ChipMOS (IMOS) is undergoing a long term restructuring that will streamline the presently convoluted corporate structure. There are a number of expected benefits, both short and long term, and I'd like to explain the process so that shareholders may benefit from this unusual opportunity.
First, an update on recent events. On August 15th, ChipMOS reported second quarter earnings of $.40 EPS with 15.5% GM. This came in at 9.5 cents above analyst expectations and 9 cents above year ago levels. The third quarter is expected to be 2% - 6% higher revenue with 17% - 20% GM. The fourth quarter is expected to be higher still. ChipMOS also pulled in about $30 million of capex for LCD drivers from the first half of 2014 to the latter part of 2013 in order to satisfy rising customer demand in a high margin, high growth segment. This will make 2013 capex an estimated $128 million.
As I previously speculated, ChipMOS announced that they would be doing "fingerprint sensors for mobile devices" which is certainly an allusion to the upcoming iPhone 5S. This clearly has a large revenue potential that should only grow with time as it would not be surprising if Apple (AAPL) extended the use of fingerprint sensors to other products. I would expect revenue from this and other opportunities to increase as the year progresses. Note that ChipMOS has planned for some time to increase their 12" gold bumping capacity by 50% in the second half of 2013, from 16,000 wafers/month to 24,000, which coincides with this opportunity.
ChipMOS also announced that they are now receiving NAND flash from long-time customer Micron (MU), no doubt from the Singapore fab, and they are also seeing increasing amounts of DRAM from Micron's partially owned subsidiary Inotera. While they have not announced a deal for the testing and packaging of Elpida production at this time, I believe that to be a possibility in the first half of 2014.
Famed billionaire investor Seth Klarman's Baupost fund revealed that it has bought 9.8% of ChipMOS, about the maximum it can buy without increased filing requirements. This is a strong vote of confidence from an investor with a fantastic track record.
ChipMOS has been undergoing a gradual restructuring process over the last couple of years in order to improve its ability to move capital within the company, revalue the company vs. competitors, and lower the impact of taxes. Within the next couple weeks I expect a key milestone in the process to be reached with a large secondary offering on the Taiwanese exchange. Although an investor will benefit from these changes even if completely unaware of them, a fully informed investor should be able to increase his returns.
Now for the convoluted part...
ChipMOS Technologies (Bermuda) is a Bermuda registered company with about 34 million shares listed on the NASDAQ under the symbol IMOS. ChipMOS Bermuda owns about $40 million and 83.45% of ChipMOS Taiwan. They own about 703.4 million shares of ChipMOS Taiwan listed on the Taiwanese GreTai exchange, out of a total of about 842.9 million shares. 6.5 million shares of the company are available for trading in Taiwan, while the remaining 133 million are owned by ChipMOS's larger ally Siliconware Precision Industries Ltd. (SPIL). ChipMOS Taiwan (83.45% owned by ChipMOS Bermuda) owns 42.9% of ThaiLin, with the rest of the company trading in Taiwan under the symbol 5466. ThaiLin is a smaller testing and packaging company and in addition to its own operations owns ChipMOS Shanghai, a substantial amount of cash, and about 4.1 million shares of ChipMOS Bermuda , the US-listed top-level company. Are you starting to feel dizzy yet?
To put it simply, ChipMOS Bermuda (the US-listed company) is a shell company that owns most of ChipMOS Taiwan plus some cash. ChipMOS Taiwan is the primary company and also owns a lot of cash plus a chunk of ThaiLin. ThaiLin in turn is a small company that also has cash, plus all of a small subsidiary in China, plus some shares in the top-level shell company.
By the middle of next year ChipMOS should exist as a single company listed on the Taiwanese exchange with the US shares existing as ADRs of the Taiwanese shares. Very simple, and a standard practice for a foreign company. The next part of this long term process is a secondary offering of about 130 million (or more due to oversubscription) ChipMOS Taiwan shares by ChipMOS Bermuda. This step in the process, and the process as a whole, offers a whole host of benefits to shareholders.
1) A secondary offering is necessary for regulatory reasons in order for ChipMOS Bermuda to lower its ownership below 70%. I believe the secondary offering that will take care of this requirement will be priced in the low to mid NT$20s based on past public presentations by the company, and the company's recent strong quarterly results should help the pricing. If listed at NT$25 ($1 USD = NT$29.96) then that would be equivalent to a level of approximately $20 USD for IMOS, and would be a discount of more than 10% from the current Taiwanese price of NT$28.
