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Montage Technology Group (NASDAQ:MONT) made its public debut on Thursday, September 26. Shares of the global fabless provider of analog and mix-signal semiconductor services ended their first day with gains of 28.0% at $12.80 per share.

The company has been showing nice growth in recent years, and more importantly this was very profitable growth, accompanied by a modest valuation at this point in time. Unfortunately, Montage Technology is a Chinese company, which might result in pressure on the valuation of the firm, given the worries about governance and accounting at Chinese firms.

The Public Offering

Montage Technology is a Chinese global fabless provider of semiconductor solutions for home entertainment and cloud computing markets. The company is focused on analog and radio frequency solutions, digital signal processors and high speed interfaces, creating high performance, but low power semiconductors.

For the home entertainment segment the company creates highly integrated solutions with customized software and support. In the cloud, the company offers high performance, but low power memory solutions, used in memory-intensive applications.

Montage Technology sold 7.1 million shares for $10 apiece, thereby raising $71 million in gross proceeds. The company offered 5.325 million shares, thereby raising $53.25 million in gross proceeds for the firm. The remaining shares were sold by selling shareholders.

Bankers and the firm set an initial price range of $12 to $14 per share. Shares were eventually sold far below the midpoint of the range.

Some 20% of the total shares were offered in the public offering. At Friday's closing price of $15.15 per share, the firm is valued at $401 million.

The major banks that brought the company public were Deutsche Bank, Stifel, Barclays, Wells Fargo Securities (NYSE:WFC) and Needham & Company.

Valuation

Montage Technology has since inception in 2004 sold over 230 million integrated circuits. As the analog and mixed-signal technology market is big, Montage focuses on long-term growth segments within the industry. Target markets furthermore have complex product design, long life cycles and stringent requirements, creating higher barriers to entry.

According to iSuppli (found in Montage's S1-Filing), Chinese manufacturers sold 154 million set-top boxes in 2012, a number expected to grow to 243 million by 2016. Besides targeting the home entertainment market, Montage also focuses on cloud computing. A high performance, low power memory solution has been the result of collaboration with key industry participants. The company is one of two suppliers of LRDIMM memory buffer, being validated by Intel Corporation (NASDAQ:INTC) for DD3 technology.

For the year of 2012, Montage Technologies generated annual revenues of $78.2 million, up 55.4% on the year before. Net profits nearly quadrupled to $18.3 million in the meantime.

For the first six months of 2013, Montage Technologies generated revenues of $45.4 million, up 33.8% on the year. Net earnings rose by a modest 6.6% to $8.8 million.

The company operates with $13.9 million in cash and equivalents and no debt outstanding. Adding gross proceeds of $53 million from the offering, and Montage should operate with a net cash position of close to $60 million.

This values operating assets of the firm at $340 million. As such, operating assets of the firm are valued around 4.3 times last year's revenues and 18-19 times annual earnings.

Investment Thesis

As noted above, the offering of Montage Technology has been quite a disappointment. The company priced the offering at $10 per share, some 23.1% below the midpoint of the preliminary offering range.

Yet in a surprise move, shares bounced back nearly all the way to their preliminary offering range level on their first day, to end the week with solid gains at $15.15 per share. At this level, shares are trading some 16.5% above the midpoint of the preliminary offering range.

Montage Technology, like any start-up is suffering from some risks. Obvious risks include competition from the likes of STMicroelectronics, technology changes, and in the inevitable falling average selling prices. Besides these risks, Montage also suffers from customer concentration, although this is decreasing rapidly.

At the same time, operational statistics look quite healthy. The company is seeing health revenue growth, while earnings are impressive as well, driven by solid gross margins of 59% of total revenues. Note that the company employs 446 workers, but is extremely focused on Research & Development, in which 290 workers are located.

So despite the risks, the valuation looks quite appealing, in hindsight especially at the offer price of $10 per share. Now with shares exchanging hands at $15 per share, the valuation still looks fair given the earnings and reported growth rates. Yet note that Montage Technology is a Chinese firm, so corporate governance issues, as well as accounting issues might downplay the valuation.

I must admit, I like the company and would have bought into the public offering if Montage were to be a U.S. company. Yet given the risks of being a Chinese companies, notably in corporate governance and accounting I decided to hold off and stay on the sidelines.

Source: Montage Technology - Nice IPO, Unfortunately A Chinese One