291.2 million was raised.

For some investors, buying the new deal would have been viewed as a simple premium contraction play, given that the differential between the stock and ADR has averaged 47% prior to the marketing of the new deal.

Others would have seen the deal as a momentum play, taking the view that if the TWSE Index is heading towards the 7,000 level this year on the back of a sustained tech rally, then it will be driven by TSMC, its largest constituent stock. On Friday, the index closed at 5,857.93, with UMC one of the chief gainers after it revealed plans to build a 300 millimetre silicon wafer plant in association with Advanced Micro Devices - an announcement that was viewed by some as a spoiling tactic for TSMC.

But for the majority of investors, Goldman was faced with the challenge of convincing them of further upside to a stock which has doubled in the space of four months and at a time when the fundamentals of the tech sector remain fragile.

"If investors believed that all the upside had already been priced into TSMC's share price, then there would have been a major problem," says one observer. "But the lead got around the issue by underlining the longer-term trend. Partly, this came through arguing that the foundry giants have been increasing market share in the semiconductor sector. Between 1987 and 2001, for example, their combined share rose from 0% to 17%, with industry monitor Dataquest estimating that they will have captured a 50% share by 2010.

"The other main plank of the marketing programme," he continues, "was to show how TSMC has been inching ahead of rivals UMC and Chartered Semiconductor, with a 54% market share as of the fourth quarter. In terms of average selling price, for instance, TSMC was able to increase prices by 27% over the first nine months of 2001, versus 11% for UMC and -33% for Chartered."

Domestic analysts comment that TSMC's share price may have 20% to 30% upside potential over the near term, but add that the stock does look like it is running ahead of fundamentals. It is currently trading at 4.7 times price-to-book against a historic low of 2.8 times just after September 11 and nearly up to the stock's historical average around the five times level.

Rick Hsu of Nomura Taipei comments, "TSMC's wafer output actually decreased in January to 332,000 from 381,000 in December. By the end of the first quarter, we think the situation should have reversed and the company will increase output by about 7%, matching its revenue forecasts over the same period."

"But even though we don't think any major increase in output will occur until the third quarter, there seems little doubt that the tech cycle has turned," he concludes. "Investors are bullish and this momentum will support the stock going forwards."