Tech Market WatchBy Perry Wu
Lately, investigating China-based technology companies listing overseas has been a busy job. But unfortunately I have yet to see much good of any of these newly minted companies. Shanda stinks, Linktone can look no further than the next quarter, and now if you have been looking for that one stock that can really cripple your portfolio, then look no further than the recently-listed Chinese tech IPO, Semiconductor Manufacturing International Corporation (SMIC).

This stock has much to offer to help you choose that really poor-quality stock you may have been desiring.

SMIC debuted its IPO just two months ago in May 2004 at over US$15, raising far north of US$1 billion, and its stock has been down ever since. It closed on Friday, May 14 at US$10.99.

The company is one of the largest semiconductor foundries in the world, meaning it produces semiconductor wafers that fit into its technology customers' semiconductor designs. Motorola currently holds an 8% stake in the company.

To start with, the company has a virtually unknown brand name, unfamiliar to just about all Chinese. Unlike other Chinese tech stocks, such as in the consumer-related Web area covered by companies like and that do have a recognizable name, SMIC is not known by the overwhelming majority of Chinese computer users. This is partly because SMIC is a B2B company, but ultimately its demand among its business customers is driven by demand by end-users, regardless of whose brand is on the chip. End users have no reason to choose a computer chip manufactured by SMIC over a design by another company.

But you say that SMIC really doesn't need to worry about it's brand because it is only providing no-name chips for big-name brands? If a company has no brand, then that makes it a commodity, so it must compete solely on price. The only way competing on price is viable is if the company has enough pricing power to command a profitable price. Do you follow?

But in this, SMIC is a flop. There are just too many competitors in the Chinese market making exactly the same product as SMIC, such as Taiwan Semiconductor Manufacturing, Chartered Semiconductor, United Microelectronics, and even IBM.

And SMIC seems to have gone out of its way to make investing in the company as complicated as possible. There are a grand total of seven different share classes of stock to choose from, not including the warrants it has so generously issued to executives. These share classes are probably there as a legacy of giving certain past investors a stake in the company before it went public. But the result is only confusion. Doubtless, SMIC's CEO probably does not even understand what each individual share class means, much less an outside investor.

Then there is the biggest shareholder wealth destroyer of all: the constant, insatiable demand for capital expenditures. The company spent half a billion (USD) in capex in 2003 alone and shows no let-up. Unfortunately, the breakneck pace of change in the semiconductor industry will make the capex obsolete in no time. So although SMIC's books show the capex as an asset, it is an asset that quickly becomes worthless.

Add to all this, SMIC had been losing money for its entire history, with its greatest loss coming in 2002 when it lost more than US$100 million. Miraculously, as the company was preparing its IPO in the first quarter of 2004, it managed to eek out a profit for the quarter of US$27 million. But with close to US$3 billion of equity, the company is earning an annualized return of capital of around 3%. SMIC could get a similar return by putting its capital in a bank CD, with vastly reduced risk.

About the only thing going for SMIC is its size. The promoters of the company, by cobbling together numerous disparate factories in China, created a company that is only integrated in legal terms. This is hardly the lean, mean, seamlessly organized manufacturing operation that is needed to compete in the hyper-competitive semiconductor space. As more foreign competitors come into China, SMIC will only find itself in a deeper hole.

Even calculating inflation, investors can probably get a higher return by placing their money under a mattress.

About the author:
Perry Wu is a writer and correspondent for and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.


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