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Chinese chipmaker to chase more advanced technology with IPO proceeds


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Chinese chipmaker to chase more advanced technology with IPO proceeds

Trade tensions are driving investments in China's largest contract chip manufacturer, as the Chinese government aims to bolster domestic technology amid new U.S. export restrictions.

China's Semiconductor Manufacturing International Corp. plans to raise up to US$6.5 billion, or 46.29 billion yuan, in a July 7 initial public offering of about 20% of the company on the technology-focused STAR market. Including the overallotment option for offering underwriter Haitong Securities, gross proceeds could reach US$7.55 billion, or 53.23 billion yuan. That is more than double the US$2.84 billion, or 20 billion yuan, that the company initially planned when it announced the IPO in June.

SMIC also secured about US$2.5 billion in investment from funds backed by the Chinese government in May. The goal of the government-backed investment was to boost SMIC's production capacity to help make up for an impending shortage of chips for Chinese equipment maker Huawei Technologies Co. Ltd. after U.S. officials moved to effectively block Huawei from accessing U.S. technology.

The new U.S. export restrictions also cut off Huawei from supplier Taiwan Semiconductor Manufacturing Co. Ltd., the world's largest chipmaker, which recently announced plans to add a chip fabrication facility in the U.S.

To avoid U.S. technology, Chinese chipmakers including SMIC will have to re-equip some facilities with equipment from the Dutch ASML Holding NV to match the chips that TSMC produces, said Linley Gwennap, president and principal analyst of the semiconductor-industry consulting firm The Linley Group.

"Right now China is dumping a lot of money into SMIC to try to get them up to speed as quickly as possible, but SMIC right now is probably 4 years behind TSMC," Gwennap said.

Given that technology is constantly improving, it will likely take longer than four years for SMIC to catch up, he added.

"SMIC has been hiring people from leading companies and has been getting closer, but is still a few generations behind" on its chip technology, Gwennap said. Catching up on next-generation chip production "is not the kind of thing it is easy to rush," he added.

Equity analyst firm Red Pulse estimated in a July 6 research note that about 40% of funds from SMIC's IPO would be slated for a new plant to produce 12-inch semiconductor wafers, 20% would go to research and development, and the rest would replace working capital.

The institutional portion of the offering has been oversubscribed by 165 times, attracting 29 strategic investors including Singapore's GIC Pte. and China National Integrated Circuit Industry Investment fund, according to the Red Pulse report.

A July 2 Goldman Sachs report predicted SMIC would move from 14-nanometer to 12-nm chips during 2020, but would not reach production of the 7-nm chip process until 2023, or 5-nm until 2025. By comparison, TSMC already produces 7-nm chips and will soon have 5-nm chips. The size of chips is continually shrinking as production facilities upgrade their processes.

But developing new process nodes is expensive, which threatens company profits even with a big influx of capital, noted Goldman Sachs, which rated SMIC a long-term buy.

By contrast, the fabrication plant TSMC has announced it will build in Arizona beginning in 2021 is scheduled to begin full production of 5-nm chips by 2024, when the leading-edge chip size is likely to be even smaller, possibly 3 nm or 2 nm, Gwennap said.

As of July 6, US$1 was equivalent to 7.02 Chinese yuan.