SMIC Gives…
Semiconductor Manufacturing International Corp (688981.CH), aka SMIC, is China’s largest semiconductor foundry, with 200mm and 300mm lines in 4 locations on the Mainland, and capacity for almost 400,000 wpm (including lines under construction). The company, which has been running at near full utilization rates, has become profitable this year, hitting company records in 3Q, but has been unable to compete with foundries outside of China due to trade restrictions placed on the company by the US. Such restrictions have limited the software and hardware needed to produce at nodes at or below 10nm, with only 5.6% of sales at nodes between 11nm and 13nm. While this still allows SMIC to produce a wide variety of products, it keeps them out of competition with Taiwan Semi (TSM) and Samsung, who are able to produce at nodes down to 4nm. SMICs formerly largest customer Huawei (pvt), also on the US trade sanction list, is unable to rely on SMIC to produce competitive APs for its smartphones, and has seen its smartphone business shrink considerably.
SMIC itself (SMIC & SMIC Holdings) are the primary shareholders of the company, holding 77% of the company’s equity, along with the Shenzhen Reinvestment Group, an organization run by the Asset Supervision & Administration Commission, a State-owned entity, but SMIC has decided to transfer a 22% stake in the company to the National Integrated Circuit Fund II, an investment group that was formed in 2019 to fund the country’s semiconductor industry. The fund has 27 investors, 19 individuals with holdings under 7%, but the largest investors are China’s Ministry of Finance (22%), the China Development Bank (10.8%) and a number of provincial and city owned investment groups, including China’s National Tobacco Corp. While SMIC itself will still have a controlling interest in the company, state-owned groups will now hold 45% of the equity, up from 22%.
While the rational for the transfer is given as a way for the company to access additional capital in the future, it seems an odd time in the company’s history to be giving away the company’s new positive performance, at least from the perspective of those used to public sector companies in democratic or quasi-democratic countries, but we understand that since SMIC is already earmarked by the US government as a company likely to aid the Chinese military, it seems the state government sees little reason not to take a bigger role in SMIC’s future. Whether the equity transfer will actually accomplish anything for SMIC in the long run remains to be seen, but when the state makes a request in China, it isn’t really a request, especially after much of the company’s early funding came from state capital.
SMIC itself (SMIC & SMIC Holdings) are the primary shareholders of the company, holding 77% of the company’s equity, along with the Shenzhen Reinvestment Group, an organization run by the Asset Supervision & Administration Commission, a State-owned entity, but SMIC has decided to transfer a 22% stake in the company to the National Integrated Circuit Fund II, an investment group that was formed in 2019 to fund the country’s semiconductor industry. The fund has 27 investors, 19 individuals with holdings under 7%, but the largest investors are China’s Ministry of Finance (22%), the China Development Bank (10.8%) and a number of provincial and city owned investment groups, including China’s National Tobacco Corp. While SMIC itself will still have a controlling interest in the company, state-owned groups will now hold 45% of the equity, up from 22%.
While the rational for the transfer is given as a way for the company to access additional capital in the future, it seems an odd time in the company’s history to be giving away the company’s new positive performance, at least from the perspective of those used to public sector companies in democratic or quasi-democratic countries, but we understand that since SMIC is already earmarked by the US government as a company likely to aid the Chinese military, it seems the state government sees little reason not to take a bigger role in SMIC’s future. Whether the equity transfer will actually accomplish anything for SMIC in the long run remains to be seen, but when the state makes a request in China, it isn’t really a request, especially after much of the company’s early funding came from state capital.
I'm gonna make him an offer he can't refuse..." - Source: Paramount Pictures – 1972
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