Sumitomo Corp, Japan?s fourth largest trading company, is planning to raise about ¥110bn in fresh capital for expansion, signalling the end of more than a decade?s decline in confidence among Japan?s big trading houses.
The company will sell 140m new shares through global coordinator Daiwa SMBC. The global roadshow begins today (Friday), with three teams in Japan, the US and Europe. Pricing will take place between July 7 and July 9.
Sumitomo Corp closed trading yesterday at ¥780 a share, implying a deal size of about ¥109bn, before taking into account the likely 2%-4% discount.
At that price, the company trades at about 12.4 times historical profits for the year ended March 31. Based on estimates from the Shikiho corporate directory, the company will make about ¥70bn of net profit this year, implying a prospective price/earnings ratio of about 10.7, before accounting for this issue.
Daiwa SMBC expects that net profits will rise to ¥72bn for this fiscal year, then to ¥78bn and ¥85bn in the following two financial years. On these estimates, Sumitomo trades at about 10.4 times prospective 2004-2005 profits.
Some 70% of the offer will be targeted at investors in Japan, and 30% to international buyers. The overseas syndicate includes Goldman Sachs, Nikko Citigroup and Nomura.
The deal has a significance beyond its size. Japan?s trading companies, have been struggling for more than a decade with stretched balance sheets and their hugely disparate activities.
However, corporate restructuring at most of the leading trading houses has given them leaner balance sheets and more focused management. Sumitomo is ready to invest in its three core activities of energy, information technology and transport equipment.
?Some people still argue that the trading companies are lagging the widespread corporate revitalisation in the country, but Sumitomo aims to prove them wrong,? said the head of ECM at a leading securities firm in Tokyo. ?The company is locating new investment opportunities as confidence in the economic recovery propels a new corporate assurance and boldness.?
The new offer can only be gauged against other Japanese trading companies, which are trading at about 11 to 12 times profits.
The capital raising continues a trend started last year by companies like NEC and Fuji TV. But Sumitomo Corp?s deal will be the first major new share issue by a trading company for several years, leaving aside Mitsubishi Corp?s ¥150bn Euroyen convertible bond in 2002.
CSMC Technologies Corp, the Chinese trailing edge semiconductor manufacturer, was forced to scrap its planned HK$683m Hong Kong IPO this Monday, just over a week after launching the deal following extensive premarketing.
The withdrawal does not necessarily reflect poorly on lead manager Citigroup ? the Hong Kong ?H? share market slumped 10% last week, and silicon chip makers in particular have fallen.
There had been huge pressure for the deal to go ahead from CSMC?s minority investors, many looking to cash in their stakes.
CSMC Technologies raised $52.2m last year from two rounds of private equity investment. Its shareholders include the International Finance Corp, 3i Group, Templeton, Development Bank of Singapore and Singapore?s Chartered Semiconductor Manufacturing.
CSMC Techologies had been scheduled to price its offer last Friday with a wide indicative range of HK$0.73-HK$1.10. But on Monday it confirmed market rumours that it had, at least temporarily, aborted its plan to list by the end of June.
The withdrawal was due in part to the restrictive Hong Kong exchange regulations, which do not permit an IPO price range to be lowered without a new prospectus and regulatory filing.
CSMC and its shareholders still hope the deal can be relaunched, and that it could list before mid-August. They are aiming to relaunch the deal with first quarter results included, which show strong growth in sales and profits.
The company has about $40m of cash to tide it over, but incumbent shareholders would prefer the market to give them fresh capital for expansion, rather than putting up the cash themselves.
If the deal is relaunched, it demonstrates interest among fund managers, albeit at prices below the bottom end of the original range.
Supporters of the deal said the price range had been aggressive but not unrealistic. Detractors said aggressively priced Chinese IPOs ? with rare exceptions such as Mengnui Dairy?s blowout HK$1.4bn deal three weeks ago ? were a thing of the past.
A major problem for CSMC was the lack of clear comparables. It uses superseded technology to produce chips more cheaply than the most up-to-date manufacturers.
This meant Citigroup was compelled to market the stock on a price-to-book value multiple, pitching the price range below the average at which several leading edge technology manufacturers trade.
Taiwan?s UMC, Singapore?s Chartered Semiconductor and China?s Semiconductor Manufacturing International Corp were trading at about 1.5 times book value when the CSMC offer was launched.
Within a week, those stocks had slipped below 1.3 times, eroding CSMC?s IPO discount. At the bottom end of the price range, CSMC?s multiple was roughly 1.25 times.
