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China’s sanctions-hit semiconductor sector gets a boost from fresh funding

China’s sanctions-hit semiconductor industry is poised to receive a much-needed lifeline via capital raised from new public listings and mutual funds, according to the latest stock market filings and financing data, as Beijing doubles down on the country’s chip self-sufficiency drive amid tightened US trade restrictions.

The initial public offering (IPO) applications of nine entities in China’s semiconductor supply chain – including six integrated circuit (IC) design companies, a chip packaging firm, a wafer foundry and a packaging material provider – have been approved this month, according to domestic stock exchange filings. These IPOs are expected to raise a total of 21.6 billion yuan (US$3 billion) from investors.

The wafer foundry now set to go public on the mainland is Semiconductor Manufacturing Electronics (Shaoxing) Corp, which is affiliated with the country’s largest and most advanced chip maker Semiconductor Manufacturing International Corp (SMIC). There were only seven chip-related IPOs approved in the same month last year.

The latest IPO approvals come hot on the heels of the go-ahead received earlier this month by Hong Kong-listed Hua Hong Semiconductor, China’s second-largest chip maker, for its US$2.5 billion listing on Shanghai’s Science and Technology Innovation Board, also known as the Star Market.

“These IPO activities have been steady regarding deal size over the past few quarters, and more are on the way,” said Gary Ng, senior economist for Asia-Pacific at French investment bank Natixis. “More IPOs will enable Chinese chip makers to easily access capital and deploy more resources for research and development.”

Ng indicated that research and development in the industry would involve “a complicated and lengthy process, but it is important to counter US restrictions”.

In the first 11 months of this year, 46 semiconductor-related companies involved in design, fabrication, components and materials went public on the Star Market, compared with 19 firms in the same period a year ago, according to Chinese corporate data service Qichacha.

More capital is also being raised by Chinese fund management firms, which have launched various semiconductor-related funds to funnel the money of retail investors into chip stocks.

ICBC Credit Suisse Asset Management – a joint venture between the state-owned Industrial and Commercial Bank of China, the world’s largest commercial lender by assets, and 166-year-old Swiss investment bank Credit Suisse – last week launched a new fund that is benchmarked on the mainland’s chip stock index.

All these inflows of fresh investment reflect an opportunity for China’s semiconductor industry to cope with the latest US trade restrictions and Washington’s increased scrutiny of firms that form part of the country’s chip supply chain.

The Bureau of Industry and Security (BIS), an agency under the US Department of Commerce, on October 7 implemented updates that further restrict China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors used in military applications, including weapons of mass destruction.

In addition, 31 Chinese tech firms, research institutions and related entities were added by Washington to the US Unverified List. Parties whose bona fides have not been substantiated by the BIS are put on this list, which serves as a trade restriction since those on it are ineligible to receive items subject to the US government’s Export Administration Regulations.

That followed Washington’s directive in September to bar Nvidia and Advanced Micro Devices from supplying their cutting-edge chips to customers in China. In August, the Biden administration enacted the Chips and Science Act to boost America’s IC production capabilities.

“Since the US chip ban, China’s onshore secondary capital market for semiconductor firms has been driven by ‘patriotism’ and potential government support … instead of the short-term cyclical tech cycle,” Natixis economist Ng said. He cited as example the shares of dual-listed SMIC, which fell 0.9 per cent in Hong Kong yet gained 8 per cent in Shanghai since early October.

The Star Market’s chip index, which includes the country’s top 50 semiconductor companies, was down 27 per cent year-to-date as of November 24, according to data from the state-run China Securities Index.

Owing to US trade restrictions, China’s latest batch of semiconductor firms going public are mostly involved in mature IC technologies.

Shanghai-based New Vision Microelectronics, for example, builds display chips and sensors using the 110-nanometre manufacturing process. The products of Shenzhen-based flash memory chip designer XTX Technology are made on the 65nm and 55nm process nodes.

Many of these chip firms up for listing are also focused on the domestic market. Shanghai Southchip Semiconductor Technology Co, whose founding members came from US IC manufacturer Texas Instruments, has Xiaomi Corp and personal computer giant Lenovo Group as clients. SCMP

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