BYD eyes HK$6b gain from spin-off

BYD Electronic (International), a handset unit of battery maker BYD, aims to raise HK$7.7 billion by issuing 550 million shares in a Hong Kong initial public offering. The offer price will be set at between HK$10.75 and HK$14 each, or 13.6 to 17.7 times the firm's earnings next year. Market sources said the price range was 15 per cent lower than the initial target of 17 to 20 times because of recent stock market volatility. UBS is arranging the deal. According to the preliminary prospectus, the company said it would use 35 per cent of the net proceeds to expand capacity in the design and production of handset casings and keypads. It would also spend 30 per cent of the funds to enhance production of moulds for plastic components, including the purchase of wire electric discharge machines and grinding machines. Another 15 per cent would be used to expand production of metallic components while 10 per cent would go towards loan repayments. 'We view BYD's spin-off as a major milestone for the company, as it generates capital for capacity expansion and repayment of debt,' said Jim Liang, an analyst at Citigroup. 'With the handset division as an independently traded entity, we believe it will enhance the company's credibility to win large volume business from global customers such as Nokia.' BYD, which makes cars and rechargeable batteries, said in May it would probably book a one-time gain of as much as HK$6.24 billion from the spin-off. 'The firm has strong growth in sales and net profit over the past few years,' said Francis Lun Sheung-nim, the general manager of Fulbright Securities. 'However, lowering the offer price by 15 per cent is not enough to attract investors as market sentiment towards new stocks is really bad.' Mr Lun also said the lawsuit filed by Foxconn International Holdings would also weigh on the firm's share price in the coming year. Foxconn in June filed a lawsuit against BYD in the Intermediate People's Court in Shenzhen. It is alleging that BYD breached its statutory duty by using confidential information obtained improperly to establish a handset production system similar to that of Foxconn, according to BYD Electronic's prospectus. Shenzhen-based BYD Electronic, which makes casings and keypads for Nokia and Samsung Electronics, the world's top two mobile-phone makers, recorded a 407 per cent growth in turnover to 3.04 billion yuan for the year to December last year compared with 600.8 million yuan in 2005. It posted sales of 362 million yuan in 2004. Net profit jumped to 731 million yuan last year, compared with 45 million yuan in 2005. For the six months to June, the firm said sales grew 87 per cent to 1.85 billion yuan from the same period last year while net profit increased 146 per cent to 446 million yuan. The company also assembles phones for Motorola of the United States. 'The spin-off is good for BYD Electronic and its parent as it can raise funds for further development,' said Michael Wong, a research director of Hantec Investment International. 'The firm will continuously benefit from strong global handset demand.' However, Mr Wong said retail investors might prefer buying Foxconn instead of BYD Electronic if their price-earnings ratios were roughly the same. 'Investors are more cautious about subscribing to new stocks due to the volatile stock market,' Mr Wong said. 'If an investor is subscribing to an initial public offering's shares, his cash will be locked up for at least 10 days, adding further stock market risk. So why not buy existing stocks?' Foxconn's price-earnings ratio will be 16 to 17 times next year, said Frederick Wong, the Asia-Pacific technology research manager at BNP Paribas Securities. 'BYD Electronic mainly obtains revenue by making handset components while revenue from higher-margin assembly process only accounted for 5 per cent of total sales,' Mr Wong said. 'The firm should expand its assembly division to compete with Foxconn, which is capable of making all kinds of high-end handsets.' Mr Wong expected Foxconn's net profit to grow 3.2 per cent to US$741 million this year and 31 per cent to US$969 million next year. Shares in Shenzhen-based Foxconn, a unit of Taiwan's Hon Hai Precision Industry, rose 3.32 per cent to close at HK$19.90 yesterday. The shares are down 19 per cent from a year ago. BYD's shares, which have doubled in the past 12 months, surged 3.77 per cent to close at HK$55 yesterday. Citigroup, which has a buy recommendation on the shares, set the 12-month target price at HK$91. What the analysts say Francis Lun Sheung-nim, general manager, Fulbright Securities Pros: The firm has recorded strong growth in sales and net profit during the last few years Cons: The lawsuit filed by Foxconn is a burden to the company Frederick Wong, manager, Asia Pacific Technology Research, BNP Paribas Securities Pros: The firm has relatively low management costs Cons: Revenue from higher-margin assembly processes accounted for only 5 per cent of total sales Michael Wong, research director, Hantec Investment International Pros: The company will benefit from sustained strong global demand for handsets Cons: Investors are exercising more caution about subscribing to new offerings because of volatility in the stock market