Pre-empting what they hope will be a turnaround in panel prices, Taiwan's capex intensive TFT-LCD producers have been re-laying plans to finance their 5G fabs through the international equity markets. Chi Mei Optoelectronics, Quanta Display and Hannstar Display are all hoping to launch deals straddling Chinese New Year, while Tatung will add to the wash of paper coming to market with an exchangeable into Chunghwa Picture Tubes (CPT).
Similar to concerns aired in early 2002, many are already starting to wonder whether the market will be able to absorb all these prospective transactions and indeed, whether it is ready to accept any of them given the lack of visibility over signs the sector is actually turning. According to Taiwan's Photonics Industry and Development Association (PIDA), Taiwanese TFT-LCD companies spent $6.09 billion in capex last year, much of which ended up being financed through the domestic syndicated loan market after panel prices, shortly followed by stock prices, started tanking in late spring.
And PIDA believes that prices of both standard 15" panels and the up-and-coming 17" panels will continue to fall because of all the production coming on stream from the 5G fabs. Last week, for example, it forecast that 15 inch panel prices could drop to $150 by the second quarter from $170 currently, while 17 inch panel prices could fall from $260 to $220. It also said 17" panels have a $235 average cost of production.
However, conscious of a pressing need to get funding in place and aware that domestic equity and credit demand is being sated, producers appear to have concluded they have little choice but accept the pricing realities of the international market. Consequently, terms for Quanta Display's $180 million convertible are said to be cheap even in comparison to convertibles for CPT and Powerchip priced at the end of 2002. Lehman Brothers holds the mandate for Quanta Display's deal, which has been filed, but is awaiting approval from Taiwan's SFC. UBS Warburg also holds a mandate for a 410 million new share GDR issue, which would raise $170 million based on Friday's closing price of NT$14.3. Some market observers believe the Quanta Display CB may come as early as next week, if it not is superceded by a $150 million convertible for Wan Hai Lines led by Morgan Stanley, which is also awaiting SFC approval. Other bankers, however, say it will probably not launch until just after Chinese New Year.
Because Quanta Display was loss making during 2002, its offering has to have a zero yield structure and filed terms comprise a five-year maturity, with a zero coupon and puts at par in years one, two and three. The conversion premium has a 14% to 19% range and there is also a re-fix with an 80% floor after six months and then every 12 month anniversary.
These terms are similar to those achieved by Powerchip, which priced a $90 million convertible via Nomura in December, with a 14% conversion premium and zero coupon, annual puttable structure. To appease investors, Powerchip also had to incorporate special compulsory re-sets one month before each put date. These have not been included in Quanta's deal, although bankers estimate that the latter's equity option will be much cheaper because Lehman is providing a degree of credit subsidy, aided by Chinatrust as co-lead. Thus whereas, Powerchip had a bond floor of 92.5% based on a credit spread of 600bp over Libor, Quanta Display has been calculated around the 95% mark, based on a credit spread of 300bp over Libor. Back in November, CPT was marketed at 400bp over.
Largely because of its parentage (Quanta and Sharp Computer), bankers say Quanta Display's credit profile is relatively strong. The company is hoping to begin production on its 5G line in the second quarter, but is still predicting an overall loss for the 2003 calendar year. At the beginning of the month, it forecasted shipping 5.46 million panels during 2003, of which 1.42 million will come from the 5G plant.
Of Taiwan's five TFT-LCD producers, Quanta Display is currently the smallest, having produced 2.34 million panels during 2002 compared to Hannstar's 3.96 million, Chunghwa Picture Tubes 4.89 million, Chi Mei Optoelectronics 4.95 million and AU Optronics 8.2 million.
Quanta's deal seems likely to be followed by an exchangeable for Tatung into CPT led by ING. Filed terms comprise a maximum issue size of $105 million, with a three-year final maturity and zero coupon structure. The exchange premium has a range of 5% to 20% and unusually for recent Taiwanese deals, it will also be credit enhanced via a Letter of Credit backed by Aa2/AA- rated ING. Tatung owns 30% of the CPT and has said it is hoping to use proceeds from the sale to fund component purchases.
Like most companies in the sector, CPT's share price has had a strong start to the year, but is still way below the sector's peak last spring. The company closed Friday at NT$13.4, up 17.54% on the year. At its peak in February 2002, it hit NT$46 and a low of NT$9.85 in September.
Winbond sister company, Hannstar, which has mandated ING and CSFB for a $200 million convertible and $200 million GDR, closed Friday at NT$11.5. This marks an 11.11% increase on the year, but down 43.71% on a 12-month basis. The stock hit a high of NT$38.3 in April and low of NT$9.1 in December.
However, the deal most market observers are waiting for is a 500 million new share ADR filed by Chi Mei Optoelectronics. With Morgan Stanley as bookrunner, alongside JPMorgan and Merrill Lynch as joint-leads, the company will raise about $460 million based on Friday's NT$32.3 close. Year-to-date, the stock is up 9.12%. But because the company did not list on the TWSE until July 2002, it completely mistimed the last industry cycle and has found it more difficult to get funding for its 5G fab in place.
To minimize execution risk, it is now said to be contemplating an accelerated marketing period for the ADR. This means that if an analysts' meeting is called as expected next week, pre-marketing will start immediately after Chinese New Year. If successful, Chi Mei will become the second global TFT-LCD producer to achieve a New York Stock Exchange listing. Late last May, AU Optronics became the first from the sector with a $578.5 million deal led by Salomon Smith Barney.
In its favour, the industry's specialist market research firm, DisplaySearch, is predicting strong growth in the global LCD TV market during 2003. With 17" panel prices falling and production booming, it says end product prices will also fall fuelling consumer demand. It is consequently predicting growth of 182% during 2003 compared to 113% in 2002. From 338,000 during the third quarter of 2002, it predicts that demand will hit two million by the fourth quarter of 2004.
