On July 16, SMIC, China's top chipmaker, saw its shares surge 245% at the open on its first day of trade in Shanghai. The company issued issuing 1,685,620,000 shares at 27.46 yuan per share, raising 46.28 billion yuan ($6.62 billion). Shares were trading at 95 yuan at the open with a market cap of RMB700 billion.
So far, SMIC has broken a number of records in A-share: It took only 19 days from acceptance to registration and 29 days to complete registration, setting a record for the fastest listing on STAR Market. With SMIC's listing on the board, the first "A+H" stock in China's semiconductor sector was officially born.
Founded 19 years ago, the development of SMIC is very tough, which took the efforts of five chairman and four CEOs to establish China's top chip in the world. Of course, there is also a group of venture capital institutions silently support behind this. Many of them are well-known VC/PE institutions such as DCM, SCGC, Walden international, and Vertex Ventures…
This is a much-anticipated IPO, and in the industry's view, along with the listing, SMIC is also ringing the bell of IPO for China's semiconductor industry.
It's the largest IPO to raise capital in a decade
It took SMIC only 46 days from June 1, when its IPO application was accepted, to July 16, when it went public on the board. It's a lightning listing.
Moreover, SMIC's landing on the board is the largest IPO of A-share in the past decade.
After the official placement offering on July 7, the company issued issuing 1,685,620,000 shares at 27.46 yuan per share, raising 46.28 billion yuan ($6.62 billion). If overlaid with the full exercise of the over-allotment option, the total proceeds would be 53.23 billion yuan. In short, it has greatly exceeded the scale of SMIC's original plan to raise 20 billion yuan for the initial public offering. The last IPO at this level was in 2010, raising 68.5 billion yuan for Agricultural Bank of China.
As one of the world's leading IC foundries, SMIC, founded in 2000, has become one of the most technologically advanced, largest, best-supported and multinational foundries in mainland China, according to its prospectus. It mainly provides customers with multiple technology nodes, IC foundry and ancillary services.
According to IC Insights' 2018 global market sales ranking for the foundry industry, SMIC holds a 6% market share, ranking No. 4 worldwide. Meanwhile, global foundry leader TSMC holds 59% of the market share. In terms of the Chinese domestic market, TSMC ranked first with 56% market share in 2018, followed by SMIC with 18% market share.
Its strength in its industry position is also directly reflected in SMIC's ability to generate revenue. For the year ended Dec. 31, 2019, SMIC's revenue was 22 billion yuan, down a bit from 23 billion yuan in 2018, according to the prospectus. But in terms of net profit, SMIC's 2019 profit was 1.268 billion yuan, a significant increase from 360 million yuan in 2018 and 900 million yuan in 2017.
Among them, integrated circuit foundry is the main source of revenue for the company's main business. The proportions to the main business income during the reporting period were 95.94%, 89.30% and 93.12% respectively.
In addition, SMIC is investing heavily in R&D. During the reporting period, SMIC's R&D investment ratio increased steadily with a growth of RMB 3.58 billion, RMB 4.47 billion, and RMB 3.56 billion, accounting for 16.72%, 19.42% and 21.55% of operating income, respectively. It is at a high level in the same industry. Although compared to TSMC, SMIC's R&D investment in 2019 is only one-fifth of the former's, TSMC's R&D investment ratio has been over 10% for the last three years.
As the only foundry in China with a 14nm process, SMIC is not resting on its laurels.
According to the prospectus, the main objective of SMIC is to expand the company's existing production capacity, improve the company's product structure and product quality, and enhance the company's R&D and competitive capabilities.
Among them, 40% of the proceeds will be used for "12-inch chip SN1 project" and 20% for "reserve funds for advanced and mature process R&D projects".
Currently, no company in mainland China has mass production capability for advanced processes below 14nm. However, as the demand for downstream applications continues to grow in emerging areas such as 5G, AI and smart driving, this capability is indispensable, which is why SMIC has chosen to invest heavily to overcome the weakness.
A tough history of China's semiconductor development
Looking back at the history of SMIC's founding, naturally one person is inseparable - Richard Chang, the father of China's semiconductor.
Back in 1977, just received his doctorate, Richard Chang, at the age of 29 years to join the American semiconductor giant Texas Instruments, to start their own 20-year career at Texas Instruments.
