China chip maker plans share offer
Chinese chip foundry SMIC is seen as a long-term threat to industry leader TSMC.
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HONG KONG, China (Reuters) -- In less than four years, Semiconductor Manufacturing International Corp (SMIC) has become China's largest chip maker and the embodiment of the country's high-tech aspirations.
On Monday, SMIC and its bankers will begin two weeks of meetings with fund managers around the world to pitch an initial public share offering worth up to $1.5 billion.
Analysts expect it will strike a chord with China-focused investors.
"It will receive a very enthusiastic response, 500 times oversubscribed -- something like that," predicted Francis Lun, general manager at Fulbright Securities in Hong Kong.
SMIC, which is 11.4 percent-held by U.S. tech giant Motorola, plans to use its IPO proceeds to expand capacity at its Shanghai plant and to build chip foundries in Beijing.
SMIC's Hong Kong and New York listing would be the world's third largest of 2004 and part of a pipeline of overseas initial public offerings from China that is expected to total some $15 billion this year.
At a price of roughly two times its 2003 book value, SMIC is asking investors to pay a premium relative to established rival Chartered Semiconductor Manufacturing Ltd of Singapore, according to fund managers who heard a pre-marketing pitch for the IPO.
That puts SMIC's valuation in line with that of number-two contract chip maker United Microelectronics Corp (UMC) of Taiwan, but lower than industry king Taiwan Semiconductor Manufacturing Corp, which trades at 4.59 times book.
"We view intensifying competition from SMIC as a long-term threat to both TSMC and UMC," Goldman Sachs wrote this week.
SMIC, the world's fifth-largest contract chip maker, had capacity equivalent to 58,000 eight-inch wafers a month at the end of 2003, and Nomura International expects it to be able to churn out 115,000 wafers a month by the end of this year.
By contrast, UBS estimates TSMC will have capacity of 384,000 wafers per month by the end of 2004.
Credit Suisse First Boston and Deutsche Bank are underwriting the IPO, which could value SMIC at up to $7.5 billion based on its plan to sell 20-25 percent of its equity. That is one-fifth the size of TSMC, and half as big as UMC.
Despite its growing technological might, China boasts no large-cap tech stocks beyond PC maker Legend Group.
So SMIC's listing would open up a new China sector for overseas investors, just as the recent, hugely popular IPOs by China Life Insurance and PICC Property & Casualty did for the country's insurance sector.
"I would say 'buy'," said Liu Yang, managing director at Atlantis Investment Management. "The largest chip maker in China? We need that kind of product."
But she sounded a note of caution on the valuation, saying a price-to-book ratio of 1.5 times would be more appropriate.
China's low labor costs don't give SMIC much advantage over offshore competitors, given that a chip plant costs about $2 billion to build -- no matter where -- and requires relatively few staff.
SMIC's production costs are higher than those at TSMC, but SMIC enjoys home-field advantage in China.
The country is solidifying its position as the world's factory, consuming a greater share of the chips used in goods ranging from mobile phones and PCs to cars and refrigerators.
According to an IC Insights report cited by CSFB, China's share of worldwide chip consumption will rise to 28 percent by 2010 from 12 percent in 2002. Beijing wants China to source about half its chips domestically, from about 22 percent now, it said.
SMIC's biggest customers are based outside of China. Its top five clients last year were global heavyweights Samsung Electronics Corp, Toshiba Corp, Infineon Technologies AG, Texas Instruments Inc and Broadcom Corp.
Analysts predict SMIC's 2004 sales will hit $900 million.
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