SMIC seeks $600 million loan in China after U.S. rejection

Silicon foundry provider SMIC (Shanghai) "is in the final stage with the Chinese government to obtain a loan in the range of $400-to-$600 million," said John Lau, an analyst with Jefferies & Co. (New York), in a report issued on Friday (May 13).

"The funding issue is likely to dissipate some recent negative sentiment on the company's ability to add capacity next year," said Lau, who in the report also lowered his 2005 forecast for SMIC due to the company's exposure in the declining DRAM market.

The banks that SMIC is lobbying for the loan are undisclosed. The silicon foundry provider had been seeking loans to expand its capacity despite a down cycle in the semiconductor industry.

The U.S. Export-Import Bank, a government agency that promotes U.S. exports, still has not agreed to serve as guarantor of a $769 million loan to SMIC. The Export-Import Bank in February effectively rejected a request from SMIC for a $769 million loan guarantee that would have been used to buy chip-making equipment from mainly Applied Materials Inc.

David Parker, a spokesman from U.S. memory maker Micron Technology Inc., recently said the U.S. government should not use U.S. taxpayers' money to export semiconductor jobs to China (see Feb. 15 story). After its U.S. loan application was rejected, SMIC has threatened to buy chip-equipment from Japanese manufacturers.

Meanwhile, Lau has lowered his forecast for SMIC due to its exposure in DRAMs. SMIC makes DRAMs on a foundry basis for Elpida, Infineon, among others.

In April, SMIC reported sales of $248.8 million in the first quarter of 2005, down 14.7 percent from $291.8 million in the prior quarter. SMIC said its net loss increased to $30.0 million in the first quarter of 2005, compared to a loss of $11.2 million in the fourth quarter of 2004.

For Q2, SMIC is projected to lose $39.4 million on sales of $232.1 million, according to Lau. "For 2005, we are increasing our revenue estimate to $1.20 billion from $1.16 billion, but lowering our earnings per ADS to minus $0.21 from $0.17, due to lower assumptions on gross margins attributing to the challenging DRAM market," he said.

"We believe the high exposure to the commoditized DRAM prices will negatively affect the company's gross margins," he said.

"The company reiterated its long-term goal to produce DRAM within the range of 20-25 percent of sales, but as Fab 4 continues to expand, DRAM composition of the company's total sales will be over 35 percent in the next 2 quarters," he added. SMIC's Fab 4 is China's first 300-mm plant.

In a report an executive from Samsung Electronics Co. Ltd. said that the DRAM market is projected to fall 4 percent in 2005 and another 12 percent in 2006.