Until 1997, a desire to revitalize China's national chip industry, he decided to apply for retirement, planed to build two companies in Taiwan, then all 8 factories built in mainland China.
Soon after, Richard Chang established a wafer foundry named Worldwide Semiconductor in Taiwan. It was a very successful venture, and the company turned a profit after only three years. Eventually, Worldwide Semiconductor was sold to TSMC for $5 billion.
Richard Chang once recalled that a group of industry professionals invited him to return to the mainland to start a business, "they asked me if I could come back to the mainland, they said there was a big gap between China and the world in the semiconductor field and now it was very keen to catch up with the world level".
Eventually, following an enthusiastic invitation from his Shanghai counterparts, Zhang decided to establish a factory in Shanghai in 2000, that is SMIC.
In September 2001, SMIC's first chip with 0.13-micron technology was successfully completed. It only took 13 months from piling up the plant to producing the first chip.
Under his leadership, SMIC's 2003 revenue was $365 million. Although far from the industry leader, a 6.3x annual revenue growth rate makes it become one of the fastest growing wafer fabrication companies in the world. Subsequently, in the first half of 2004, SMIC's revenues reached $400 million, surpassing its full-year 2003 results.
SMIC, which is in the fast lane of growth, also went public in 2004 in New York and Hong Kong, setting a record for the fastest IPO in the semiconductor industry. And in the same year, SMIC also became embroiled in a patent lawsuit with TSMC, until a settlement was reached in 2009. But as a condition of the settlement, Zhang had to leave SMIC.
Since then, Wang Ningguo and Qiu Ciyun have served as CEOs of SMIC. During Mr Qiu's five-year tenure, SMIC's annual sales also grew from $1.3 billion to $2.9 billion in 2016, and metrics such as stock market capitalization, capital investment, and production capacity also doubled.
Then in 2017, Zhao Haijun, who had been COO of SMIC, and Liang Mengsong, former director of R&D at TSMC, took on the role of CEOs. Since then, SMIC has been in a dual CEO mode.
The prospectus shows that as of May 31, 2020, SMIC's largest shareholder is Cina Datang Corporation Ltd., with a shareholding of 15.77%, and the second largest shareholder is Xinxin (Hongkong) Capital Co., Limited, with a shareholding of 14.62%.
According to Tianyancha, SMIC received tens of millions of dollars in strategic financing from DCM Capital in the second year of its establishment, and in the same year it was supported by DCM, SCGC, Walden international, and Vertex Ventures…
After 20 years, SMIC is already a huge enterprise. As of the end of 2019, SMIC had 37 holding companies, of which 17 were domestic subsidiaries and 20 were foreign subsidiaries, and a total of 26 participating companies in which it held shares or interests. In addition, SMIC has been making investments.
Knock on the door of China's semiconductor IPO
State electronic research pointed out that the current global foundry market can be divided into three echelons. The first tier is TSMC, Intel, and Samsung, which have advanced process technology capacity. The second tier is UMC, SMIC and Global Foundries, with some advanced process capabilities. The third tier is Huahong Group, Tower Jazz and Powerchip, focusing on mature processes.
SMIC, as a member of the Chinese chip companies, shoulders the burden of a safe and controllable semiconductor industry chain. And the only way to catch up with the international leader is to continue to increase R & D costs and capital expenditure.
Even more exciting is that, along with SMIC's listing, semiconductor companies in China are expected to usher in a wave of IPOs.
Canqin Technology's application for listing on STAR Market has been accepted by the SSE. The company is mainly engaged in the research and development, production and sales of microwave dielectric ceramic components, and its main product is dielectric waveguide filter, which can be used in 5G macro base stations.
Prior to this, the application of 3Peak Incorporated for listing on STAR Market, which focuses on the development and sale of analog IC products, was accepted in April this year. In addition, the applications of Galaxy Microelectronics and Shengyi Electronics CO.,LTD for listing have been accepted by the Shanghai Stock Exchange.
The door to IPOs in China's semiconductor industry is opening.
This is an article from WeChat official accounts PEdaily (ID: pedaily2012), written by Yang Jiyun and Liu Bo, translated by Chris Yuan.