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Rescuing China's would-be chipmaking champion

Debt-laden Tsinghua Unigroup on fast track for bankruptcy reorganization

Unigroup, majority owned by Tsinghua University in Beijing, was once at the forefront of China's drive to develop a domestic semiconductor industry.   © AP

Tsinghua Unigroup is on a fast track for asset restructuring under pressure from creditors as the once high-flying maker of computer chips is mired in a nearly two-year debt crisis. At stake are nearly $46 billion of assets and one of China's most ambitious semiconductor investment projects.

Unigroup, majority owned by Tsinghua University in Beijing, was once at the forefront of China's drive to develop a domestic semiconductor industry. The company embarked on a series of acquisitions and investments in the capital-intensive integrated circuit sector between 2013 and 2019, forging partnerships with Intel and HP, and emerging as a major player. But it failed to generate income quickly in an industry famous for huge costs of entry and long payback periods. Since late 2020, the company has defaulted on a raft of bonds amid an escalating capital crunch.

A Beijing court set a Sept. 5 deadline for potential investors to register to take part in Unigroup's bankruptcy restructuring. Creditor Huishang Bank filed a petition in July seeking a court-led reorganization of the state-owned conglomerate, citing unpaid debts and insufficient assets.

If they pass the court's review, potential investors can carry out due diligence studies on Unigroup and submit binding restructuring plans by Sept. 25. Creditors need to file claims by Oct. 8, according to the court. Under China's bankruptcy law, the company will have until April 2022 to discuss and settle on a reorganization plan with potential strategic investors.

Unigroup is expected to attempt to reach an agreement with creditors for some of its debt to be forgiven and for repayment deadlines to be delayed, while strategic investors will be invited to provide new funds. If the company, its creditors and potential strategic investors fail to reach agreement, the company could be liquidated.

According to company filings, Unigroup had 296.6 billion yuan ($46 billion) of total assets as of the end of June 2020. Liabilities amounted to 202.9 billion yuan, with nearly 80 billion yuan maturing within a year.

Strategic investors chosen to lead Unigroup's reorganization will need to tackle the massive debt pile. But a more challenging task will be reviving the company's flash memory chip production unit, Yangtze Memory Technologies. The Wuhan-based project is among China's most ambitious attempts to build advanced semiconductor capabilities. In 2019, it started producing China's first homemade 64-layer 3D NAND flash memory chips. In April 2020, it developed a 128-layer 3D NAND chip, which started production this year.

But proceeding with the project will require massive future investment. Gu Wenjun, chief analyst at semiconductor industry analysis firm ICwise, said Yangtze Memory Technologies needs more than 500 billion yuan of investment over the next 10 years, while the company is unlikely to turn profitable for three years. Several market sources told Caixin that Yangtze Memory Technologies' massive capital needs are the most concerning challenge for potential investors in the Unigroup restructuring.

The Unigroup crisis reflects a common problem in China's push for strategic projects in the semiconductor industry, which often have easy access to initial capital but face difficulties achieving sustainable growth, Gu said.

"Now it is a chance for Unigroup to be reborn," he said.

Caixin learned from people familiar with the matter that a working team sent by the Beijing municipal government to Unigroup since January contacted potential strategic investors and shortlisted 14 candidates, including enterprises backed by the governments of Shanghai, Hangzhou and Hubei, as well as investment bank CSC Financial, appliance maker Midea Group and surveillance equipment maker Hangzhou Hikvision Digital Technology.

The list was shortened to five by June, including Guangdong provincial government-backed Guangdong Hengjian Investment Holding, Beijing government-backed Beijing Electronic Holding and Beijing Jianguang Asset Management, Wuxi Industry Development Group and e-commerce giant Alibaba Group Holding. All five candidates proposed to take over all of Unigroup's assets and started due diligence studies, Caixin learned.

A person close to the working team said the selection of candidates was decided not only by the price they offered but also their ability to manage Unigroup's businesses and plan for the company's future development.

According to a Unigroup statement issued in July, the company's assets can be divided into three parts - chipmaking, cloud and noncore businesses. The strategic investors should be capable of taking over Unigroup's core chipmaking and cloud computing businesses, according to the statement.

As the court-led bankruptcy reorganization procedure starts, more companies may have the chance to participate in bidding for Unigroup's assets, one person close to the matter said.

Unigroup had 296.6 billion yuan ($46 billion) of total assets at the end of June 2020. Liabilities amounted to 202.9 billion yuan.    © AP

The failing giant

Established in 1993, Unigroup is 51% owned by Tsinghua University and 49% owned by Chairman Zhao Weiguo, who has headed the company since 2009. Unigroup has stepped up acquisitions in the chipmaking industry at home and overseas since 2012, growing into an industry behemoth.

It is unclear whether Zhao will lose all his holdings in the company. But most experts say he would step down from the company's management.

In 2013, Unigroup paid 16.2 billion yuan to privatize U.S.-listed Chinese chipmakers Spreadtrum Communications and RDA Microelectronics. It merged the two to form the mainland's largest phone chip producer, Unisoc. In 2015, Unigroup paid $2.5 billion to buy a 51% stake in digital solutions provider H3C from HP. In 2018, Unigroup spent $2.3 billion yuan to acquire France's Linxens.

The expansion reflected Zhao's strategy of leveraging overseas chipmaking assets, mainly in the U.S., to strengthen Unigroup's business footprint. But the intensive spending mainly relied on short-term borrowings from banks and bond sales, and the company was unable to generate income from the newly acquired businesses quickly enough, draining its liquidity, a former Unigroup employee said.

