On September 8, Semiconductor Manufacturing International Corporation (SMIC) said it would resume trading after a six-day suspension and announced plans to acquire Semiconductor Manufacturing North China (SMNC).
The next day, SMIC’s A-shares fell 10.26%, while its Hong Kong-listed shares gained 0.17% after climbing as much as 4% intraday. Why did investors in the two markets react so differently to the same deal?
SMIC already owned 51% of SMNC and consolidated it as a subsidiary. In practice, 51% of the unit’s net profit was already attributed to SMIC shareholders. With the new deal, SMIC aims to acquire the remaining 49%, allowing all of its profit to accrue to shareholders.
That 49% stake was held by five state-backed entities: China Integrated Circuit Industry Investment Fund (32%), Wuxi Zhixin Integrated Circuit Investment Center (9%), E-Town Capital (5.75%), Zhongguancun Development Group (1.125%), and Beijing Industrial Investment (1.125%). Once the deal closes, these entities will no longer hold shares in SMNC.
However, this does not mean they are exiting entirely. SMIC structured the deal as a share swap, issuing new shares to acquire the five state investors’ stakes. As a result, the entities will become SMIC shareholders, with a 12-month lock-up period.
The preliminary plan also disclosed financial data for SMNC. In 2024, it generated RMB 12.98 billion (USD 1.8 billion) in revenue and RMB 1.68 billion (USD 235.2 million) in net profit. Operating cash flow reached RMB 6.34 billion (USD 887.6 million), with a debt ratio of 8%.
SMIC did not disclose the total transaction value, which is calculated as the number of new shares issued multiplied by the issue price. It did reveal the issue price: RMB 74.2 (USD 10.4) per share, or 80% of the average A-share price over the 120 trading days before pricing. That was nearly 35% lower than SMIC’s pre-suspension closing price of RMB 114.76 (USD 16.1). Since the total deal value remains uncertain, the acquisition’s price-to-earnings ratio cannot yet be determined.
In general, issuing new shares when stock prices are high is often viewed negatively for three reasons: it can signal overvaluation, dilute earnings per share (EPS), and create pressure because of the discounted price. For SMIC, however, the new shares are being used to acquire minority stakes in an existing subsidiary, not to raise cash. This reduces concerns about cashing out. Instead, investor focus has shifted to EPS dilution and the steep discount.
From a signaling perspective, the willingness of state-backed investors such as the Big Fund to accept shares at RMB 74.2 suggests they see that level as reasonable. For A-share investors, however, the price was far below the pre-suspension trading level, fueling concern. For Hong Kong investors, SMIC’s stock was at just HKD 58.15 (USD 7.5) on September 8, below the A-share issue price. To them, the deal implied potential EPS upside and was therefore viewed more positively.
Ignoring share-weighting effects, EPS after the deal can be approximated as post-acquisition net profit divided by the total of new and existing shares. Since the number of new shares is calculated as transaction value divided by issue price, a lower deal value and a higher issue price both reduce dilution and may even boost EPS.
For A-share investors, the RMB 74.2 issue price was far below the RMB 114.76 pre-suspension close, which raised concerns despite the absence of deal value disclosure. For Hong Kong investors, however, that same RMB 74.2 translated into a premium over the local market price, making the deal look accretive.
Still, with only the issue price disclosed, it is too early to say definitively whether EPS will be diluted or enhanced. A simple calculation shows that for EPS to remain unchanged in 2024, SMIC would need to issue about 1.78 billion new shares at RMB 74.2, valuing the transaction at RMB 132 billion (USD 18.5 billion). This would imply a valuation of nearly RMB 270 billion (USD 37.8 billion) for SMNC, or a static price-to-earnings ratio of around 160.
Given that SMNC is a mature chip foundry with steady cash flows and limited recent capital expenditure, such a high valuation seems unlikely. The final acquisition price is likely to be lower, which would make the deal EPS-accretive. If the transaction value comes in well below the upper estimate, the acquisition could shift from being seen as a risk to being viewed as a clear positive for SMIC shareholders.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Fan Liang for 36Kr.