Chinese Chip Companies See Record IPO Activity Amid Growing Competition

The Chinese semiconductor industry is experiencing a surge in Initial Public Offerings (IPOs) due to the government's efforts to promote the development of the chip sector, which has attracted a great deal of investment.

Chip-producing companies and those that make chip-making equipment raised a total of $12 billion from domestic initial public offerings in the year up to December 15th, which is almost three times the amount raised in 2021. Additionally, they have filed for IPOs worth $17 billion in mainland China.

As the United States has taken steps to limit China's involvement in the international technology industry, Chinese chip companies have had to amass larger financial reserves.

In October, the United States government implemented more stringent export regulations on advanced chips and chip-making equipment to China. This was an increase from the prior regulations, which only applied to a limited range of technologies and only to certain Chinese companies such as Huawei Technologies Co. and Semiconductor Manufacturing International Corp. Additionally, the new restrictions made it more difficult for Chinese companies in the sector to employ Americans.

Analysts have noted that the recent strengthening of restrictions on American chip-sector production indicates that China is becoming more and more isolated in its attempts to match the U.S. in terms of advanced technology.

The Chinese government has been pushing to develop the country's chip industry, and this has only increased the enthusiasm of venture capitalists. In 2021, the semiconductor sector was the most popular destination for venture-capital money, as investors expressed their willingness to align with the government's objectives.

Jianchun Cai, the general manager of the Shanghai Stock Exchange, recently asked stock market investors to use their resources to support areas of China that need technological innovation. This request was made during a meeting with institutional investors and securities firms on December 9th.

Lijun Sun, the co-head of global banking for UBS Securities, UBS Group AG’s Chinese securities subsidiary, has attributed the surge in chip IPOs in China this year to U.S. export controls. This has caused Chinese manufacturers to look for local alternatives, which has given investors assurance that the growth of the semiconductor industry in the country is here to stay.

Three years ago, the semiconductor industry in China was dominated by U.S. chip and chip-making companies due to the lack of restrictions on exports to China. However, with the introduction of these restrictions, there has been an increase in the number of domestic startups across the entire industry supply chain, according to Mr. Sun.

Hygon Information Technology Co., a Chinese chip sector company, made the largest IPO of the year in August, raising $1.5 billion. The U.S. Department of Commerce added the company to a list in 2019 that requires American firms to get approval before selling goods or services to them, as stated in their prospectus. Beijing YanDong MicroElectronic Co. followed suit, raising $541 million to build a 12-inch wafer production line mainly using domestic equipment.

The stocks of chip companies that have recently gone public have been doing better than other industries in China in 2021. Data from Wind shows that around 60% of them are trading at least 20% higher than their initial listing price, and another 10% have seen their value double since their listing.

The process of going public in China is often more drawn out than in other markets due to the need for companies to answer multiple queries from regulators. According to The Wall Street Journal's analysis of official data, companies that listed on the Shanghai Science and Technology Innovation Board this year took an average of 186 days to receive approval. The average approval time for the 26 semiconductor companies that have listed this year was 156 days.

Allen Lu, a partner and head of audit for the technology, media and telecom sector at KPMG China, noted that the demand for semiconductors has grown due to the swift advancement of consumer electronics, industrial control, and the Internet of Things.

He noted that the capital market is increasingly showing more interest in investing in the semiconductor industry.

Mulong Gong, managing partner of King & Wood Mallesons’ Beijing office and the head of the firm’s finance and securities group in China, noted that despite some uncertainties in terms of funding and market liquidity, the policy environment for the domestic chip sector is unlikely to shift.

The increase in chip listings has caused a slight increase in the total number of IPOs in China, which is in stark contrast to the decrease in other areas.