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Chinese Chip Giant Prepares to Build Its War Chest During U.S.-China Tech Battle

By Serena Ng 

China's leading chip maker is preparing for a multibillion-dollar stock sale, as the country tries to build up its semiconductor capabilities during a heated trade conflict and tech battle with the U.S.

Semiconductor Manufacturing International Corp. last June delisted from the New York Stock Exchange after trading there for 15 years. The company kept its other listing in Hong Kong and its American depositary receipts trade over the counter in the U.S.

Shanghai-based SMIC, a chip foundry, counts several state-owned enterprises among its largest shareholders and has a market capitalization of more than $10 billion. Semiconductors are essential components in smartphones, computers and many other high-tech products; SMIC has recently experienced large demand from Chinese customers.

SMIC said in a regulatory filing late Tuesday that its board approved a plan to sell up to 1.69 billion new shares -- representing about a quarter of the company -- in a listing on the Science and Technology Innovation Board, the Shanghai Stock Exchange's fledging Nasdaq-style venue.

Analysts from Bernstein Research estimated that the company could raise about $2.4 billion, while Guosen Securities, a Chinese brokerage, said the sale could top $3 billion. An offering of that size would represent the largest stock sale on the so-called STAR market, which went live last summer.

SMIC's Hong Kong-listed shares jumped 11% on Wednesday, indicating shareholders favor the plan. Those shares have gained 41.5% so far this year, significantly outperforming the broader market.

For years now, China has been working to bolster its semiconductor industry so it can be more self-sufficient. That effort became more urgent over the past year after the U.S. placed limits on sales of chips to Chinese telecom giant Huawei Technologies Co., citing national-security concerns. Last month, the U.S. Commerce Department tightened export-control rules that could further restrict semiconductor shipments to China.

To support domestic manufacturers, China rolled out subsidies and tax cuts for companies and in 2019, it set up a 204.2 billion yuan ($28.8 billion) national semiconductor fund, as it attempts to close the technology gap with the U.S.

The state's backing of the technology sector -- including the semiconductor industry -- has been a contentious topic in U.S. trade negotiations with China. Last year, a report by the Organization for Economic Cooperation and Development said government support exceeded 30% of SMIC's total revenue from 2014 to 2018. The company has reported about $3 billion in annual revenue for the past few years, according to S&P Global Market Intelligence.

SMIC said about 40% of the proceeds from its planned stock sale will help pay for a "12-inch SN1 project," which is a chip production and research site. The rest would fund research and development and the company's working capital needs.

"We believe SMIC is gradually severing the tie to the U.S. capital markets, as the tension between the U.S. and China escalates," analysts from Bernstein Research said in a note Wednesday. They added that the company's access to American technologies and semiconductor manufacturing equipment, "will be more and more challenging," in light of tighter U.S. export controls.

The company said it had $2.2 billion in cash on its balance sheet at the end of 2019. The company in recent years has also sold U.S. dollar bonds to international investors.

SMIC, in response to a query Wednesday, said its decision last year to delist from the NYSE was due to low trading volumes and "the significant administrative burden and costs of maintaining the listing," and it wasn't due to U.S.-China trade tensions.

--Zhou Wei contributed to this article.

Write to Serena Ng at

(END) Dow Jones Newswires

May 06, 2020 06:53 ET (10:53 GMT)

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