For many years, a rule insisted that companies needed to show three consecutive years of profit before they were allowed to apply for a listing on Hong Kong’s main bourse.
That rule was amended in 2004 to make way for “large corporations with market values higher than HK$4 billion ($510 million)”.
The amendment, it was suggested at the time, was tailormade to lure the IPO of SMIC – a foundry set up by the Chinese government to take on Taiwan’s older and larger fab TSMC.
SMIC floated its shares in both Hong Kong and New York that year. But in a case of history repeating itself, the semiconductor firm seems to have found favour again with the regulators this year.
This time round a change in the rules by the China Securities and Futures Commission (CSRC) is paving the way for SMIC’s return to the A-share market.
On April 30, the CSRC announced a change to market capitalisation thresholds for so-called “red chip” companies (businesses operating in China but floated on overseas bourses – including Hong Kong – or registered abroad) to apply for a listing on a mainland Chinese bourse.
Previously only red chips with market values above Rmb200 billion ($28.3 billion) were eligible. This meant only a handful of internet giants such as Alibaba, Tencent and Baidu met the criteria. But the threshold has now been lowered to Rmb20 billion for companies with “self-developed and world-leading technology”. That rule change looks perfect for SMIC, with the Shanghai-headquartered company announcing a plan to list in the same city just a few days later on May 5.
SMIC said in a stock exchange filing in Hong Kong that it is planning to issue up to 1.69 billion yuan-denominated shares on the STAR bourse (see WiC461 for more on this Nasdaq-like exchange).
Its share price has been trading at about HK$17 since last week. Using that as a reference, its migration to the A-share market could raise as much as Rmb26.2 billion – or more, as local media outlets think SMIC could command a higher valuation from domestic investors than in Hong Kong.
Since its market debut in Hong Kong 16 years ago, SMIC has been an unloved stock compared to other red chips such as China Mobile and CNOOC (both known as “purple chips” because they are also members of the blue-chip Hang Seng Index). Although SMIC’s performance in Hong Kong has been unspectacular, its New York-listed ADRs had fared far worse, with average daily turnover only a fraction of Hong Kong’s.
That’s why a decision was made to delist from New York a year ago. Since then investor interest has spiked notably, with SMIC’s market value more than doubling to nearly HK$90 billion.
That means it is now trading at a valuation of over 50 times earnings. Yet analysts think that its A-shares could be worth a lot more, given how locally-listed counterparts such as Changjiang Electronics Tech are trading at 150 times earnings or higher.
At the heart of the matter is the race for tech supremacy with the United States. SMIC is supposed to be one of the standard bearers in the longstanding policy of ‘indigenous innovation’ but even as the leading chip foundry on the mainland, it is believed to be several generations behind TSMC in technological terms. TSMC says it might start commercial production of 5-nanometre chips this year. SMIC is stuck at the 14-nm node.
China’s telecom equipment heavyweight Huawei has been using TSMC’s 7-nanometre (a billionth of a metre) technology for its flagship Kirin processors, accounting for as much as 15% of TSMC’s sales last year. But in a bid to skirt American sanctions in the future, the Chinese firm has shifted some production of smartphone processors to SMIC – which is now mass producing the Kirin 710A chipset. SMIC gifted employees this week with a Huawei phone inscribed with “Powered by SMIC” on its back.
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