Investors are casting doubt at the financial health of one of China’s most strategically important technology companies.
Tsinghua Unigroup Co., the foremost company spearheading China’s development in the microchips business, has seen the price of its dollar-denominated debt crater.
According to Bloomberg, Tsinghua Unigroup’s Hong Kong-traded $750 million bonds, due in 2023, plunged to as low as 75 cents on the dollar on Nov. 1 before recovering.
The Shenzhen-listed subsidiary of the company—Unigroup Guoxin Microelectronics Co.—was halted from trading on Nov. 6 after the stock suddenly dropped by 10 percent.
Tsinghua Unigroup, which is among a handful of chipmakers with central government backing, had to release a statement reassuring investors of its liquidity. On a call with investors, it said that it had ample cash on hand, totaling $2.4 billion, and up to $16 billion of undrawn credit lines, according to Bloomberg.
Most importantly, it announced that it had not defaulted on its bonds. Credit Suisse is currently working with Tsinghua Unigroup on extensions related to existing bank loans that the company had issued to Credit Suisse.
The company has levered up in recent years to fuel its growth—mostly accruing its technical know-how by acquiring other companies. Tsinghua Unigroup has issued three series of U.S. dollar-denominated bonds in Hong Kong totaling $1.875 billion in outstanding principal.
Hope for Homegrown Semiconductors
Tsinghua Unigroup is one of China’s most important indigenous companies. It’s the leading Chinese semiconductor developing and producing chips used in a variety of functions including domestically made smartphones and China’s national ID system.
Unigroup is critical to Beijing’s plans of digital self-reliance. Its success has become increasingly urgent as the United States has moved to block Chinese manufacturers such as telecom giant Huawei and security hardware firm Hikvision from purchasing U.S.-made microchips. Unigroup’s homegrown chips are supposed to replace that supply.
In 2015, Unigroup had offered to acquire U.S. chipmaker Micron Technologies for $23 billion. The merger was ultimately scrapped after Washington opposition.
In 2018, the company was able to acquire French chip component maker Linxens—for an estimated 2.2 billion euros ($2.6 billion), according to estimates by Chinese business magazine Caixin, as exact terms were not publicly disclosed. Technology transferred from Linxen forms the bulk of Unigroup’s assets and technical know-how.
In early 2019, Unigroup completed development of China’s first 64-layer 3D NAND flash memory, a major breakthrough given that the technology is currently dominated by manufacturers in Japan, South Korea, and the United States.
Beneficiary of State Backing
Tsinghua University, the elite Beijing-based research university, is a majority shareholder in Unigroup. Xi Jinping and Hu Jintao, the current and previous Chinese Communist Party regime leaders, both attended Tsinghua.
Another major investor in Unigroup is China’s National Integrated Circuit Investment Fund, an investment vehicle launched specifically to support indigenous developments of semiconductors. The fund contributed capital to build Unigroup’s $24 billion memory chip plant currently under construction in Wuhan City, Hubei Province.
The fund, which has around 140 billion yuan ($22 billion) of capital, has concerned U.S. authorities due to its support of Chinese chipmakers that could threaten the global market position of U.S. chipmakers such as the San Diego-based Qualcomm Inc.
Beijing is now fundraising for a second fund to support the chipmaking sector, and interestingly, is soliciting foreign investors to contribute capital. This decision was approved even as disagreements over forced technology transfer and technological competition between China and the United States have been a major cause of the ongoing trade war.
Last year, the United States Trade Representative’s investigation of China’s trade practices detailed Beijing’s aggressive development of its domestic semiconductor sector in order to supplant global competitors, which ultimately led to the administrations’ decision to impose tariffs on Chinese imports.
At the same time, Beijing has been looking to reduce public universities’ stakes in companies such as Unigroup, citing concerns over corruption. In October 2018, Tsinghua Holdings sought to transfer a 36 percent stake in Unigroup to Shenzhen Investment Holdings, an investment vehicle owned by the Shenzhen City government.
But ultimately the sale was not successful and has been shelved indefinitely.
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