Consequently, the CB was sold purely on its equity story, which is expected to improve after the company announced a joint venture with Asustek Computer in August. According to a source, the offer was well covered with around 40 investors in the book when it closed after only two hours. About 80% were specialty CB investors who were likely pleased about the opportunity to buy something out of Taiwan.
Having accounted for a majority of Asian CB issuance until about 18 months ago, Taiwan has had only four other convertibles this year as companies have chosen other ways to raise money. The bulk of the issuance in the region is now coming from India and China/Hong Kong.
The issue was also the first CB in Asia ex-Japan to be arranged by Nomura this year.
The bonds have a five-year maturity, but can be put back to the issuer after two years. There is also a call after two years, subject to a 130% hurdle, to ensure that the bonds convert reasonably quickly.
In the meantime, the bonds pay no coupon and are to be issued, redeemed and put back at par.
They were marketed with a conversion premium of 12% to 16% above yesterdayÆs (November 2) closing price of NT$23.50. Even with the lack of yield, the premium was fixed in the upper half of that range at 14.9% for a conversion price of NT$27.
The bond floor was also quite low at 88%-89%, while the implied volatility was just above 31%. Like other tech stocks Giga-Byte is volatile, but even so, the 252-day historic vol is only about 30.5%. There is virtually no stock borrow, however, and the trading volume is only about $3 million per day, which makes it difficult to play the volatility or indeed to hedge the equity option.
The CB accounts for close to 19% of the existing share capital.
The stock borrow cost was assumed at 5% and investors will get full dividend protection. The underwriter used a credit spread of 100 basis points over US Libor.
The share price has been on a declining trend this year amid weak shipments, inventory shortages and price competition, but after trading flat in a range between NT$18 to NT$20 during most of the summer, the price has started climbing again on the back of positive third quarter earnings.
It fell 3.7% on Wednesday, however, after a negative sector report, which gave the CB investors a few extra cents on the table. Prior to the launch of the CB yesterday, the stock edged up 1.3% to NT$23.50, which left it down 25% year to date.
According to the sector report, the fourth quarter is expected to be a bit of a challenge for the industry due to a lingering component shortage and the upcoming launch of the consumer version of Microsoft's Vista operating system which is expected to push orders into the first quarter. Others, however, regard this as being a short-term issue only. Long term, the stock should remain well supported, they say.
In a recent report, Citigroup argued that a PC replacement cycle in 2007 should help boost shipments and improve margins for motherboard manufacturers including Giga-Byte.
"With valuations attractive and strong catalysts expected from 2007, we believe now is a good time to buy Giga-Byte stock, especially for value investors," analysts Kirk Yang and Jones Ku said. They initiated coverage on the stock with a NT$31 target price and noted that aside from the share price upside implied by that, Giga-Byte also offers a dividend yield of about 6%.
The company, which is the fourth largest manufacturer of motherboards in the world in terms of market share, says it will use the money raised from the CB to buy raw materials from overseas.
The joint venture with Asustek, which will produce Gigabyte-branded motherboards and graphics cards, plans to start operations in January 2007. Giga-Byte will hold 51% of the JV which it hopes will help improve its operational efficiency and give the two companies greater resources to expand their business in the slow-growth market for motherboards where the leading PC manufactures are increasing their market share.
According to the source, the JV is seen as positive because it will halt the price war within the industry that has dampened earnings in the first half of this year. With one competitor effectively taken out of the market, average selling prices are expected to rise.
ôThe timing of the bond is good as it comes on the back of this joint venture and an extremely positive third quarter result, but investors are also happy with the companyÆs prudent management style,ö says one observer.
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