TSMC launches pre-marketing as Benq Corp prices

Pre-marketing began yesterday (Monday) for Asia''s first $1 billion plus capital markets deal of the year.

The Taiwanese government has begun to press-ahead with its sell-down of TSMC (Taiwan Semiconductor Manufacturing Company) stock after briefly considering whether to bring rival UMC (United Microelectronics Corporation) to market first. The decision was taken after evaluating both companies' share prices and concluding that the former has considerably outperformed the latter during the recent tech rally.

Led by Goldman Sachs with Merrill Lynch as joint-lead, formal roadshows will begin on Monday January 28, for pricing on Friday February 1. Pre-marketing has begun on an auspicious note, with the index experiencing its biggest one day surge in over a month yesterday, closing up 5% at 5551.24 on news that President Chen Shui-bian had appointed Yu Shyi-kun as premier. TSMC was also one of the key drivers of the rally, propelled by local newspapers reports that it is planning to open its first manufacturing plant on the Mainland. It rose 6.5% to close at NT$90.50.

The National Development Fund, National Stabilization Fund and TSMC management are hoping to launch a 51 million ADR deal, raising $1.031 billion (post greenshoe). However, since this figure is based on Friday's closing ADR price of $17.59, proceeds are likely to have risen once the strong performance of the underlying stock rose is factored into New York trading overnight.

Under the terms of the new deal, the NDF will sell-down a 0.68% stake (21.8 million ADRs), resulting in a drop from 10.58% to 9.9%. The NSF will sell a 0.8% stake (26.8 million ADRs), seeing its holdings drop from 1.12% to 0.32%, while current management including Harvey and Morris Chang, will see a 0.07% stake (2.4 million ADRs), resulting in a drop from 1.12% to 0.86%

Alongside the leads, co-managers comprise Bank of America, Credit Suisse First Boston, Deutsche Bank and JPMorgan.

Investors' main investment decision will centre on the likelihood of further gains given that TSMC's stock has more than doubled in price over the space of four months. Analysts generally concur that while there are likely to be dips over the short-term, the general trend is still upwards.

As one puts it, "Over the long-term we're still very confident about TSMC's share price, though there is likely to be a slightly rocky road ahead. Whether the stock will ever get back to its historic highs again though, is much harder to evaluate. But confidence levels are definitely rising with regard to a gradual economic recovery and the stock also has more value to unlock. It's currently trading at five times book relative to historic highs of eight to nine times."

Bankers who have led recent Taiwanese deals, also report that there is a noticeable split among investors, with a majority still confident of being able to ride the upside and a minority less certain that the rally has much further to run. "Asian funds, which have the best understanding of Taiwan are the most bullish, while European funds are still somewhat cautious," one banker comments. "Asian investors seem to have a better appreciation of the cyclical nature of the Taiwanese stock market and know how to ride its waves."

Bankers also say that the Taiwanese market is likely to remain volatile over the coming weeks as global tech companies continue to release their fourth quarter results. "Trading has been very earnings driven and last week's dips co-incided with weaker than expected figures from IBM and then Samsung Electronics," the banker notes. "With less than 50% of companies having released their results yet, this will continue for some time."

The pricing of a $74.68 million GDR for Benq Corp on Friday highlighted the trend. With Nomura as lead manager, the company priced a 10 million GDR deal after finding a two day window when its stock was not either limit up or down.

Initially, Acer Inc had filed to sell a 125 million share deal, but opted for a 50 million share offering. This represented a 3.6% sell-down in its subsidiary, which has recently been renamed "Bringing Enjoyment and Quality to Life" (Benq) from its previous incarnation as Acer Communications & Multimedia.

The current transaction, which marks Nomura's third for the group, was completed as a placement with no new issue research produced and just a small syndicate of sub placement banks appointed. These comprised Barits Securities, China Development Bank, Grand Cathay Securities and National Securities.

The deal was also priced at NT$52.32, a relatively tight discount of 4% to Friday's NT$54.5 close.

A total of 30 investors are said to have participated in the deal, of whom about 25% were said to be new to the company. In terms of geographical distribution, there was a 50/50 split between Asia and Europe, with no 144a tranche.

Similar to TSMC, bankers say that investors were concerned that the stock has already had a good run (up 16% year-to-date) and also produced record fourth quarter earnings. However, Nomura is forecasting EPS growth of 75% during 2002, with all three of the company's main business lines experiencing strong growth.

Benq is, for example, Taiwan's largest mobile phone manufacturer and a 6.4% rise in its stock price yesterday was fuelled by news that it will produce one third of its phones on the Mainland from this year.

Over the medium-term, the biggest sales driver is TFT-LCD monitor manufacturing, which comprised 8% of sales in 2000, is forecast to have risen to 20% in 2001 and may hit 30% by year-end 2002. The company is Taiwan's largest manufacturer in the sector and also has a 20% stake in Au Optronics, which supplies its flat panels.

"There is starting to be a huge shift to TFT-LCD, as the computer giants move away from cathode ray tubes," says one banker. "Au Optronics is forecasting that Taiwan will increase its global market share from 58% to 62% over the course of this year, with shipments rising 89% year-on-year."

Where valuations are concerned, bankers say that Benq is trading on a fully diluted p/e ratio of 15 times 2002 earnings minus the company's sizeable investment portfolio and at about 22 times earnings on a whole business basis. This compares to historic highs at the 30 times level.

Towards the middle of the week, Morgan Stanley is also hoping to price a $175 million convertible for Siliconware Precision Industries. The deal was initially scheduled to price on Friday after books were closed oversubscribed by early afternoon (Asian time), having been opened at New York's open the previous evening. However, the lead says that an issue which arose during execution has forced pricing to be put on hold for a few days.

As a result, grey market trading which had hit 103 bid was back to a 101 level at Asia's close yesterday. Terms comprise a five-year maturity, with two-and-a-half-year call and put options. With a premium redemption structure, there will be a zero coupon, 10% to 15% conversion premium and a yield-to-maturity of 2.5% to 2.75%.

Convertible experts say that terms look reasonable compared to pre-marketing levels, when the company had been pushing for a three-year put.

Year-to-date, the stock is down 13.27% to close yesterday at NT$26.8.

Wednesday will also see the pricing of a GDR offering for Realtek Semiconductor. Led by Salomon Smith Barney, the IC designer is offering 41 million new shares and 7.5 million shares via a government sell-down.

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