Wafer thin demand for CSMC

Chinese chipmaker finally completes IPO.

CSMC Technologies completed a 621 million share deal on Friday, raising HK$310.5 million ($39.8 million) after pricing the offering at the bottom of its HK$0.50 to HK$0.54 indicative range. Citigroup was lead manager of the deal, which may get bumped up to HK$357.07 million ($45.7 million) if the greenshoe is exercised.

The IPO had been re-launched one week earlier after failing to clear the market in June when investors refused to support a price range of HK$0.73 to HK$1.10. In the interim period, sentiment towards the semiconductor industry has not picked up. However, the company decided to re-launch the deal since its listing application is about to expire and it did not want to incur the additional costs of a new one.

As it stands, CSMC has effectively raised new money of only about $25 million, since existing shareholders also decided to subscribe to the new offering in a bid to generate momentum and avoid excessive dilution. A group of key shareholders are expected to be allocated about 40% of the deal, with controlling shareholders China Resources and CSMC management ending up with stakes of roughly 20% each.

The retail book is said to have closed a couple of times subscribed and the institutional book about 1.3 times subscribed, with participation by roughly a dozen accounts. The deal has the standard 90%/10% split between retail and institutional investors. Current shareholders will not receive preferential allocations.

At $25 million, CSMC has raised less than eight times the $150 million to $200 million proceeds management were once hoping for. By the time they first began pre-marketing an IPO in mid-May, the semiconductor sector had already weakened and ambitions were scaled back to $100 million.

Some tech specialists believe a deal could still have got done at this point, if management had been prepared to drop their pricing expectations and try and build momentum from a lower valuation range. "At the beginning of the pre-marketing period, they were still talking about a price to book valuation of 1.6 times," says one tech specialist. "This was completely unfeasible given where much better industry comps were trading."

At the beginning of pre-marketing, SMIC was being quoted at 1.6 times 2004 book, down from the 2.3 times valuation it achieved at the time of its listing in mid-March. Singapore-based Chartered Semiconductor was trading even lower at roughly 1.4 times.

CSMC went on to set a formal range of 1.25 times to 1.6 times and by the time the deal was pulled a day before pricing, SMIC had come down to 1.2 times. Since then, the latter has been fairly range-bound and is currently 40% down from its listing price of HK$2.72. At its new pricing level, CSMC has been valued at one times 2004 book, the absolute minimum valuation China will allow its state-owned entities to be listed at.

The world's three largest listed foundries are all now trading towards the bottom of their historical ranges. Chartered is down about 42% year-to-date and is also trading at book value. UMC is down 33% on the year and is trading at 1.5 times, while TSMC is down 31% to trade at 2.4 times book.

The companies themselves have all recently reported strong second quarter results and continue to give optimistic guidance about the industry's prospects. Indeed, there appears to be a growing disconnect between the foundries and the analysts that cover them.

Over the past two months, sell recommendations have become near unanimous as analysts predict the beginning of a downturn on the back of the inventory de-stocking and increasing capacity. The companies, on the other hand, believe inventory corrections will be short-lived and have publicly commented that fundamentals remain strong and the current cycle should be good well into 2005.

CSMC differs from its four larger listed competitors because it specialises in trailing-edge technologies. The companyy currently operates one fab in Wuxi, which produced about 14,000 5" wafers in 2003 and 12,000 6" wafers. It specialises in process geometries of 0.35 to 0.5 micron, compared to the more sophisticated geometries of 0.13 and below adopted by TSMC and co.

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