Rakon to expand in China
22 September 2009: Rakon Limited (NZX:RAK) today announces it will begin the construction of a new Chinese manufacturing facility in conjunction with its existing Chinese joint venture partner, Timemaker. This new facility will build upon the existing Chinese joint venture operations and enhance the capability of the New Zealand manufacturing facility.
“Significant growth opportunities are in front of us and we need to make sure we build on our technology leadership with a scale of operations and cost base that will enable us to secure business and maximise returns,” said Brent Robinson, Rakon’s Managing Director.
“Combining our technology with access to scale in China and India provides us with a significant edge over our competitors as we seek to grow market share in the telecommunications market and fast growing mobile location sector. China has become the centre of manufacturing for consumer electronics, and expanding our presence there gives us a much stronger position in what is the world’s largest market.”
Rakon is undertaking a NZ$65 million equity raising to provide funds for the expansion of its Chinese manufacturing operations. Construction of the first stage is expected to cost NZ$30 million through to the end of FY11. Additional funds will be used for working capital, repayment of all debt and the settlement of outstanding deferred consideration for Timemaker of NZ$6.3 million.
"We put our Chinese expansion on hold last year while the world was in recession. However, the scale of the earnings growth opportunities in front of us, and the speed at which they are developing, gives us confidence that now is the right time to proceed,” said Mr. Robinson.
“During the past 12 months we have been able to re-evaluate both the location and type of facility we will build to ensure we will get the greatest return on our investment."
Rakon’s plans are to build a crystal manufacturing plant in Chengdu, one of China’s largest cities. Rakon expects to commence building the new facility this year and for operations to commence early 2011.
"Chengdu is an excellent location for us,” Mr. Robinson explained. “It is a large city with a skilled labour force, the infrastructure is superior to the eastern seaboard, there is already a high-tech zone with over 700 foreign invested enterprises and it is a development base for many of our Chinese customers. Expansion in China also aids in reducing our exposure to the highly volatile New Zealand dollar which can greatly affect the cost sensitive, high volume products we will manufacture there.”
The NZ$65 million equity raising comprises a NZ$45 million underwritten institutional placement, as well as a NZ$20 million underwritten Share Purchase Plan (SPP) for eligible shareholders. The placement price is underwritten at NZ$1.10.
The institutional placement comprises two tranches, the first being an unconditional tranche raising of approximately $25 million. The second tranche of approximately $20 million will be conditional on approval by shareholders by way of a shareholder vote. This vote is scheduled to be held on 12 October.
Rakon’s founder and Non-Executive Director, Warren Robinson will also participate by being issued NZ$1 million worth of shares immediately prior to the placement, at the same price as the shares issued under the placement.
“I recognise that in order to make the most of these opportunities, Rakon needs to raise the required capital to fund the expansion of its manufacturing capability in China, and I’m personally willing to support the equity raising by subscribing for shares prior to the placement,” said Warren Robinson.
Sir Peter Maire, director and substantial share holder of Rakon also expressed his full support for the initiative.
“This is a great company with an exciting future and I’m proud to be part of it,” said Sir Peter.
“Expanding in China is an important step forward for Rakon because it really sets the company up as a world leader in all aspects of its business. It also gives Rakon a real edge in these high volume, fast growing markets. I’ve got great belief in where Rakon is going and I’m disappointed that due to the timing I’ll be unable to participate in the equity raising. But Tahia Investments is in for the long haul and I have no intention of selling in the next 12 months.”
Bryan Mogridge, Chairman of Rakon commented that he was very pleased Warren Robinson was participating in the placement and also pleased that Sir Peter Maire had reaffirmed his commitment as a long term shareholder.
“I believe Rakon is on the verge of substantial earnings growth given the opportunities presented by GPS being increasingly sought after as a feature in mobile phones, and growth of wireless infrastructure applications including femtocells. Warren and Peter share this view and having their support as directors and substantial shareholders is good for Rakon,” said Mr. Mogridge.
Rakon has been granted a trading halt to undertake this placement. Normal trading in Rakon shares is expected to resume immediately following the placement, which is expected to be on the 23rd of September.
Rakon will also offer eligible New Zealand shareholders a Share Purchase Plan (SPP). The price of these shares will be the lower of either the institutional placement price, or 2.5% below the average end of day market price of Rakon shares traded on the NZX over the period of five business days immediately prior to the closing date of the SPP. Each holder will be eligible to apply for up to NZ$ 15,000 worth of shares, with applications being scaled if subscriptions exceed NZ$ 20 million. Any scaling of the SPP will be done relative to each shareholder’s existing shareholding and the total number of new shares they apply for. Full details will be sent to eligible shareholders as part of the SPP documentation.
Rakon has been advised by the Securities Commission that the existing SPP class exemption is about to be changed to enable eligible shareholders to subscribe for NZ$15,000 worth of shares in the SPP, and NZX has provided a waiver on that basis. Further details will be provided in the SPP booklet when it is sent to shareholders.
Rakon is also issuing approximately NZ$6.3 million of Rakon shares at the same price as the shares issued under the institutional placement to its existing Chinese joint venture partners as part settlement of existing deferred consideration in respect of the establish of its original Chinese joint venture, Timemaker.
Update on business
“Our UK operations have continued to perform very well, with demand for the Pluto TCXO in communications applications being stronger than we initially expected. Demand is increasing in our OCXO business out of France and India after being slower than anticipated in the first half of the year,” said Mr. Robinson.
"The downturn in the global economy has meant we have seen increased competition in the GPS sector during the first part of this year, which has driven sales prices down faster than we had expected. This coupled with a weakening USD and material supply constraints have had a negative impact on our New Zealand operations."
Rakon expects the second half of the year to improve significantly with 2010 EBITDA to be between NZ$4 and 8 million dollars, inclusive of a first half loss of between NZ$3 to 4 million dollars.
Mr. Robinson went on to say, "We have been able to maintain positive operating cash flow and are seeing a significant upturn in volume demand for the second half of the year. In particular, we anticipate strong growth from major smart phone manufacturers, as well as increasing volumes for Rakon’s higher margin femtocell products."
Rakon said it expects sales volumes in the second half of the year to be approximately 150% higher than those of the same period last year, when sales dropped off dramatically due to the global financial crisis.
"This volume increase is important as it gets us back to where our operations are much more efficient," explained Mr. Robinson.
The 2011 financial year is expected to generate significant earnings growth for Rakon, underpinned by growth in smart phones, femtocell roll outs and overall telecoms growth. Rakon estimates 2011 EBITDA will be between NZ$30 and 35 million dollars.
"We have great potential with GPS in mobile phones and a great deal of investment going into the networks that make up the backbone of the communications networks," said Mr. Robinson.
“We are expecting a lot of this potential demand to be realised over the coming 18 months, with sales volumes in our 2011 financial year forecast to grow by 70% over 2010 levels.”
A conference call will be held at 11:30am today, can be found here: ChinaPresentation.aspx
This announcement has been prepared for publication in New Zealand and may not be released or distributed in the United States. This announcement does not constitute an offer of securities for sale in the United States or any other jurisdiction. Any securities described in this announcement may not be offered or sold in the United States absent registration under the US Securities Act of 1933 or an exemption from registration.