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Delayed IPO clouds Kioxia's vision as strong No. 2 in memory chips

Market unconvinced by ex-Toshiba unit's blueprint for growth

Formerly Toshiba Memory, Kioxia aims to be a more powerful industry No. 2 that can challenge front-runner Samsung.   © Reuters

TOKYO -- Memory chip maker Kioxia Holdings' postponement of its initial public offering casts doubt on a vision of creating a more powerful industry No. 2, one able to cut into Samsung Electronics' lead while fending off the rise of Chinese competitors.

Sino-American trade frictions proved a major factor in the decision to delay the Oct. 6 listing in Tokyo, threatening to freeze the Toshiba spinoff's shipments to Huawei Technologies.

With a market share of 19% in NAND flash memory -- a key component in smartphones -- Kioxia faces a wide gap with South Korean rival Samsung's 35.9%. Meanwhile, Yangtze Memory Technologies, part of the Chinese-government-supported Tsinghua Unigroup, is gaining the technological strength to come from behind.

Japan "needs to build up a second-ranked group to compete against Samsung and Chinese players," said a person with knowledge of thinking at the Ministry of Economy, Trade and Industry.

Kioxia's announced the delay Monday, confirming an earlier Nikkei report. The outlook for the IPO listing dimmed during book-building that ended last week -- the phase when brokerages underwriting the offering gauge investor demand. The response from international investors, which were tapped to buy 86% of the share sale, was tepid.

Prospective buyers frowned at the tentative price range of 2,800 to 3,500 yen ($26.50 to $33) a share decided on Sept. 17 as too high. Kioxia's price target had already been lowered once from the 3,960 yen where it stood when the IPO plans were approved Aug. 27.

A range of 2,000 to 2,500 yen would be appropriate, an asset manager at an international hedge fund said.

"We will be a solid No. 2," Kioxia President and CEO Nobuo Hayasaka has said, in a reflection of the tough environment faced by the company.

Seagate Technology, Western Digital and Toshiba, dominate the market for hard-disk drives, while Samsung, SK Hynix and Micron Technology do so for dynamic random-access memory. Even in NAND, where Kioxia ranks second in the world, rivals like Western Digital and Micron are not far behind.

Both those within and outside of the company believe the way forward is to form loose alliances with rivals to solidify its standing as the second-largest memory chip maker. For example, Kioxia controls a combined 32.8% of the market with Western Digital, with which it cooperate on research and production. With SK Hynix, which holds convertible bonds in Kioxia, it has a combined market share of almost 40%.

METI had hoped that Kioxia's debut would open up further opportunities for fundraising and partnerships, allowing the company to take the lead in the alliances it forms.

Still, Kioxia's capital investment -- expected to stay at around 300 billion yen a year, or about 30% of its revenue -- is only a fraction of what Samsung spent last year. Its interest-bearing debt also exceeds 1 trillion yen.

SK Hynix is currently limited to taking up to a roughly 15% stake in Kioxia. But this cap expires in 2028. If Kioxia fails to swiftly secure additional funds for growth, it could end up conceding control to SK Hynix in their potential alliance.

Kioxia is expected to set an alternative date for its IPO toward the end of 2020 or the start of 2021. The delay is not expected to have an immediate impact on its investment strategy, considering the company only expected to raise about $570 million to $710 million.

But Kioxia will need to present investors with better terms and a more competitive vision for its future to ensure the success of its next attempt, which may prove a difficult task.

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