In the long run, Epistar Corp’s (晶元光電) merger with its 48 percent-owned subsidiary will have a positive impact on the company’s share price and return on equity (ROE), analysts said.
The deal, announced last week, also shows that the nation’s biggest LED chipmaker is hunkering down during the industry’s down-cycle, while simultaneously preparing for the industry’s next peak season, they said.
Epistar, which counts Samsung Electronics Co, LG Display Co, Everlight Electronics Co (億光), Lite-On Technology Corp (光寶) and Edison-Opto Corp (艾笛森) among its customers, announced on Thursday it would merge with Huga Optotech Inc (廣鎵) via a share-swap deal.
Epistar owns about 48.4 percent of Huga’s shares. The company said it planned to trade one Epistar share for 4.85 Huga shares and expected to complete the transaction on Dec. 28, according to a filing to the Taiwan Stock Exchange. After the merger, Huga would become a fully owned LED chip unit of Epistar, but continue to operate under its own brand, the filing showed.
“Overall, we feel that the merger is fairly valued and [will have a] long-term positive [effect for] ... Epistar, although the company will needs to spend more resources to improve Huga’s performance in the short term,” Primasia Securities Co analyst Filia Lin said in a note on Friday.
Lin said one positive benefit of the deal was that the two companies complement each other in terms of product mix and client portfolio.
“Huga concentrates on mid to low-power chips for handsets and consumer electronics, while Epistar focuses on mid to high-power chips for TV and lighting products,” Lin said in the note.
Further, Huga gets 40 percent of its sales from Seoul Semiconductor Co, between 30 percent and 40 percent from OEM services for Epistar and the rest from local packaging houses, while Epistar has a much more diversified client mix and covers more big lighting brands, Lin said.
JPMorgan analyst Narci Chang (張恆) said he believed the deal was healthy for the industry overall because it would generate no new supply at a time when the industry is “heading into its next up-cycle, with LED lighting demand rising and supply under control.”
In addition, the two companies would become more efficient after they integrate their resources and cut costs, he said.
“The transaction would consolidate their marketing efforts under the same brand and would reduce unnecessary competition,” Chang said in a separate note.
Banking firm JPMorgan maintained an “overweight” rating on Epistar and kept its target price on the stock unchanged at NT$90, which represented a 48.27 percent upside from the company’s closing share price of NT$60.7 on Friday.
However, a key downside risk on the stock is the end-demand for the tech sector — including LED TV demand and LED lighting adoption — during the second half of this year, JPMorgan said.