Who understands SMIC's acquisition plan?

On the evening of September 8th, after a six - trading - day suspension, SMIC announced the resumption of trading and released a preliminary plan for the acquisition of SMIC North.

The next day, the A - share price of SMIC dropped by 10.26%, while the H - share price of SMIC closed up 0.17%, with the highest intraday increase even exceeding 4%.

So, why do the A - share and H - share capital markets have such different attitudes towards this transaction?

The "National Team" Hasn't Left

In terms of the transaction background, SMIC originally held 51% of the equity in SMIC North and accounted for SMIC North as a subsidiary. Simply put, 51% of SMIC North's net profit would be included in SMIC's attributable net profit and shared by SMIC's shareholders.

This time, SMIC will acquire the remaining 49% of the shares in SMIC North. In this way, all of SMIC North's net profit will be shared by SMIC's shareholders.

The remaining 49% of the shares in SMIC North were originally held by five state - owned enterprises, namely the National Integrated Circuit Industry Investment Fund (32%), the Integrated Circuit Investment Center (9%), Yizhuang State - owned Assets Investment Co., Ltd. (5.75%), Zhongguancun Development Group Co., Ltd. (1.125%), and Beijing Industrial Investment Management Co., Ltd. (1.125%). After SMIC completes this acquisition, these five state - owned enterprises will also withdraw from the shareholder list of SMIC North.

However, this does not mean that these five state - owned enterprises are cashing out and leaving.

In terms of the transaction method, SMIC adopted the form of a share - swap transaction, that is, it used its newly issued shares to exchange for the shares in SMIC North held by the five state - owned enterprises. Therefore, after the transaction is completed, the National Integrated Circuit Industry Investment Fund, the Integrated Circuit Investment Center, etc. will become shareholders of SMIC, with a lock - up period of 12 months.

The preliminary transaction plan also disclosed the core financial data of SMIC North. Looking specifically at the performance data, SMIC North's operating income and net profit in 2024 were 12.979 billion yuan and 1.682 billion yuan respectively. The operating cash flows in 2023 and 2024 were 6.204 billion yuan and 6.34 billion yuan respectively, and the asset - liability ratio was only about 8%. It is a typical cash - cow asset.

Screenshot of the announcement

In terms of the specific transaction price, SMIC did not disclose the total transaction price (number of newly issued shares * issue price) in the preliminary plan, but disclosed the unit price of the transaction (issue price). The issue price was calculated at 80% of the average A - share trading price (92.75 yuan per share) in the 120 trading days before the pricing benchmark date, which was 74.20 yuan per share. This price was nearly 35% lower than the closing price of SMIC's A - shares before the suspension. Since the total transaction price has not been fully confirmed, the price - to - earnings ratio of the acquisition cannot be confirmed for the time being.

Why Do the H - shares and A - shares Have Different Trends?

When a listed company issues shares during an upward price trend, it is often regarded as a negative signal by the capital market. The reasons mainly come from three aspects: it implies that the stock price may be overvalued, it may dilute the earnings per share (EPS), and the discount on the issue price creates a psychological pressure level.

For SMIC, the newly issued shares are mainly used to purchase the minority stake in its subsidiary, not for newly planned investment projects, which does not fully match the motivation of "cashing out at a high price". Therefore, the market's focus on SMIC's share - issuance and acquisition plan is more on whether it will dilute the EPS and the psychological pressure caused by the discount on the issue price.

Psychologically, the fact that the National Integrated Circuit Industry Investment Fund, the Integrated Circuit Investment Center, etc. are willing to accept SMIC's shares at a price of 74.20 yuan per share means that these companies consider this a relatively safe price. For SMIC's A - share shareholders, this price is lower than the current stock price, while for H - share shareholders, it is the opposite. This also leads to different attitudes of investors in the two markets towards SMIC's acquisition plan.

Looking at the impact on EPS, simply put, without considering the weighted impact of shares, EPS = attributable net profit after share issuance / (total number of shares before share issuance + number of newly issued shares), where the number of newly issued shares = total transaction amount / issue price. Therefore, for investors, the lower the total transaction amount and the higher the issue price, the less likely the EPS will be diluted, and it may even increase.

For SMIC's A - share investors, the issue price of 74.20 yuan per share in this transaction is significantly lower than the closing price of 114.76 yuan per share when SMIC announced the trading suspension on August 29th. Although the total transaction amount has not been determined yet, this relatively low issue price has already had an impact on A - share investors.

In the H - share market, the price of SMIC's H - shares has always been at a discount compared to its A - shares. On the evening of September 8th, the price of SMIC's H - shares was only HK$58.15 per share. Therefore, for H - share market investors, the issue price of SMIC's A - shares is relatively high, which is instead interpreted as a positive factor for EPS growth.

However, as mentioned above, since the consideration for this transaction has not been determined, it is still unclear whether it is positive or negative for EPS based only on the known issue price. According to the above simple EPS calculation method, if the company's EPS in 2024 is to remain unchanged, SMIC needs to issue approximately 1.78 billion new shares at a price of 74.20 yuan per share, corresponding to a total transaction amount of 132 billion yuan, a valuation of nearly 270 billion yuan for SMIC North as a whole, and a static price - to - earnings ratio of about 160 times for the acquisition.

Considering that SMIC North is a wafer fab with mature processes, with relatively stable cash flows, and the company's low asset - liability ratio indicates that it has not made large - scale capital expenditures in recent years, it is difficult to give it a high valuation. Therefore, the acquisition consideration is likely to be lower than the above - estimated amount. That is to say, this acquisition is likely to have a positive impact on SMIC's shareholders' EPS. If the transaction consideration is significantly lower than the above - estimated price and has a significant positive impact on EPS, then this acquisition may still turn out to be a positive factor for SMIC.