Leading Chinese chip maker Semiconductor Manufacturing International Corp. (NYSE:SMI) has just announced a relatively modest $200 million bond offer, hinting that investor interest may finally be returning to this perennial underperformer after years of disappointment. Not very many people even follow SMIC these days, and I’ll admit that I personally still watch the company because I hope that someday it can realize some of the potential that many once held for it. This latest bond offer looks positive because it’s being underwritten by 2 big foreign investment banks, JPMorgan Chase (NYSE:JPM) and Deutsche Bank (NYSE:DB), meaning demand for the notes is coming from market-driven international investors rather than state-run Chinese buyers.
According to the company’s latest filing, it will issue the 5-year bonds with a conversion price of HK$0.7965. (HKEx announcement) SMIC only says the money will be used for capital spending and general corporate purposes. It adds that state-owned telecoms giant Datang, a major company shareholder, will have the right to purchase bonds allowing it to main its current stake in the company. SMIC is currently majority owned by Datang and other state-run entities, which have propped it up for much of the last 5 years as it struggled to compete with Taiwanese giants TSMC (NYSE:TSM) and UMC (NYSE:UMC) in the in the highly cyclical semiconductor industry.
The new bonds’ conversion price represents a 35 percent premium to SMIC’s last closing price in Hong Kong of HK$0.59. That means the stock needs to rise a relatively modest 35 percent over the next 5 years for bond buyers to make some money. While that sounds modest by most standards, it would mark a relatively solid accomplishment for SMIC, whose shares have traded as low as HK$1.40 over the past 5 years as the company struggled with numerous issues.
This new bond offer comes the same week that SMIC reported its latest quarterly results that look OK to me but certainly aren’t too exciting. The new numbers seem to show that after a surge last year, the company is settling down into a slower growth pattern. SMIC, which became profitable in 2012 after years of losses, said its profit in the third quarter reached $42.5 million. That figure was more than triple a year ago, but represented a sharp pull-back from its profit of $75.4 million in the previous quarter. Other signs were equally so-so, including revenue that grew a modest 16 percent year-on-year but was also down from the previous quarter. Likewise, margins showed signs of steady erosion from peak levels about a year ago.
SMIC’s latest bond offering comes as other faster-growing Chinese firms also issue a steady stream of similar bonds to foreign investors who suddenly seem interested in the Chinese tech story again. Internet leaders Tencent, Baidu (NASDAQ:BIDU) and Ctrip (NASDAQ:CTRP) have made major new bond offerings in the $800 million to $1 billion range in the last year, all of which have been well received by the market. SMIC’s offer is much smaller, reflecting its more limited growth potential and investor uncertainty about its future.
So what do I see in the future for SMIC? The fact that the company has now reported 6 consecutive quarterly profits is certainly a positive, and it does seem to be on relatively solid footing under its current management. This bond offer also indicates that foreign investors are starting to show an interest in SMIC again, though that interest could quickly evaporate if the company returns to the loss column. On the whole I’d say SMIC seems to be back on positive track, and that the company’s shares should have little difficulty rising 35 percent to the level of the conversion price for these new bonds by the time they mature in 2018.
Bottom line: SMIC’s new bond issue shows international investors are regaining interest in the company, though it will remain vulnerable to global industry cycles.