The U.S.-backed loan, which is still in limbo, could potentially be used by SMIC to expand its wafer production in 2006 and reduce a worrisome debt load, said John Lau, an analyst with Jefferies & Co. (New York).

Meanwhile, as expected, a consortium of Chinese banks this week agreed to loan $600 million to Shanghai-based foundry SMIC to allow the company to expand its 300-mm wafer operations in Beijing.

The deal comes about three months after the U.S. Export-Import Bank, a U.S. government agency that promotes exports, declined a request from SMIC for a loan guarantee to international banks willing to lend $769 million. The funds would have been used to buy chip-making equipment, mainly from Applied Materials Inc.

Some U.S. semiconductor makers, particularly Micron Technology Inc. (Boise, Idaho), disapproved of the U.S. bank guaranteeing a loan for a foreign competitor, while the U.S.-Taiwan Business Council was supportive of the loan, believing that it promoted the health of the U.S. equipment industry.

Apparently rebuffed, SMIC threatened to buy equipment from non-U.S. suppliers and turned to Chinese banks for help in the company's 2005 expansion plans.

However, the deal with the U.S. lending agency isn't dead. While SMIC has garnered capital from Chinese banks, the company is still in talks with the U.S. Export-Import Bank to obtain the $769 million loan, according to Lau of Jefferies & Co.

"The company is still negotiating with the (U.S. Export-Import Bank) to obtain additional funding to finance the company's 2006 expansion plan," Lau said in a report. "We believe the loan facility will ease investors' concerns over the company's ability to stay competitive, but we remain concerned over the company's rising debt level and high DRAM exposure."

In a recent report, Lau lowered his 2005 forecast for SMIC due to the company's inordinate exposure in the declining DRAM market.

SMIC's debt level is projected to reach $1.39 billion in 2005, up from $736.4 million in 2004, he said. The company's projected cash position is around $764.9 million in 2005, up from $627.5 million last year, he said.

"We believe that the company has enough funding for its 2005 expansion, but further funding may be difficult without demonstrating profitability and positive cash flow," he added.

In April, SMIC reported sales of $248.8 million in the first quarter of 2005, down 14.7 percent from $291.8 million in the prior quarter. SMIC said its net loss increased to $30.0 million in the first quarter of 2005, compared to a loss of $11.2 million in the fourth quarter of 2004.

For Q2, SMIC is projected to lose $39.4 million on sales of $232.1 million, according to Lau. "For 2005, we are increasing our revenue estimate to $1.20 billion from $1.16 billion, but lowering our earnings per ADS to minus $0.21 from $0.17, due to lower assumptions on gross margins attributing to the challenging DRAM market," he said.

By: DocMemory
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