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Hua Hong Semiconductor's Stellar Star Market Debut Driven by Chip Self-Sufficiency Goals

Hua Hong Semiconductor, the world's second-largest initial public offering (IPO) this year, achieved a remarkable debut on mainland China's Star Market, defying expectations despite being issued at twice the price of its Hong Kong-listed shares.

The fervour among mainland investors for China's pursuit of chip self-sufficiency played a significant role in propelling Hua Hong's impressive start.

Emerging as mainland China's second-largest semiconductor manufacturer, Hua Hong Semiconductor commenced trading in Shanghai at 58.88 yuan, a notable 13% higher than its offer price of 52 yuan. This resounding success was further underlined by the stock's morning trading surge of up to 15%. As the trading session paused, the stock remained 5.5% higher at 54.86 yuan, with approximately 46 million shares changing hands, equivalent to 44% of its free-floating shares.

The stellar debut marks a staggering 145% premium compared to Hua Hong's Hong Kong-listed H shares, which experienced a concurrent 7% decline, trading at HK$24.45 in Hong Kong. This trend echoes the debut performance of its larger counterpart, Semiconductor Manufacturing International Corporation (SMIC), the mainland's leading chip maker. SMIC achieved a record-breaking IPO on the Star Market in July 2020, raising 53.2 billion yuan (US$7.4 billion), and experienced a remarkable 246% surge in its share price upon trading debut on July 16, 2020.

Ivan Li, a fund manager at Loyal Wealth Management in Shanghai, commented, "Traders had all expected a first-day jump in Hua Hong shares because of the high profile of the chip industry. They believe that the country’s top chip makers will be able to catch up with foreign rivals sooner or later."

Hua Hong Semiconductor's IPO generated net proceeds of 21.2 billion yuan by floating 408 million shares on the Nasdaq-style Star Market of the Shanghai Stock Exchange. This surpassed its initial target of 18 billion yuan, driven by robust demand that saw local investors oversubscribe to the shares by an impressive 142 times. Notably, the state-backed National Integrated Circuit Industry Investment Fund, commonly known as the Big Fund, made a substantial investment of 3 billion yuan in Hua Hong's Shanghai share sale.

The IPO stands as the largest on the mainland stock market for the current year, and it ranks as the second-largest globally, trailing only the US$4.37 billion offering by US consumer health company Kenvue, according to Bloomberg data.

Hua Hong Semiconductor's success aligns with a broader trend where investors seek opportunities through thematic investments, particularly in areas such as China's tech self-reliance and artificial intelligence. China's CSI 300 Index has witnessed a modest 3% increase this year, lagging behind other major benchmarks in the region, such as Japan's Nikkei 225 and Taiwan's Taiex, which have surged more than 20% during the same period.

This move also resonates with Beijing's strategic efforts to bolster domestic semiconductor manufacturers' access to capital markets, facilitating their growth as part of a broader initiative to reduce reliance on cutting-edge foreign technologies.

While Hua Hong Semiconductor may trail advanced international chip foundries like Taiwan Semiconductor Manufacturing Co., its well-established technologies, spanning the 55-nanometre process node to 28nm systems, cater to applications in automobiles, home appliances, and general consumer electronics. The IPO proceeds will primarily be allocated towards expanding capacity at the company's Wuxi foundry, which presently produces 65,000 wafers per month. Additionally, Hua Hong operates three 8-inch wafer fabrication plants in Shanghai.

At the close of 2022, Hua Hong Semiconductor's combined production capacity reached 324,000 8-inch-equivalent wafers per month, up from the previous year's 313,000.

Analyzing the situation, Li Hui, an analyst at Huajin Securities, stated, "With the policy push and the development on the domestic replacement in the semiconductor industry, demand for wafers from China’s chip-design firms will remain strong. Hua Hong is expected to be a big beneficiary as a key foundry supplier."



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