Wednesday, July 8, 2020
China’s leading domestic chip maker is minting cash in the stock market. Winning the global technological race will be much more challenging.
Semiconductor Manufacturing International Corp., SMICY -9.05% a Chinese contract chip manufacturer already listed in Hong Kong, plans to raise up to $7.5 billion—including an overallotment option—by selling new shares in Shanghai worth the equivalent of around a quarter of the company. The new listing, on a tech-focused board called the STAR market, is the largest this year globally and will be the biggest on a mainland exchange in a decade, according to Dealogic.
SMIC’s buoyant share price in Hong Kong, which has more than tripled this year, has allowed the company to raise much more than what it was expected to two months ago, when the company approved the share sale. Paradoxically, the expected higher valuation from the Shanghai listing is partly why its stock has done so well lately.
Investors are also bullish because SMIC is clearly an important part of China’s plan to make more of the chips it needs at home: The capital raised will help fund a chip-production and research site. The company remains far behind market leaders like Taiwan Semiconductor Manufacturing Com pany and South Korea’s Samsung Electronics. Analysts estimate SMIC’s technology is still around five years behind TSMC and the gap will likely remain in the foreseeable future.
There is no doubt SMIC will get more lower-end orders from Chinese companies as China seeks to become more self-reliant in its semiconductor supply. The company, however, earns much lower margins than the leaders: Its gross margin was 26% last quarter, compared with TSMC’s 52%. The company will also need to invest vast sums of money to develop more cutting-edge technology, which will weigh on returns too.
And the company isn’t immune to the Trump administration’s move to cut off chip supplies to Huawei since it depends on U.S.-made chipmaking equipment. That means it may not be able to sell chips to Huawei, one of its biggest customers. The U.S. also seems likely to place restrictions on exporting cutting-edge technology to Chinese companies in the future, which would make it even harder for SMIC to catch up to the leaders.
SMIC’s stock already trades at 99 times next year’s expected earnings, according to S&P Global Market Intelligence, among the priciest chip stocks. TSMC, for example, trades at 19 times. Investors may want to consider taking some chips off the table.
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