Outside the chip industry, Unigroup launched investments in a wide range of businesses including an online lottery site, an insurance company in Yunnan, a natural gas supplier in Xinjiang and an education services provider.

Between 2015 and 2019, Unigroup's assets almost tripled from 105.4 billion yuan to 297.8 billion yuan. Its total liabilities surged from 129 billion yuan in late 2017 to 218.7 billion yuan at the end of 2019.

The China-U.S. trade war dealt another heavy blow to Unigroup as American authorities tightened their grip on Chinese investment in the U.S. tech sector.

"Unigroup's high-profile acquisitions worldwide sparked concerns of the U.S. government as all China-led acquisitions in the semiconductor industry are suffering headwinds," one industry investor said.

The straw that broke the camel's back was the changing attitude of the company's largest shareholder. In 2018, Tsinghua University set out a plan to sell its stake in Unigroup as part of an overhaul of universities' business assets ordered by the central government. Without the university's backing, Unigroup has been shut out of the bond market since March 2019.

Strive to survive

As Unigroup's liquidity woes worsened, the company started selling assets. In May 2020, Unigroup sold 13.39% of Unisoc for 7.4 billion yuan. Four months later, it sold 5.68% of its cloud business arm Tsinghua Unisplendour for 4.7 billion yuan. But the asset sales offered little relief as the company's debt widened to 202.9 billion yuan by the end of June 2020, including 81.4 billion yuan due in one year.

According to company filings, Unigroup and its subsidiaries defaulted on domestic and offshore bonds totaling 18 billion yuan as of April 26.

Even before the company's first bond default in November, a Beijing government-led team was sent to the company to help defuse debt risks, people familiar with the matter told Caixin. Zhao warned authorities of the company's troubles in seeking government help, but he didn't expect the situation to become so severe, people said.

A major concern for investors is hidden debt among Unigroup's web of subsidiaries. According to company filings, as of end June 2020, Unigroup had 286 subsidiaries.

Despite the massive debts, some of Unigroup's assets are attractive to investors. According to a person close to the revamp, Unigroup's most valuable assets include Shenzhen-listed cloud unit Tsinghua Unisplendour, security chipmaker Unigroup Guoxin Microelectronics, mobile phone chipmaker Unisoc and Yangtze Memory Technologies, all leading players in segments of the semiconductor industry.

Unigroup is the largest shareholder of Unisoc with 35.23%. The unit was valued at about 60 billion yuan when it raised 5.3 billion yuan in April. In the first half of this year, Unisoc reported 240% revenue growth, mainly driven by consumer electronics.

Unisoc has been preparing for a public listing on Shanghai's Nasdaq-like STAR Market. But the parent company's debt crisis added uncertainty to Unisoc's listing plan. Several brokerage sources said it is unlikely for Unisoc to obtain listing approval before the largest shareholder's reorganization plan is settled. The listing plan may be further delayed if Unigroup's restructuring leads to an ownership change for Unisoc, they said. But Unisoc is also likely to bring the fastest return to investors, analysts said.

"Unisoc's asset quality is sound," one market source said. "As long as the debt issues are solved, it will be able to push forward a public listing soon."

Unigroup Guoxin is the only publicly traded chipmaking unit of Unigroup. The company is a leading manufacturer of smart security chips that are widely used for mobile SIM cards and bank cards. Despite the parent's crisis, Unigroup Guoxin posted more than 100% growth in 2020 net profit while its market cap surged to a record 100 billion yuan July 7.

Unigroup's main cloud business arm is Shenzhen-traded Unisplendour, which owns majority stakes in H3C and UNIS WDC, a joint venture with Western Digital, the American computer hard disk drive manufacturer.

Compared with the chip business, Unigroup's cloud businesses are in a better shape and are more transparent, analysts said. In 2020, Unisplendour posted 59.7 billion yuan of revenue with net profit of nearly 1.9 billion yuan.

The tricky part

The most complicated part of reorganizing Unigroup will be Yangtze Memory Technologies.

"To take over Unigroup, (investors) should consider not only how much debt it owes, but also how much money it needs for the future," Gu said. The huge amount of capital required for Yangtze Memory Technologies' future sets a high bar for potential investors, he said.

Set up in 2016, Yangtze Memory Technologies is one of the key projects pushed by the government under a national strategy to improve the country's self-reliance in semiconductors. The 38.6 billion yuan of Yangtze Memory Technologies registered capital came from the National Integrated Circuit Industry Investment Fund, Hubei government-backed investment companies and Unigroup. Currently, Unigroup holds 51% of Yangtze Memory Technologies.

But amid the Covid-19 pandemic, the Wuhan-based project has lagged behind schedule. According to the original plan, the second phase of the project was to be completed by the end of 2020 with capacity to produce 300,000 chips a month. However, construction was delayed as Wuhan was locked down for months to contain the coronavirus. Progress was further slowed as the National Integrated Circuit fund became more cautious about injecting capital into the project after Unigroup's financial woes came under the spotlight, sources said.

Strategic investors of Unigroup need the financial capacity to make hefty investment in Yangtze Memory Technologies in coming years as an exit from the project won't come anytime soon, analysts said. But in the long run, Yangtze Memory Technologies will generate high returns for investors, Gu said.

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Read also the original story.

Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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