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China tech

Chipmaker SMIC touts benefits of $6.5bn China share listing plan

Beijing keen on biggest offering on tech STAR Market amid tension with US

A successful offering would give SMIC, China's top contract chipmaker, a market capitalization similar to BYD and SAIC Motor -- the country's two biggest automakers.    © Reuters

TAIPEI -- Semiconductor Manufacturing International Co.'s planned 46.3 billion yuan ($6.55 billion) share offering in Shanghai will help the Chinese chipmaker grasp a "precious opportunity" in the domestic semiconductor market, the world's largest, its chairman said on Monday.

SMIC's intention to list up to 25% of its shares on Shanghai's STAR market would make it the biggest equity offering in mainland China in a decade. It will help the contract chipmaker's investment firepower as it tries to step up competition with rivals including including Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.

At the proposed price of 27.46 yuan per share, it would value the Beijing-backed chipmaker at approximately 196 billion yuan, or $27.75 billion, putting it among the top five tech stocks in the country by market capitalization.

The offering outstrips plans touted last month for SMIC to raise around 20 billion yuan, and come after a surge in the value of SMIC's Hong Kong listed shares. They jumped 13% in Hong Kong to a fresh record high on Monday and have trebled in value this year.

SMIC could also increase the number of shares on offer, in which case it would raise 53.2 billion yuan ($7.55 billion), according to its regulatory filing with the Shanhai Stock Exchange. It would be the biggest share offering in China since Agricultural Bank of China in 2010.

The offering comes at a time of increasing tension between China and the U.S. over tech, which has made Beijing more determined to increase the country's self-reliance in production of semiconductors.

It would also stimulate interest in STAR, which opened a year ago aspiring to become a "Chinese Nasdaq" as a venue for the domestic tech sector to raise equity.

Zhou Zixue, SMIC's chairman, said in an online investors roadshow on Monday that the listing was a "big milestone" for the company and "the entire Chinese capital market".

Zhou said China was now the world's largest semiconductor market and that SMIC needed to leverage more funding sources and increase its production capacity to take advantage of a "precious key opportunity".

In its exchange filing SMIC said 29 strategic investors would take part in its offering, including the China Integrated Circuit Industry Investment Fund, nicknamed the "Big Fund"-- the country's most important funding vehicle to seed the chip industry.

Others include the state-backed China Information and Communication Technology Group; GIC Private Limited, Singapore's sovereign wealth fund; and Abu Dhabi Investment Authority, another big wealth fund.

SMIC gained regulatory approval for the listing in only 19 days, showing how keen China is to help the company become a national chip champion. The listing is expected to take place this month.

The contract chipmaker is a beneficiary of Beijing's desire to reduce reliance on foreign suppliers, sparked by Washington's clampdown on several key Chinese tech companies including Huawei Technologies, ZTE and Hikvision.

SMIC plans to raise $6.55 billion in what would be the biggest initial public offering on Shanghai's STAR Market. (Source photos by AP)

Huawei has shifted some mid- to low-end chips to SMIC and asked its other chip suppliers to shift manufacturing to China, sources told the Nikkei Asian Review, helping to boost local chip manufacturers' business.

SMIC has more than doubled its capital expenditures to $4.2 billion for 2020 in a move to gear up its tech capability, while it reported better than expected earnings in the first half of 2020. In 2019, SMIC generated $3.12 billion in revenue, compared with $3.36 billion in 2018.

SMIC was previously listed on the New York Stock Exchange, where trading in its shares was low, but delisted last year.

The U.S. is stepping up regulatory scrutiny of Chinese companies. The U.S. Senate in May passed a bill that could ban many Chinese companies from listing shares on U.S. exchanges or raising money from American investors, unless they allow American authorities to audit their financial statements for three consecutive years and prove they are not controlled by any foreign governments.

SMIC, which was founded in 2000 and counts Huawei, Goodix, Qualcomm and many local Chinese chip developers as clients, is China's biggest hope of challenging market leaders including TSMC and Samsung.

While its technology lags behind the likes of TSMC, SMIC has been hiring industry veterans from its competitors. Its co-CEO since the end of 2017 is Liang Mong-song, an ex-TSMC and Samsung executive.

TSMC is the No. 1 player in the so-called foundry market -- that is, making chips for other companies such as Apple and Huawei. It has a market share of more than 50%, according to data from research company TrendForce. SMIC had about 5% of the market for the April-June quarter.

In its offer prospectus, SMIC has flagged many business risks ranging from tech gaps with market leaders to geopolitical tension and potential problems in obtaining foreign chip-production equipment and materials. For example, Washington's move to require non-American chip suppliers to apply for licenses if using U.S. tools to supply Huawei, SMIC's key customer, could have significant business impacts.

"The impact of the export control regulations is not immediately clear ... however, the U.S.-China trade frictions could limit our ability to serve certain customers and lead to a reduction of orders," SMIC said in its prospectus. "Our company still relies heavily on foreign chip-production materials and core chip-production equipment."

The shipment of advanced chipmaking equipment from Netherlands-based ASML, the largest European chip equipment maker, to SMIC was put on hold due to U.S. pressure, Nikkei reported last November.

Other Chinese chip-related companies have also recently filed to list on the STAR Market, including Bestechnic, a key Bluetooth chip startup, and Cambricon Technologies, a Beijing-backed artificial intelligence chip developer. Both are key Huawei suppliers.

One of China's essential goals in establishing the STAR board last year was to improve access to capital for the country's strategic chipmakers.

Roger Sheng, a Shanghai-based analyst at research company Gartner, told the Nikkei Asian Review that SMIC's case showed the Chinese government's commitment to persuading more domestic tech innovators to stay at home.

"In the near future, given the U.S.-China conflicts, it's inevitable that Chinese tech companies will definitely decelerate from listing in the U.S.," Sheng said. "The Shanghai STAR Market -- the Chinese version of Nasdaq -- [would] be a magnet for these players."

Additional reporting by Narayanan Somasundaram in Hong Kong

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