The planned public offering of Semiconductor Manufacturing International (SMIC) capitalizes on two market infatuations at once: excitement over all things Chinese and keen interest in the chip sector's rebound.
In a deal expected to raise around $1.5 billion, the Shanghai-based foundry is slated to debut on the
on March 17 with the symbol SMI. The offering will be co-managed by Credit Suisse First Boston and Deutsche Bank, which set an expected range between $15.50 and $17.50 for the American Depositary Shares.
A number of institutional investors say they're awaiting more financial details and background from the company's upcoming roadshow. But many say SMIC's profile is intriguing, and their comments speak as much to the long-term promise of the Chinese market as to concerns over short-term hype.
Deal pricing would obviously be a very important factor," said Gabriel Erdi, a trader at the
Marketocracy Technology Plus fund. "But if the valuation is fair and it's in a growing market, that's a good combination. It's definitely appealing because of the nature of the business."
Market research firm iSuppli predicts the worldwide chip market is likely to show sales growth of 17% in 2004, to $209 billion. Semiconductors used in China should account for about $48 billion of that total.
"There hasn't been exactly a robust IPO cycle yet for semis. Demand for new issuance is always strong in a market that seems to be heading, with some fits and starts, up," said Kevin Vassily, an analyst at Susquehanna Financial Group. "That alone should provide interest." (
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In the final quarter of 2003, SMIC posted its first profit, $8.3 million on revenue of $145 million, although for the full year it had a net loss of $103.3 million on revenue of $365.8 million.
Trailing the Chip Giants
But some investors caution SMIC is far from a slam-dunk investment. A big concern is that SMIC lags well behind industry leaders
United Micro Electronics
in technological capabilities, handicapping its ability to command higher prices for chipmaking.
When it comes to the most advanced semiconductor technology, which involves squeezing transistors onto a chip only 90 nanometers apart, the Taiwanese foundries are ahead of SMIC by at least a year, estimated Len Jelinek, an analyst for iSuppli.
One tech fund manager, who asked to remain anonymous, said his interest level in SMIC would be marginal. He already has a stake in TSM, which boasts a technological edge that allows it to grab higher-margin business.
The burden will be on SMIC to prove itself to chip outfits, given China's less-than-sterling record for protecting patents, the source said. "For them to get traction they'll need to gain trust in terms of intellectual property. There's a difference between having
big-name customers and doing mass production for them."
In a similarly skeptical vein, Jessica Hong, co-manager of the U.S. Global Investors
China Region Opportunity fund, noted that SMIC currently ranks fifth among foundries. "We already own the top two foundries in Taiwan. We don't need any more exposure to that sector," she said. (Her fund does have indirect exposure to SMIC through its holdings in Shanghai Industrial, a conglomerate with a 12% stake in the foundry.)
For now, SMIC can't yet claim to be a play on domestic Chinese demand for chips. Leading customers include
. Although SMIC is physically headquartered in Shanghai, the vast majority of SMIC's clients hail from outside China. (The firm is incorporated in the Cayman Islands.)
The clientele is likely to change as Chinese chip houses get up to speed in coming years. But the country's semiconductor designers are still fashioning chips with technology that was standard in the U.S. four or five years ago.
Also, SMIC will face more well-heeled competition on its home front down the road, given TSM's plans to build a fab in Shanghai.
Meanwhile, although the final deal pricing has yet to take place, SMIC's price-to-book value stands at roughly 2.2, assuming the midpoint of the price range, noted Kathy Smith, an analyst for Renaissance Capital. (The estimate also reflects an estimated $1 billion post-IPO payout to SMIC.)
That metric values SMIC only slightly below United Micro, which has a price-to-book value of 2.4 times, while Taiwan Semi carries a loftier valuation of 4.4 times.
Not everyone would agree the company deserves to trade in concert with United Micro, which claims a decided edge in manufacturing technology.
But for all of the fundamental concerns about SMIC, it's also gained a reputation for surpassing expectations in its four-year lifespan, showing itself to be more aggressive than anyone expected. Many on Wall Street admit being startled when the company laid out a fat $1.95 billion capital spending plan to ramp up its capacity this year.
Among other factors that have helped the company, the tech downturn forced many Chinese engineers to leave the U.S. and return home. "There's been a tremendous infusion of talent that people frankly didn't count on," said iSuppli's Jelinek. "They're clearly closing the technology gap much quicker than a lot of people anticipated."
A year or more down the road, many analysts believe, SMIC could start to impinge on the profits of industry leader Taiwan Semi.
Proof that SMIC is being taken seriously: Taiwan Semi filed a lawsuit against it in December 2003, charging that the company infringed patents and stole trade secrets. "Regardless of what
Taiwan Semi will say, the lawsuit was an attempt to slow them down," said Patrick Ho, an analyst for Moor's & Cabot. "If SMIC was still at the lagging edge and not
moving toward the leading edge, I don't think the lawsuit would have occurred."
Although SMIC still lags its rivals in technology, its pending IPO positions it as a headline-grabber for investors keen on both China and chips -- an enviable position these days.