Hong Kong-listed Semiconductor Manufacturing International Corporation (SMIC) raised $972.5 million on Tuesday, taking advantage of buoyant regional stock markets to pull off a tightly priced transaction and one of the largest overnight equity deals in Asia this year.
The offering, which was structured as an equity combo comprising a HK$3.8 billion ($491 million) placement of new shares and a $481.5 million sale of convertible preference shares, came less than a week after the Hang Seng Index broke the 30,000-point mark for the first time since December 2007. When the deal launched, it was just 1% shy of that level.
It also follows SMIC's share price climb earlier this month to its highest level in more than a decade, when it topped out at HK$14.36 before retreating to HK$11 on worries about a short-term global glut in semiconductors.
China’s largest chip maker last raised public equity less than 18 months ago with the sale of a $450 million convertible bond. But this time around it was able to raise more than twice the proceeds, while locking in long-term working capital for years to come.
That's because SMIC turned away from raising capital from a regular convertible bond, which is treated as a liability on its balance sheet and has to be repaid when the bond matures. By resorting instead to a primary share placement, the first from SMIC since April 2014, it was able to immediately replenish its cash.
The 360 million-share deal was pitched at a discount of 3.1% to 4.9% over SMIC’s HK$11.2 Tuesday close, before settling at the lowest end of HK$10.65 per share. As a result, the company was able to raise capital at a 33% higher level than its average stock price of HK$8 since 2004, when it listed.
Concurrently, SMIC raised another $481.5 million from the sale of perpetual convertible preference shares (CPS) that pay a 2% coupon every year.
The CPS terms were generally considered aggressive, not only because of its fixed-for-life nature but also because of the lack of a step-up and a coupon reset clause that is typically seen in other perpetual securities. This means investors will have very limited flexibility in cashing out unless the stock reaches the conversion price of HK$12.78 per share, or a 20% premium against the HK$10.65 placement price.
In addition, the CPS was structured as subordinated debt as opposed to a senior bond.
One source familiar with the situation said the CPS tranche was specifically designed for long-term investors with a positive view of the company and China’s semiconductor industry.
By taking on additional risk with the fixed-for-life instrument, investors will get a 2% coupon for a stock that literally pays no dividend. Meanwhile, the high volatility of SMIC shares suggests the strike price is within reachable levels, the source said, referring to the fact it traded over the HK$14 mark less than a month ago.
The CPS tranche was anchored by two existing shareholders, namely Datang Telecom and China Integrated Circuit Industry Investment Fund (China IC Fund).
According to a company statement, the two companies subscribed for $416.5 million worth of CPS, while another $65 million were subscribed to by institutional investors. They also exercised pre-emptive rights to subscribe for $100 million worth of common shares in the placement tranche.
JP Morgan was the sole global coordinator of both the placement and the CPS tranche. Deutsche Bank was a bookrunner in the placement tranche, and also a joint bookrunner in the CPS tranche, alongside Barclays.
At the forefront
Equity analysts are generally cautious over SMIC’s short-term prospects due to potential oversupply in its market and increased operating expenditure. The company also indicated 1% to 3% revenue growth for the fourth quarter, which was well below the 8% the market was expecting.
However, most analysts are confident about SMIC in the long run since it underpins the Chinese government's efforts to develop a self-sufficient semiconductor market and reduce the country's reliance on foreign chip makers such as Intel, Samsung, and Qualcomm.
China IC Fund, a Rmb120 billion investment fund backed by the Ministry of Finance and China Development Bank, is SMIC’s second-largest shareholder with a 15.1% stake. The company also counts China Investment Corporation, the country’s sovereign wealth fund, as a shareholder.
SMIC announced last year that it had started mass production of 28-nanometer chips, looking to tap into a market previously dominated by Taiwanese manufacturers such as TSMC, Globalfoundries, and UMC. The company said it expects the business to account for 10% of total sales this year.
The 28nm process technology supports a wide range of applications, including high-speed networking chips, central processing units, application processors, as well as the internet of things.