China’s Chipmaker Mania Grows With Cambricon Surging 350% on Debut

(Bloomberg) --

Chinese chipmakers have surged in the past year, boosted by Beijing’s support for self-sufficiency in semiconductors and as adoption of 5G and artificial intelligence prove resilient amid the pandemic. There’s no sign that rally is about to slow even as their stocks looks increasingly expensive.

Cambricon Technologies Corp. Ltd., a developer of AI chips, rose as much as 34% today, extending its first-day surge of 230% on the Shanghai Stock Exchange’s STAR board. It follows top chipmaker Semiconductor Manufacturing International Corp., which jumped 202% on its Shanghai debut last Thursday. Other chip stocks that have also rallied include Advanced Micro-Fabrication Equipment Inc., which has posted gains of about 139% since the start of this year, while Will Semiconductor Ltd. and Gigadevice Semiconductor (Beijing) Inc. are the fifth- and seventh-best performers on the CSI 300 Index in the past twelve months.

That’s left chipmakers trading at lofty valuations. SMIC’s first-day surge meant its Shanghai stock has a price-to-earnings multiple of 278 times, more than three times that of its Hong Kong-traded securities. Advanced Micro-Fab is trading at about 400 times forward earnings, compared with 13.9 for the Shanghai Composite Index. Still, local investors are looking past the high valuations and any concerns over rising U.S.-China tensions and are instead banking on Beijing’s support for the semiconductor industry as it seeks to reduce reliance on American technology.

“These kind of high valuations will become a new normal during a three to five year period when the industry is still developing and remains backed by supportive government policies and access to capital financing,” said Kevin Wang, vice president and semiconductor analyst at Mizuho Securities Asia Ltd. “If they can maintain their current growth rate then definitely the PE and share prices will continue to rise. This is likely to occur as China accelerates its localization.”

To accomplish this goal, the government last year created a $28.9 billion semiconductor investment fund and has also provided subsidies and introduced supportive policies for the industry. Adding to that is a post-pandemic explosion of government and private sector investment in 5G wireless networks, cameras and sensors and AI software, spurring continued bullishness among domestic investors.

Advanced Micro-Fab rose as much as 11% today, its biggest intraday gain in two weeks. Will Semiconductor and Gigadevice climbed more than 1% earlier today.

Outside mainland China, some investors may be turning more cautious. SMIC’s shares slumped 25% in Hong Kong on the day its Shanghai stock debuted and are down about 33% from the record reached July 13. The H-shares are trading at about HK$29.25, or the equivalent of about 26.38 yuan, about a third of its shares on the mainland.

The discrepancy between the valuations of semiconductor companies in Shanghai and Hong Kong is driven by onshore Chinese investors that believe domestic localization will drive future investment into the industry, according to Nicholas Yu, a portfolio manager at Ovata Capital Management Ltd.

“For unique technology in China, people are very willing to pay a premium for it because whatever earnings they have right now aren’t indicative of future earnings power,” he said.

©2020 Bloomberg L.P.