SMIC on track to float China’s largest offering in 10 years as national pride fires up buying interest in chip maker

08-Jul-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

Semiconductor Manufacturing International Corp (SMIC), China’s top chip maker, is set to draw heavy subscriptions when it begins offering its 1.686 billion shares to mainland investors on Tuesday, putting the share flotation well on its way to becoming the largest in the A-share market since 2010.

The buzz around SMIC has sent its Hong Kong-listed shares soaring.

Its shares shot up 21 per cent to HK$40.10 on Monday, marking a fresh all-time high, and they have skyrocketed 236 per cent so far this year. The Hong Kong shares traded at about a 32.8 per cent premium to the A-share offering price.

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“Investors believe the stock will rocket once listed in A share market. And with a new round of capital, the company can increase capital expenditures for research and development,” Kenny Wen, wealth management strategist at Everbright Sun Hung Kai, said of SMIC’s four-day winning streak over which it gained nearly 51 per cent.

A potential subscription euphoria surrounding the company, buoyed by an influx of fresh capital, will spark worries about a boom-to-bust cycle in an often-arcane A-share market that frequently leaves small investors to lick their wounds.

Hong Kong-listed SMIC said on Sunday evening that it priced its shares at 27.46 yuan (US$3.89) a piece, 109 times its earnings in 2019, after consulting institutions about the pricing.

It is expected to raise 46.29 billion yuan (US$6.57 billion) from the share sales, the largest since July 2010 when the Agricultural Bank of China netted 68.7 billion yuan of proceeds on the mainland stock market.

SMIC’s fundraising size could amount to 53.3 billion yuan if an overallotment option were to be exercised.

“The current strong market sentiment and the ample funds flowing through the stock exchanges will make the offering an easy sale,” said Zhou Ling, a fund manager with Shanghai Shiva Investment. “Patriotism will be another catalyst to fuel subscriptions to the shares.”

SMIC is expected to debut this month, according to a person with knowledge of the matter, though the exact date has not been announced.

SMIC, a competitor against Taiwan Semiconductor Manufacturing (TSMC) whose price-to-earnings ratio stands at about 21, obtained a speedy approval from the mainland regulators to raise capital last month.

It spent just 18 days to secure a nod from the Shanghai Stock Exchange to conduct the share sale and originally targeted proceeds worth 20 billion yuan.

Established in 2000, SMIC is mainland China’s top semiconductor foundry and competes with Taiwan-based TSMC, which has more advanced technology.

Beijing is looking to stay ahead in the technology race as the US steps up efforts to curb China’s ascendancy in the industry, leading to a long-running spat covering trade, intellectual property and national security.

As the US has moved against Huawei and other technology companies, taking steps to cut off their access to American components and networks, China’s chip industry faces the growing prospect of being strangled by the US government and business community. To try to prevent that, Beijing has been spending massive amounts of capital and rolling out tax incentives to underpin home-grown chip companies.

One result of US-China tensions was the creation of the Star Market, which was launched in July 2019 after being ordered into existence by President Xi Jinping as a way to offer fast-track financing to promising technology start-ups. It is that board where SMIC will debut its shares.

There are no daily limits on how much a stock can go up or down the first week it trades on the Star board. It is expected SMIC will soar, explaining why its Hong Kong shares are shooting up so quickly ahead of the Shanghai debut.

“Each A-share bull market has a major theme,” said Alan Li, portfolio manager at Atta Capital. “One Belt, One Road was the main theme in 2014-15. Investors believe that in the bull market this time, the semiconductor sector will be a core theme supported by policies.”

China’s National Integrated Circuit Industry Investment Fund, popularly known as “the big fund”, is investing 3.5 billion yuan in the company, SMIC said.

Foreign funds via the QFII and RQFII programmes are allowed to subscribe to the new shares on the Star Market, which is still off-limits to investors trading A shares through the Stock Connect.

China’s yuan-denominated shares have shot up recently amid an increasing fund inflow as initial signs of economic recovery following the Covd-19 pandemic cemented investors’ belief in an upcoming strong rally.

Last week, the Shanghai Composite Index chalked up a gain of 5.8 per cent, and closed at 3,152.81, the highest level since April 24, 2019.

Of analysts tracked by Bloomberg, 13 rate SMIC a buy, nine a hold and 10 a sell. It has blown past its consensus target price of HK$19.11.

Its 14-day relative strength index is about 85, above the 70 warning level that a stock may be significantly overbought and ready for a correction.


Category: China

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