Citigroup is the sole arranger of the offering, which is looking to tap into strong investor demand for alternative energy-related assets as well as expectations that the solar power sector will continue to support earnings growth rates in the high double, or even triple digits for some years yet.
Indeed, with oil prices continuing to hover around $75 per barrel, it seems demand for less expensive and renewable energy sources can really only head one way. Governments worldwide are also increasingly offering subsidies and tax breaks for solar power producers, which is further underpinning the sector.
ôWe believe the PV cell industry is likely to grow by more than 40% per annum over the next two years and by more than 30% per annum over the next decade,ö analysts at Morgan Stanley projected in a May report. ôWe see E-Ton Solar growing its market share from less than 1% in 2005 to 2.5% in 2007, driving a five-fold increase in earnings over that period.ö
The company designs and manufactures photovoltaic (PV) solar cells which work as semiconductors, converting sunlight directly into electricity.
The final size of the GDR offering will depend on the share price in the local market, but itÆs already clear that international investors will have to pay a lot more than the locals did as the share price has soared 296% since listing. The price went up so much in fact, that the company on July 14 did a split to make the shares more affordable at an absolute level.
Having quadrupled from the IPO price of NT$218 on the first trading day on March 8, E-ton Solar became the first Taiwan-listed company in 15 years to see its share price push through NT$1,000 û and that only four days after its debut. Some profit-taking followed which took the price off those highs and adjusted for the split, the share price has for the most part traded in a more manageable range between NT$450 (the low in late June) and NT$700. (The split divided each existing share into 1.42 new ones.)
Valuations arenÆt affected by the split of course, and based on WednesdayÆs close of NT$608, the stock is trading at 34.7 times projected 2006 earnings, according to a research report by KGI Securities. This compares with 29 times for larger Taiwan-listed competitor Motech.
Given the strong growth prospects for the sector, the PE multiples falls to 19.4 times for E-ton Solar and 17 times for Motech when looking further out to 2007. The company posted a 330% increase in net profit to NT$275 million in 2005 and KGI expects it to grow by another 163% this year and by 108% in 2007.
Even so, E-tonÆs richer valuation has prompted a number of research analysts to express a preference for Motech over the market newcomer in recent months, although KGIÆs Jennifer Liang says E-ton Solar is fairly valued even at the current share price.
The question remains whether international investors will be keen on the stock at these levels and it seems likely that the company will have to offer the new shares at a discount approaching the maximum 10%.
ôThere is no arguing that the longûterm outlook for the industry and the company is one of really fast growth, but it (whether or not investors are willing to buy) is still a matter of valuation,ö Liang adds.
The discount relates to the market price of the Taiwan-listed common shares, but there is some flexibility involved in that the reference price can be equal to the closing or VWAP price either on the day of the GDR pricing or the previous day, or the average price over the previous five or 10 days.
According to people familiar with the offer, E-ton Solar will likely continue with its marketing efforts, which will include visits to both Europe and the US. It will fix the price around August 10 or 11. Sole arranger, Citigroup isn't expected to issue any indicative discount range, but rather allow potential investors to guide freely at which price they would be willing to buy the GDRs.
The company is offering 8 million GDRs û each corresponding to one common share û which based on the current market price would result in a maximum deal size of N$4.86 billion ($148 million), assuming zero discount. The shares on offer account for about 20% of its existing share capital.
According to analysts, E-ton Solar and its existing peers are likely to see more competition going forward as more players enter this ôhotö industry, while a current shortage of the silicon wafers - the raw material for solar cells û is likely persist until 2008 and continue to weigh on gross margins. In that respect, it is seen as a positive that E-ton Solar has already secured some supply of 400MW silicon wafers for the next 10 years, although several analysts argue that this contract is likely to meet only 30% of the companyÆs demand in 2007.
E-ton Solar is planning to increase its production capacity to 100MW by the end of this year and to 200MW by the end of 2007 from about 60MW at present.
The company raised NT$675.8 million ($20 million) from the sale of 3.1 million new shares in an IPO in February this year ahead of its switch to the GRETAI over-the-counter market on March 8. The company had been listed on TaipeiÆs Emerging Stock Market û essentially the third board û since March 2005 and fixed its IPO price at NT$218 based on the average share price in the fourth quarter of last year.
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