China’s largest chipmaker my have had a disappointing first day of trading on an American exchange (NYSE: SMI) last week. But several VC firms still stand to see a huge payday from the IPO of Shanghai-based Semiconductor Manufacturing International Corp. (SMIC).
The company offered 98 million American Depositary Shares at $17 a piece last week, but the stock closed at $15.50, an 11% decline from the offering price, after the first day of trading Wednesday.
Nonetheless, the venture-backed SMIC completed its IPO, and in doing so raised more than $1.8 billion, making it the third largest IPO worldwide this year.
And, potentially, the IPO represents a big payday for the VC backers, who invested more than $390 million in the largest foundry in China, according to the MoneyTree Survey from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
Among the VC firms that have backed SMIC are Hambrecht & Quist Asia, GIC, Walden International, AsiaVest, New Enterprise Associates (NEA) and more than three dozen other investors (see sample list in chart). Though the exact investments and at what valuations aren’t known, H&Q Asia, for instance, saw its total investment of $85 million increase in value from 2.5x to 3x in value with the IPO, according to Mark Hsu, a vice president at H&Q Asia.
The biggest shareholders in SMIC, both before and after the IPO, are the Shanghai Municipal Government, Motorola Corp., Beijing University and possibly the Chinese Government via an entity called Beida Jade Bird Software.
In the aftermath of successful IPOs by such Chinese companies as the China Life Insurance Co. (NYSE: LFC), which raised $3 billion in its December 2003 IPO, there was an expectation that SMIC, with backing by the General Motors Pension Fund, Motorola and NEA, would garner the same enthusiastic response when it debuted here. Chinese companies are expected to raise roughly $20 billion in international IPOs this year as the Chinese economy continues to grow.
But in 2004, there has so far been a decline in enthusiasm for other recent Chinese company IPOs – both Linktone Ltd. (Nasdaq: TOMO) and TomOnline (Nasdaq: LTON) are trading down about 17% and 21%, respectively, from their IPO price as of last Wednesday. It was, thus, no surprise that shares of SMI tumbled as low as they did in the company’s first day of trading.
Meanwhile, SMIC does not possess the sort of solid financials that makes investors want to snap up its new issues. Founded in 2000, SMIC has reported losing money in each year of its existence, including last year, when it lost more than $72 million on revenue of $366 million.
Plus, SMIC faces stiff competition.
The world’s leading foundries includes Taiwan-based UMC (which has sales of $2.6 billion and TSMC (sales of $6.1 billion).
The United States does not possess a foundry industry. However, SMIC’s story for investors is largely based on the promise of the company as the leading foundry in the fastest growing semiconductor market worldwide. SMIC makes logic chips, RF ID chips, several kinds of memory chips, specialty products such as LCD chips on silicon, and systems-on-a-chip.
The company, which targets mobile phone users, is believed to hold particular potential, as only about one-fifth of the country’s 1.3 billion people have wireless phone subscriptions.