VC investors cash out of Solomon Systech

Private equity investors make second divestment since IPO

Eight Taiwanese VC investors and one non-executive director sold a combined 8% stake in Hong Kong listed Solomon Systech yesterday (October 4). The group raised HK$511.3 million ($74 million) from the 201.9 million block trade, led by JPMorgan.

Having marketed the deal at HK$2.79 to HK$2.83, the lead priced it at HK$2.83. This represented a 1.6% discount to the stock's HK$2.87 close and flat to the VWAP.

As a result of the deal the issuer group drops to a 4.4% stake. The nine will now be locked up for 90 days.

The order book is said to have closed just over two times covered, with participation by roughly 30 accounts.

Year-to-date, Solomon Systech has been a strong outperformer in Hong Kong, rising 51% year-to-date. However, it has had a fairly volatile ride, having climbed to a high of HK$2.85 on June 1 only to plummet to a low of HK$2.20 on September 3.

Since then the stock has climbed once more, with specialists citing a recent IR drive at the CLSA and JPMorgan conferences as a key factor.

Solomon Systech first listed in April 2004 after pricing a $153.5 million IPO at HK$1.74 per share via JPMorgan. Deutsche Bank went on to complete block for the VC investors later that November at HK$1.96 per share.

At its current level, the stock is trading around 10 to 11 times 2006 earnings - a slight discount to Taiwanese comparables such as MediaTek. Solomon System is a fabless IC designer, with a speciality in mobile handset display drivers. The company was founded by a group of ex-Motorola employees and the handset giant is still its largest customer.

Specialists say the stock has performed well because investors are beginning to focus more on the IC design side of the business. "This part of the tech food chain is starting to get a lot of attention," says one. "Investors like it because it is design intensive rather than capital intensive and maintains high margins."

The company's gross margin stood at 31.2% at the end of the first half. Net profits were flat over the first six months of the year, but rose 62% year-on-year to $36.3 million.

However, some analysts believe the stock has peaked and believe margin pressure is likely as ASP's (Average Selling Prices) drop from competition by new entrants in Taiwan and Korea. Solomon Systech was the first non-IDM to ship colour STN and mobile TFT controller IC's and has a current global market share of 16%.

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