Caixin
Jul 22, 2020 09:30 AM
TECH TALK

Break Out the High-Tech Chips — It’s Party Time

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Call it the perfect storm of stock market reform, a bitter technology war with the U.S. and China’s love for buzzwords, especially anything in the high-tech realm.

That appears to be what’s shaping up in China’s chip sector, which has suddenly become swollen with a pipeline of semiconductor IPOs that looks set to become the country’s newest tech craze. Some might wonder why I’m not writing this week’s column about the just-announced mega IPO plan from Ant Group that, after all, also qualifies as a high-tech play of the fintech variety.

But that would miss the point, as fintech is so yesterday’s news by Chinese standards, which seem to launch, devour and then spit out the latest high-tech flavors on a pretty regular cycle that seems to last two to three years. Fintech was the word of the moment at the height of China’s peer-to-peer (P2P) lending craze a few years back. But that was pretty much squashed and the industry largely extinguished by a regulatory crackdown on sloppy and often outright fraudulent business practices.

All that explanation may seem excessive now for something so squarely in the past. But I’ve repeated it here as it’s quite relevant to the perfect storm that’s now brewing for the high-tech chips that power pretty much all of today’s modern gadgets and any electronic device now out there.

This particular storm has its roots back in 2014, when Beijing decided that China needed to boost its chip sector and set up the China Integrated Circuit Industry Investment Fund to do just that with more than 100 billion yuan ($14.3 billion) in capital. More recently, the call to boost the sector has taken on more urgency as a U.S.-led campaign rapidly cuts off big Chinese tech firms from their Western suppliers, showing just how dependent the former group is on key Western-developed technologies like chips.

The third key element in our perfect storm is China’s relatively new STAR Market, which was launched a year ago with the promise of revolutionizing the nation’s archaic IPO process. That board has become something of a listing frenzy since its launch, attracting numerous candidates that wouldn’t have made the cut on any of China’s other major boards.

Two of the biggest changes are laxer profitability requirements, and a scrapping of informal caps that often kept IPO share prices artificially low. STAR also uses a more Western-style registration system for IPOs that is much more streamlined than China’s traditional reviews and lets the market play a greater role in determining what offerings move forward and how to value them.

This confluence of factors paved the way for meteoric first-day gains over the past week by two companies that almost certainly would have evoked yawns from most investors otherwise. The first of those saw contract chipmaker Semiconductor Manufacturing International Corp. (SMIC) raise more than $6 billion in a STAR board listing last week, with its shares more than tripling on their first trading day. Never mind that Shanghai-based SMIC has been around for two decades now, and was largely ignored by investors for most of the last 16 years when it was listed in Hong Kong.

More gold in Cambricon

But at least SMIC is profitable and is also a relatively large company, with revenue last year of more than $3 billion. The same can’t be said for smaller chipmaker Cambricon Technologies, which has forecast a paltry 85 million yuan in revenue for the first half of this year. What’s more, Cambricon has also forecast a loss of up to 300 million yuan over that period — hardly the stuff that champions are made of. And yet none of that seemed to faze investors, who also bid up Cambricon shares by more than 200% in their Monday trading debut.

Longtime China tech people will know this is hardly the first time for this kind of high-tech hysteria. As I’ve mentioned above, fintech was once the hot ticket in town. Other buzzwords that have gone through the cycle include virtual reality, and current favorites blockchain and artificial intelligence, though the former appears to have peaked and is on the way out. The big difference this time is really the confluence of the U.S. tech war and the STAR Market launch coinciding with this latest trend.

That could mean big bucks, both for companies and investors who play their cards right. If a so-so name like SMIC and a loser like Cambricon can make it big in this climate, then the sky really looks like the limit in this coming wave.

I personally was aware of just two chip IPOs on the horizon, including Unisoc, a unit of the larger chip aspirant Unigroup whose core assets were the once U.S.-listed Spreadtrum and RDA Microelectronics. The other is the chipmaking unit of electric vehicle specialist BYD, which was recently spun off and just last month raised a fresh 800 million yuan.

In search of more names, I turned to my analyst friend Sheng Linghai at Gartner, who provided a somewhat mind-boggling list of 40 such companies that are somewhere in the listing process, mostly on the STAR board. Among those, he pointed to Galaxycore, 3Peak, Bestechnic, WeEn Semiconductors and Fudan Micro as some of the more promising names.

But given that this is China, potential is really the last thing you need to succeed right now. Instead, probably any organization with the word “chip,” “semiconductor” or the less-flashy “integrated circuit” in its name will suddenly become a hot ticket, and I fully expect we should see a mass movement of new and existing companies adopting such names in the year ahead.

Many of those may also successfully raise millions or billions of yuan in funds, either from private equity or IPOs. I would wager that many of those will see explosive growth in valuations during their upcoming two or three years in the sun, which could play well to any savvy investors who know where and how to place their money. After that all bets are off, though I do expect that at least a few good names should still be left standing when the final chips fall into their long-term resting places.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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