July 11, 2020
Sometimes it seems difficult for China’s chip-making champion, Semiconductor Manufacturing International Corporation (SMIC). In recent years, the US has attacked its supply chains, cutting them off from essential high-tech tools. It imposed export controls on SMIC’s customers and enacted new rules that threaten to designate the company as a subservient to the People’s Liberation Army. The company’s sales fell 7% in 2019 to $ 3.1 billion – not the kind of performance expected from a Chinese high-tech titan.
SMIC is one of many corporate victims in the growing conflict of access to advanced technology that is taking place between the US and China. While the two geopolitical rivals try to decouple their economies, they and their allies enact restrictions on all types of software and hardware. On July 6, U.S. Secretary of State Mike Pompeo said the United States could ban TikTok, a short Chinese-owned video app, loved by Western teenagers. Facebook, Google, Microsoft and Twitter suspended their usual cooperation with Hong Kong police after Chinese territory adopted a new security law that gives Beijing greater control (of the quartet, only Microsoft has significant business on the continent that can be targeted) Chinese retaliation)
You can reasonably conclude that weak revenues and American ire would be a drag on SMIC’s share price. Not at all. The market capitalization of the Hong Kong-listed company quintupled last year, to $ 29 billion. SMIC is organizing a new list of shares worth 46.3 billion yuan ($ 6.6 billion) at the Shanghai Science and Technology Innovation Council (better known as the STAR Market). He set a price for the shares that value the company at 109 times its earnings in 2019, a proportion five times higher than that of more advanced competitors, such as Taiwan Semiconductor Manufacturing Company. It may be one of the largest listings in the world by 2020.
So, what is happening? The answers lie in SMIC’s status as China’s best hope of building a domestic semiconductor industry. This is a long-standing strategic objective for the Chinese Communist Party, which is therefore pleased to leave the power of the Chinese state behind SMIC. Although the company is lagging behind global competitors at the moment, it is in a strong position to sell chips to China’s large and growing electronics market.
Investors who make assumptions about a company’s long-term success in relation to its short-term performance may see the US government’s attention as a sign of SMIC’s potential. Many Chinese patriotic traders are likely to belong to this group. But the immediate investment risk of American stocks is real.
The most recent attack occurred on May 15, when the Commerce Department introduced new export control rules that prevent SMIC from using American chip-making equipment to produce microprocessors for Huawei, the Chinese telecommunications giant at the center of the stage in the technological cold war. Bernstein, a research firm, says that if SMIC loses Huawei’s custom, it will reduce its existing revenue by 20% and, fundamentally, deprive it of “most” of its expected growth. SMIC’s already thin margins could turn negative when $ 1.7 billion in investments since 2016 start to incur depreciation costs, according to Bernstein, who recently said in a report that SMIC’s shares looked overvalued.
SMIC and its investors expect the company to be able to overcome these and future obstacles to achieve the lucrative position of chief chip maker in the Chinese market. Being fully supported by the Chinese government will help. The question that looms over SMIC, and all of the country’s chip ambitions, is whether a combination of stocking and negotiating kit with partners can maintain existing supply chains long enough, even in the face of American disruption, to allow development national products. substitutions. If it can, SMIC can flourish. Otherwise, Beijing will lose its goal. ■
This article was published in the Business section of the print edition, under the title “What goes up and up and up”
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