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Can SMIC Overtake Kweichow Moutai?

After being listed on Shanghai’s Star Board on 16 July, Semiconductor Manufacturing International Corporation (SEHK: 981) (SSE: 688981), also known as SMIC, has skyrocketed.

It’s considered to have a market capitalisation of more than RMB 600 billion (US$85.7 billion) by one Chinese securities brokerage.

This new Shanghai-listed company ranks 11th in the league table of Chinese A shares by market value, and enjoys a trading volume of around RMB 9.7 billion every day.

Securities analysts from China Guosen Securities pointed out that SMIC will be worth more than Kweichow Moutai Co Ltd (SSE: 600519) in the future – currently the largest listed A-shares company.

The analysts also say that its valuation will exceed semiconductor foundry leader Taiwan Semiconductor Manufacturing Company (NYSE: TSM) (TPE: 2330), also known as TSMC.

Here, I’ll take a closer look at the legitimacy of this bullish claim for SMIC.

The uniqueness of SMIC

According to the report issued by the Chinese securities brokerage, SMIC’s 8-inch wafer (a thin slice of semiconductor used for the fabrication of integrated circuits to manufacture solar cells) has strong demand in domestic China.

This demand comes from products such as contact image sensor (CISs), power management integrated circuits (PMICs), and fingerprint recognition, to name just a few.

This chip-making technological know-how is considered as state-sensitive since the beginning of the US-China trade tensions.

China has been looking to decouple from the US and Taiwan and push for its own semiconductor industry, whereas Moutai is a distilled Chinese liquor with roots in the Qing Dynasty. It has an advanced distilling technique and remains vastly popular in China.

However, unlike semiconductor chips, I think Moutai is replaceable by other spirits producers and requires less labour intensity to produce one unit. Thus, SMIC has a higher value in that sense.

Valuation of SMIC

The securities brokerage also pointed out that different markets have its own way to evaluate semiconductor foundries.

With China’s unique market structure, reference should be made to the technology companies listed on the tech-focused Star Board.

In the case of comparing SMIC against China Resources Microelectronics (SHA: 688396), SMIC’s share price should at least grow three times its present value based on the full connectivity between Hong Kong and China’s stock markets.

My view is that future growth can be expected but investors should stay rational for now by looking at its financial status.

Overrated business performance

It is worth mentioning that although SMIC’s H-share (Hong Kong-listed) stock price jumped before the A share listing, the market is aware of its business performance falling behind global rivals.

TSMC’s 7-inch nanometer chips took 52.7% of total market share globally while SMIC has a different market segment in China and Hong Kong.

Its 55/65 nanometers and 40/45 nanometers chips only account for 32.6% and 14.9%, respectively. If SMIC fails to deliver results, it may have a negative effect on its valuation and mid-term share price.

Foolish conclusion

In my opinion, SMIC could easily be worth more than Moutai, but it may take some time to surpass TSMC.

The reason why TSMC remains the world’s best semiconductor foundry is because of its dominant technology advantages and capacity to produce efficiently.

It is fair to say that SMIC will catch up given its status of becoming a strategic asset. With the backing of the state, value investors can closely monitor its business performance and see whether it supports its high valuation going forward.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Edmund R doesn’t own shares in any companies mentioned.