IPO Preview: Montage Technology

Sep.25.13 | About: Montage Technology (MONT)

Based in Shanghai, China, Montage Technology (NASDAQ:MONT) scheduled a $92 million IPO with a market capitalization of $345 at a price range mid-point of $13 for Thursday September 26, 2013.

S-1 filed September 11, 2013.

Manager, Joint Managers: Deutsche, Barclays, Stifel
Co Managers: Wells Fargo, Needham

Summary

MONT is a global fabless provider of analog and mixed-signal semiconductor solutions currently addressing the home set-top box entertainment and cloud computing markets.

Sales to end customers in Asian countries accounted for 96%, 97% and 94% of total revenue in 2010, 2011 and 2012, respectively. Although end customers are primarily manufacturers located in Asia, MONT's integrated circuits are incorporated into finished products sold globally.

For the six months ended June 2013 revenue increased 32% to $45 million from $34 million for the June 2012 six months. Profits increased only 7.3% to $8.8 million from $8.2 million.

Valuation

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing June 6 mos '13

Cap (NYSE:MM))

Sls

Erngs

BkVlue

TanBV

in IPO

Montage Technology (MONT)

$345

3.8

19.6

3.3

3.3

27%

Click to enlarge

MONT is priced at the mid-point at $19.6 times annualized earnings for the six months ended June '13. The P/E multiple of 19.6 seems low for a profitable 32% increase in revenue, but profits only increased 7.3%.

Conclusion

There's a current lack of interest in most China IPOs. 20x earnings may seem reasonable but the profit growth is only 7.3%. MONT probably needs to be priced down from range mid-point.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

MONT is a global fabless provider of analog and mixed-signal semiconductor solutions currently addressing the home entertainment and cloud computing markets.

MONT's expertise in analog and radio frequency solutions, digital signal processors and high speed interfaces serves as the foundation for its technology platform. These technical capabilities enable MONT to design high performance, low power semiconductors.

In the home entertainment market, MONT's technology platform enables the company to design highly integrated solutions with customized software and support for set-top boxes.

In the cloud computing market, MONT offers high performance, low power memory interface solutions that enable memory-intensive server applications.

Since inception in 2004, MONT has sold over 230 million integrated circuits, which have been shipped to over 150 end customers worldwide.

Chinese market for set top boxes

Initially, MONT developed commercial solutions for the home entertainment market to address the rapidly growing demand for television in China, Southeast Asia and other emerging markets.

According to iSuppli Corporation, or iSuppli, in 2012, 154 million set-top boxes were sold by Chinese manufacturers. MONT believes that set-top boxes sold by Chinese manufacturers primarily target China and other emerging markets.

The number of set-top boxes sold by Chinese manufacturers is expected to grow to over 243 million units in 2016 according to iSuppli. This would represent a compound annual growth rate of 12% from 2012 to 2016.

End Customers

End customers are manufacturers of set-top boxes or televisions in China and internationally and to cable network operators in China.

Sales to end customers in Asian countries accounted for 96%, 97% and 94% of total revenue in 2010, 2011 and 2012, respectively. Although end customers are primarily manufacturers located in Asia, MONT's integrated circuits are incorporated into finished products sold globally.

MONT's set-top box solutions have been shipped to more than 150 end customers, including nine of the ten largest set-top box manufacturers in China as measured by units sold in 2012. In 2012, only one of MONT's set-top box end customers, Shenzhen Changhong Digital Technology Limited, accounted for more than 10% of total revenue for the year, and the five largest end customers accounted for in aggregate 41% of total revenue for the year.

MONT sells memory interface solutions to leading memory module manufacturers globally. MONT has sold memory interface solutions to Samsung Electronics, SK Hynix Semiconductor, Inc., Elpida Memory Inc., and Micron Technology, Inc., the world's four largest memory module manufacturers as measured by revenue generated in 2012, and to Kingston Technology, the world's largest third-party DRAM module supplier as measured by revenue generated in 2012.

Intellectual Property

As of June 30, 2013, among other jurisdictions, MONT has 20 and 17 issued patents in the United States and China, respectively, and 15, 29 and two patent applications pending in the United States, China and Taiwan, respectively.

Among these 83 issued and pending patents, 40 of them relate to technology and design features of set-top box solutions, 37 of them relate to technology and design features of memory interface solutions and six are related to Wi-Fi technology

Competition

Competitors range from large, international companies offering a wide range of semiconductor solutions to smaller companies specializing in set-top box or memory interface solutions.

Primary competitors in the set-top box market include semiconductor companies that sell to emerging markets such as HiSilicon Technologies Co., Ltd., ALi Corporation, RDA Microelectronics, Inc., Airoha Technology Corporation and STMicroelectronics NV, as well as smaller semiconductor design companies based in China.

MONT believes that it provides a more comprehensive suite of set-top box solutions for emerging markets than any of its Asia-based competitors.

MONT's market share for set-top box chipset solutions in China in terms of units sold was 7% in 2009 and 14% in 2012, according to iSuppli. Competitors in the memory interface market include Inphi Corporation, Integrated Device Technology, Inc. and Texas Instruments Inc.

5% stockholders pre-IPO

Mr. Kuai Lap Tai and Ms. Iong Wa Chao, 6.2%
AsiaVest Opportunities Fund IV, 19.2%
Intel Capital (Cayman) Corporation and its affiliates, 10%

Use of proceeds

MONT expects to net $61.6 million from the sale of 5.325 million shares. Shareholders intend to sell 1.775 million shares

The primary purposes of this offering are to obtain additional equity capital, create a public market for ordinary shares, and facilitate future access to capital via public markets.

Proceeds will be allocated to working capital and general corporate purposes, including working capital for operating subsidiaries outside China and making payments to suppliers overseas, capital expenditures relating to the expansion of operations.

MONT currently does not intend to use any proceeds from the offering to fund operations or capital expenditures in China or otherwise transfer the proceeds into China.

Disclaimer: This MONT IPO report is based on a reading and analysis of MONT's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.