LED chipmaker Epistar plans to find important downstream strategic partners by issuing 250 million new shares for private placement, and targeting Europe- and US-based lighting brands as investors. The deal is expected to be completed before June.
Despite the fact that rumors in the market indicate Epistar may attract China-based funds through the private placement, the firm has concerns about sharing technology. Therefore, Epistar has been targeting international lighting firms.
The private placement was passed at the company's 2012 shareholders meeting, but due to its falling stock price and net profits in 2012, the deal was delayed.
The deadline for the private placement is set for the end of June, and as Epistar's recent stock price has returned to NT$55/share (US$1.84/share), the deal is likely to reach a conclusion before the end of April. Epistar noted that the private placement will emphasize forming effective strategic alliances and building a downstream distribution chain. The firm said it has been evaluating various possibilities.
The firm added that capital injection is not the main focus for this private placement. As of the end of September 2012, Epistar had cash and cash equivalents of around NT$13.3 billion, therefore the firm does not plan to make more capital injection plans in 2013.
However, market observers in the financial industry have concerns over Epistar's cash position in 2014 because of the firm's euro convertible bonds (ECB) issued in 2011, which had a premium of 30% and a convertible price of NT$132.6/share. The ECBs attracted around US$280 million of capital. Despite the fact that the ECBs were issued for five financial years with a 0% coupon rate, in the third financial year, if Epistar's share price has yet to reach NT$132.6/share, investors can ask to redeem the bonds and take back the principle. As LED market conditions began to weaken in the second half of 2011, share prices of LED firms began to fall. Market observers believe that if Epistar's share price does not increase to NT$132.6/share, many investors may exercise their redemption options in 2014.
About this concern, Epistar stated that ECBs are an investment tool with a period of five financial years, and investors are diverse. Considering lighting demand and interest rates, it is unlikely all investors will ask to redeem early. However, Epistar added, the firm has been making preparations and will set aside around NT$8 billion in cash in advance.
Epistar explained that due to a market imbalance for upstream epitaxial wafers, the firm does not have strong demand to expand capacity. In addition, expansion plans in China have obtained subsidies from the local government, therefore, capex is limited. Epistar stated that the firm's current debt ratio is around 20% with healthy cash flow, hence, even if investors exercise redemptions ahead of the five year period, Epistar will still have a healthy financial and cash position.
According to Biing-Jye Lee, chairman of Epistar, the industry used to expect LED lighting to bloom in 2014, however, 2013 may be the year. Lee added that the key will be the magnitude of the economic revival. If the economy successfully climbs out of the trough while the price-performance ratio of LED lighting matches expectations, LED lighting may bloom in the second half of 2013.
Orders have been increasing since the Lunar New Year holidays, pushing Epistar to see rising capacity utilization rates. March capacity utilization is expected to reach above 80%, said Epistar.
