Korean polysilicon producer seeks $700 million from GDR sale

OCI Company, a Korean producer of value-added specialty chemical products, is currently on the road to drum up support for an issue of global depositary receipts (GDRs), which looks set to become the largest sale of such instruments by an Asia ex-Japan issuer since Taiwan’s Innolux Display Corp raised $1.35 billion in November 2007.

The company is aiming to raise up to $700 million that will go towards the construction of two new polysilicon plants as it seeks to ramp up its production of this raw material for the solar power sector. It started commercial production of polysilicon only in 2008, but as of last year it was already one of the three largest polysilicon manufacturers in the world, thanks to its rapid expansion and the high purity of its product, which is in demand among solar cell manufacturers. And, according to the offering circular, the company believes that polysilicon will account for a greater portion of its sales, gross margins, and net income in the near to medium term. Consequently, it is a key focus of the story it is telling investors during the roadshow.

OCI also produces petro and coal chemicals from coal tar and light oils; inorganic chemicals such as soda ash and hydrogen peroxide; and high-performance specialty gases that are used primarily in the TFT-LCD and semiconductor industries. It has also recently started to develop the technology for making sapphire-based ingots for the LED industry and expects to start commercial production by the end of this year.

Sources say OCI has chosen to do a fully marketed transaction rather than an overnight sale because it wants to broaden its shareholder base. The company has become very big very quickly – it currently has a market capitalisation of about $11.4 billion – and its investor relations activities haven’t kept pace. This, they say, is a good opportunity for the management to change that and communicate its story to the wider investor community.

GDRs offer more flexibility in terms of how they are marketed than a Korean share placement or a rights issue and, while they are notorious for their thin liquidity, a large portion of the deal is expected to be converted into domestic shares soon after pricing. The GDR issue will be targeted at all international investors, including onshore US accounts.

OCI is offering approximately 15.6 million GDRs, which will account for 6.4% of it enlarged share capital. Some 76.9% of the total, or 12 million GDRs, are backed by new shares, while the rest will consist of treasury shares. One common share is equal to 10 GDRs.

The price will be set at a discount of up to 10% to a reference price that will be equal to the volume-weighted average price for a three-day period ending two days before the pricing. At present the deal is scheduled to close and price next Tuesday, which means the reference price will be equal to the VWAP on May 17-19. However, the bookrunners may close the deal early if they feel they have sufficient demand.

Indeed that may well be the case as there has been good momentum in the book since the deal launched on Monday this week. The large size of the company and the liquidity in its domestic shares, which trade about $150 million to $200 million per day, makes it an interesting play for long funds that specialise in solar power or alternative energy stocks. But investors supposedly also like the company because of its economy of scale and low cost base, which suggests it will remain competitive as the solar power industry matures and the supply/demand situation gets tighter.

Already, it is supplying polysilicon to some of the largest solar wafer, cell and module manufacturers in the world, including Suntech Power and Yingli Green Energy in China, Green Energy Technology in Taiwan, Deutsche Solar in Germany and SunPower Corp in the US.

And the company will continue to grow. It has announced plans to triple its annual production capacity of polysilicon to 86,000 tonnes by the end of 2013 from 27,000 at the end of last year, and according to one source, it is on track to become the number one polysilicon player in the world by the end of this period. The company already has three polysilicon plants and it is currently in the process of expanding the capacity at the third plant to reduce bottlenecks. The two new plants, in Gunsan and Saemangeum in Korea, will add 20,000 tonnes and 24,000 tonnes of additional capacity, respectively, and are scheduled for completion in 2012 and 2013.

The total construction cost of the two plants will be about $3.1 billion, which, according to the offering circular will be funded partly from its operating cashflow and partly from the GDR proceeds. OCI said it “may need to raise additional funds through debt offerings or other financings to meet the remaining funding needs”.

However, there are expectations that the construction of polysilicon plants across the world in response to the shortage of this raw material a few years ago will eventually lead to an oversupply of polysilicon that will result in significant pricing pressure. But OCI believes that the large scale and integrated nature of its manufacturing plants will help it to maintain a key advantage versus the competition. In the offering circular it said that it is able to achieve cost savings through better utilisation of by-products and energy recovery across different processes, as well as additional cost savings through shared infrastructure and resources across different product lines, lower logistics costs and increased purchasing power.

In 2010, 58.4% of its Ebitda came from polysilicon, compared to just 36.6% in 2008. Meanwhile, its overall net profit has increased to about $528 million in 2010 from about $270 million in 2008.

While the development of solar power energy still depends to a large extend on government subsidies, a report published by industry consultant Solarbuzz this year said demand for high-purity polysilicon should grow alongside a projected increase in the demand for photovoltaic (PV) installations to 41.9 gigawatts in 2015 from 18.2GW in 2010.

The deal comes after the company’s share price has tripled in the past 12 months. The stock fell slightly in the first two days of the roadshow, but yesterday jumped 8.3% to W577,000, which left it only 9.8% below its record high of W640,000 that it hit at the end of April.

The GDR is being arranged by Barclays Capital, Credit Suisse and Royal Bank of Scotland.