2) The small initial offering of 6.5 million shares on the Taiwanese exchange (symbol 8150) was done at NT$15 and immediately soared to NT$42 before settling around the NT$28 level. I believe the level of the Taiwanese listing will rise immediately once the overhang of the secondary is gone. As the Taiwanese level rises, so too will the American listing.
3) The secondary offering should raise somewhere in the neighborhood of $110 million for ChipMOS Bermuda, putting its total level of cash at around $150 million. This money is stuck at the top level in a shell company and can only be used for 2 things, buybacks of the shares of IMOS, or dividends to owners of IMOS. A portion of it will be used to buy the 4.1 million shares held by partially owned subisidary ThaiLin, and will likely be done with a liquidity discount to the trading price at the time the purchase is made. This sets up an arbitrage opportunity for the company -- they can sell shares in Taiwan and buy back IMOS shares in the US at a significant discount to the equivalent Taiwanese price. If the US listed price drops, the arbitrage opportunity increases, providing support to the price of IMOS.
1) Taiwanese companies must pay an extra 10% tax on profits from the previous year that are not distributed to shareholders. Because of this, ChipMOS expects to pay in excess of 50% of profits as dividends to shareholders in future years. However, Taiwan has tax withholding of 20% to foreign shareholders. Because of this, with the current structure, dividends sent to ChipMOS Bermuda lose 20% to the Taiwanese government before ChipMOS Bermuda can then send those dividends on to US shareholders. With a simplified structure, US shareholders would still be subject to tax withholding, but could then reclaim the lost taxes as a credit when filing taxes, so nothing is lost.
2) ChipMOS could be revalued vs. its peers by listing in Taiwan. It's much more well known there, and would be compared to peers such as Chipbond. Chipbond is a smaller competitor and the only other significant player in the LCD driver testing/bumping/packaging space. Chipbond has a P/S of 3.06, PE of 15.24, and P/B of 2.23, while ChipMOS has a P/S of .70, PE of 10.24, and P/B of 1.08. If listed in the same market, this vast disparity in valuation would not exist for long and ChipMOS could be expected to see double its current price.
3) A simplified structure would allow more easy access to cash, which is currently stratified between multiple levels of the company and not easily transferable between levels.
Below is a brief timeline of some key points in the restructuring process, past and future.
1) ChipMOS Bermuda sells subsidiary ChipMOS Shanghai to partially owned subsidiary ThaiLin. COMPLETED, April 22, 2011.
2) ChipMOS Bermuda lists ChipMOS Taiwan on the GreTai Securities Market of Taiwan, selling 6.5 million shares (.8% of its total ownership.) COMPLETED, April 19, 2013.
3) Secondary offering of approximately 130 million shares in order to get below 70% ownership, required for listing on the big board in Taiwan. Expected within the next couple of weeks.
4) Buyback of 4.1 million shares of IMOS from partially owned subsidiary ThaiLin. Expected shortly after secondary offering.
5) Application to move listing to big board in Taiwan, expected in the fourth quarter of 2013.
6) Listing on Taiwanese big board. Each IMOS share will become an ADR of multiple ChipMOS Taiwan (8150) shares. The number of ChipMOS Taiwan shares each IMOS ADR is worth will be affected by the number and size of buybacks of IMOS shares before this step. Any cash not spent on buybacks of IMOS shares will be given as dividends to IMOS share owners, and ChipMOS Bermuda will cease to exist. Expected in first half of 2014.
7) Acquisition of unowned portion of ThaiLin, either through buyout or merger, expected in first half of 2014. At this point the process is complete and ChipMOS will consist of a single company listed in Taiwan, with ADRs in the US controlling the bulk of the shares.
I believe that ChipMOS presents a strong asymmetric risk/reward relationship. Because of its impending offering in Taiwan (at a price likely higher than it's currently at in the US), there is a limit to how much the stock can drop. The money gained in the listing will primarily be spent on buybacks in the US, with the remainder going to dividends. If the stock drops the company can buy back more shares and the arbitrage play becomes even greater. In the longer term, ChipMOS will gain a number of benefits from its simplified corporate structure including improved tax treatment and a revaluation vs. peers that should see it easily double its share price within the next year. This combined with its growth opportunities and increasing profits should see the price increase both in the short and long term, and presents a unique opportunity for an educated investor.