China’s Biggest Chipmaker Planning Huge Offering On Shanghai Exchange

China’s largest chipmaker, Semiconductor Manufacturing International Corp., or SMIC, is seeking to raise at least $6.55 billion by listing its shares on the Shanghai Stock Exchange Science and Technology Innovation Board, better known as the STAR Market.

SMIC, which trades on the Hang Seng index of Hong Kong, said if the overallotment option is exercised in the offering, it could generate as much as $7.5 billion, which would make it Mainland China’s biggest offering since Agricultural Bank went public in 2010.

SMIC once traded on the New York Stock Exchange but delisted in May 2019 citing low trading volumes.

SMIC’s Hong Kong-listed shares have surged more than 170% since the end of March.

SMIC earned $3.1 billion in revenue in 2019 and ranks among the largest standalone chipmakers in the world behind Taiwan Semiconductor Manufacturing Co. (TSM), GlobalFoundries and United Microelectronics Corp. (UMC).

Net proceeds from the stock offering will be used by SMIC to invest in technology and better compete with its global rivals. The company has already received more than $2 billion from state-backed development funds over the past few weeks.

Two large sovereign wealth funds, Singapore’s GIC Private Ltd, and Abu Dhabi Investment Authority have subscribed as strategic investors in the offering for shares valued at 3 billion yuan ($428 million) and 400 million yuan ($57 million), respectively, SMIC noted.

The STAR Market exchange was formed last year by the Shanghai bourse to promote Chinese tech companies.

Established in 2000, SMIC seeks to close the gap between domestic and foreign chipmakers and make the country less dependent on foreign suppliers – in 2019, China imported chips valued at $306 billion, or about 15% of China's total imports that year.

The Chinese government wants local chipmakers to attain equal status with foreign semiconductor companies by 2030.

However, some analysts say SMIC is already too far behind.

"SMIC currently lags behind TSMC in technology by about five years, and we believe the gap will persist over the next five years," Citi analysts wrote last month.

The company also must deal with rising U.S.-China tensions given that SMIC uses many American-made software and equipment to manufacture its chips. Moreover, SMIC supplies chips to Chinese tech giant Huawei Technologies, which the U.S. government has sanctioned.

"SMIC will definitely be required by the new U.S. rule to obtain an export license from the U.S. before being able to make any ... chipsets for Huawei," wrote the Jefferies analysts. "It would, in our view, be unimaginable for SMIC not to comply with the new rule as it would risk being cut off from further supplies of U.S. [semiconductor] equipment and access to U.S. software."

The Wall Street Journal reported that while SMIC will undoubtedly generate more orders for chips from local companies, it will struggle to compete globally. SMIC also operates under lower gross margins -- 26% last quarter, versus 52% for TSMC.

In addition, SMIC shares may also be way overpriced – trading at 99 times next year’s expected earnings, versus a figure of 19 for TSMC.