Baidu's ( BIDU) spectacular August IPO may have put some glitter on China's emerging tech industry. But when it comes to offerings for Chinese chip companies, investors are less enthused. Actions Semiconductor ( ACTS), a Chinese chipmaker for MP3 players, made its Wall Street debut Wednesday and received a decidedly frosty reception. After postponing its IPO date and lowering its offering price, Actions Semi went public at $8 a share and closed at the same price, with its stock never budging higher than $8.25. Vimicro International ( VIMC), another fabless semiconductor maker from China, had its own IPO two weeks earlier with even worse results -- shares opened at $10 and immediately headed south. At Thursday's market close they stood at $8.51. This lackluster performance is in sharp contrast to some of the companies' compatriots. Overall, Chinese companies have fared well in U.S. public offerings. The average gain of Chinese IPOs dating back to 2003 is 41%, says John Fitzgibbon, an analyst with IPODesktop. But this rising tide has eluded Chinese semiconductor companies. "Obviously the tape is telling you the investors aren't buying into it," says Fitzgibbon, whose firm has no banking relationship with the companies mentioned in this story. A combination of limited track records -- Actions Semi and Vimicro began operations in 2001 and 1999, respectively -- and concerns over intellectual property and accounting practices in China may be giving investors cold feet, say some analysts. And the chip companies simply may have had the misfortune of tapping the public markets at a time when semiconductor companies are not in demand. "These companies may be performing well relative to the industry, but the industry does not have the attention of Wall Street right now," says Bill Tai, a partner at venture capital firm Charles River Ventures. Tai points to Beijing-based Semiconductor International Manufacturing ( SMI), a bellwether of Chinese semiconductor companies, whose stock is down roughly 50% since March 2004.
"As a result," says Tai, "shareholders that have lost money by buying that stock probably are not that interested in looking at another deal." These concerns took a toll before Actions Semi even got out of the gate. The company initially envisioned selling 13 million shares of American depository receipts priced between $9.50 and $11.50. The company later pared back its plans, offering 9 million shares at $8 a share. Similarly, Vimicro sold ADRs to the public at $10 a share, below its previous $11-$13 target. Actions Semi makes chips for MP3 players that incorporate signal processing, memory and processor functions on a single chip. The company's $109.7 million in revenue for the first nine months of the year is up 337% from the first nine months of 2004. Net income for the first nine months of 2005 is $53.7 million. Vimicro, which makes multimedia processors used in Webcams and cell phones, lost $5.6 million in 2004, but boosted its annual revenue roughly 200% to $50.3 million.
Protecting IPBoth companies say they don't expect to sustain this kind of explosive growth going forward. But legal concerns rather than questions about growth prospects may have weighed heaviest on investors' minds. Both Vimicro and Actions Semi have acknowledged that efforts to protect their intellectual property could prove difficult in China, where laws do not protect IP rights as effectively as they do in the U.S. "Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement," reads a passage in Vimicro's registration statement. "Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries," it said.
And Actions Semi is the target of a patent-infringement lawsuit from Austin, Texas-based SigmaTel ( SGTL), which seeks to prevent Action Semi's chips from being sold in the U.S. Actions Semi estimates that less than 10% of its chips are currently available in products that are ultimately sold in the U.S. "In general, U.S. investors have always viewed the whole concept of patents and IP protection very skeptically in China," says Piper Jaffray analyst Tore Svanberg. But Svanberg, whose firm has a banking relationship with Vimicro, says that many of these concerns are overblown. Protection of IP in China is better than most people think, he says. And notwithstanding Vimicro's and Actions' anemic IPOs, Svanberg expects more Chinese semiconductor companies to issue shares in the U.S. "Chinese semiconductor companies in general are getting more traction in the global semiconductor marketplace," he says. "And because of that, they're obviously looking for a good capital market base; and I think the U.S. market is still the undisputed leader," Svanberg adds. Charles River's Tai agrees that the recent IPO performance is not indicative of the strength of the Chinese semiconductor industry. "Chinese semiconductor companies tend to be extremely fast followers and very good at driving down costs," says Tai. And while U.S. companies likely will continue to dominate the market for advanced processing technologies such as CPUs and high-speed communications chips, Tai believes that China will become a bigger player for commodity silicon in price-sensitive consumer electronics. "This is the beginning, not the end, of the trend," says Tai.