Trade dispute dampens SMIC's debut
Shanghai-based chip foundry raises $1.7 billion
By Steve Gelsi, CBS.MarketWatch.com
Last Update: 11:05 AM ET March 17, 2004

NEW YORK (CBS.MW) -- Shares of China's Semiconductor Manufacturing
International dipped below their offering price Wednesday in initial trading
on the New York Stock Exchange.

The silicon-chip manufacturer (SMI: news, chart, profile), known SMIC,
opened at $17 and fell to $16.19, down 4.8 percent, in recent action.
Volume of more than 18 million shares made the IPO one of the most
heavily traded issues on the Big Board.

Dampening the debut was a complaint lodged by U.S. officials against
China under World Trade Organization rules over tax breaks enjoyed
by chipmakers based on the mainland.

"The WTO news worried some people," said Kathy Smith of Renaissance
Capital, which owns the stock.

IPO analyst Francis Gaskins agreed that the trade flap is affecting
shares of SMIC, despite the IPO's kudos on Wall Street as a good
bet on China growth.

Also, the Hong Kong stock market has been trading down in recent
days, which dampens enthusiasm for overseas issues, he said.
SMIC's Hong Kong debut is scheduled for Thursday. See Asia Markets.

As with many foreign IPOs, SMIC priced its IPO days before kicking
off actual trading. Traditional IPOs begin trading the morning after a pricing.

"If the issue doesn't trade up right away, investors all want out --
they're not willing to hold it," Gaskins said.

Still, at $1.7 billion in U.S. proceeds, SMIC qualifies as the largest
tech offering thus far in 2004, and as the third-largest IPO overall in
terms of dollar proceeds.

The Shanghai, China-based firm offered 97.9 million American depositary
shares at $17.50, the top of its $15.50-to-$17.50 range with underwriter CS First Boston.

SMIC has drawn a big following among fund managers such as
Thornburg Investment Management, which praised its four-year-old
track record and quick revenue growth. See full story.

Analyst David Menlow of IPO Financial said the chip foundry outclasses
other recent China IPOs because of its "quality and strength."

Founded in 2000 by 20-year Texas Instruments veteran Richard Chang,
SMIC has already rung up a profit as it's moved to quickly expand its
manufacturing operation.

"SMIC has a first-mover advantage in China, where the market share
of global chip consumption is expected to expand to 24 percent from
14 percent," noted Renaissance Capital in its IPO of the Week column.

SMIC's customers include Samsung (SSNGY: news, chart, profile),
Texas Instruments (TXN: news, chart, profile) and Fujitsu (FJTSY:
news, chart, profile).

"Because of its first-mover advantage and smaller size, SMIC is
expected to grow three to four times more quickly than its peers,"
Renaissance Capital said. "Yet, its proposed valuation represents
a discount to its peers on a price-to-book basis, an often-used
valuation metric in the industry."

The company was funded with $1.7 billion from the Shanghai municipality,
Peking University and some international investment pools.

The Shanghai municipality will be SMIC's largest shareholder after
the offering, holding a 10 percent stake.

Motorola (MOT: news, chart, profile), which also has a purchase agreement
with SMIC, secured a stake in the company when SMIC purchased its Tianjin facility in January.