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China Semiconductor Bond Bust!

China Semiconductor Bond Bust!
by Robert Maire on 11-25-2020 at 10:00 am

– Tsinghua $198M Bond Bust
– Good for memory: Samsung Micron LG Toshiba –
– Not good for chip equipment
– Could China Credit Crunch hit more than foundry embargo?
– Damage to China memory positive for other memory makers
– Not good for chip equip if customers can’t get money

China Semiconductor Bond Bust

China’s most prestigious leader of the effort to become dominant in semiconductors suffered an embarrassment of defaulting on $198M in bonds that were due Nov 17th. While seemingly a drop in the bucket of overall debt and the fact that they were in the midst of negotiating their way out it still sends shivers through China’s debt market and sent the bonds plummeting.

Tsinghua is not the only state backed Chinese firm with bond troubles which makes the concerns all the more worrisome.

Chinese tech group joins list of companies to default on bond issue

NAND in Wuhan and DRAM in Chongqing
Tsinghua already has a NAND factory in otherwise famous Wuhan and is planning a DRAM fab in Chongqing. They are a spinoff subsidiary of the prestigious Bejing University. They are perhaps the shining star of China’s semiconductor aspirations. Though SMIC has been around a long time it seemed Tsinghua had more potential. Tsinghua Unigroup default tests China’s chipmaking ambitions

Good for non Chinese memory makers like Samsung & Micron, LG & Toshiba

Being in the memory market and having the specter of China entering your market after watching China annihilate the LED & solar cell markets was likely quite chilling. China obviously doesn’t care about profitability (at least not in the beginning) and could easily trash pricing and destroy the commodity memory market just like the commodity LED and solar markets before it.

If I were in Boise I might have a little schadenfreude about the Chinese bond market right now, not unlike TSMC and SMIC.

Anything that slows down China’s aspirations in the memory market is likely positive for other competitors.

Equipment vendors likely between a rock and a hard place in China
Checking accounts receivable.

Semiconductor equipment makers may not be as happy about the bond default and subsequent credit downgrades.

We would bet a lot of money that the equipment makers are likely owed a whole lot more than $198M in equipment purchases and are looking at many times that in future orders and business. So their exposure far exceeds the bondholders.

Unlike the bondholders, equipment makers don’t want to stop shipping to their biggest, best and fastest growing market, that is China.

If equipment makers stop shipping due to credit risk/downgrades or fear of not getting paid then Tsinghua will avoid doing business with them at all costs (its not like there aren’t trying to avoid American equipment already given what happened to their cousins at SMIC).

Equipment vendors have to keep shipping with the hope that the Chinese government will be the backstop, or the company figures it out.

We can only imagine that some CFO’s have to be checking their Tsinghua related accounts receivable exposure.

Credit is all about faith
Too big/important to fail?

Lest anyone forget, the credit market is all about faith. Faith in getting paid back on the loan. The 2008/2009 market collapse was a collapse in the credit market. Faith in ever getting repaid went to zero.

The semiconductor industry is very highly capital intensive and very fickle in cyclical profitability. In addition the would be Chinese chip makers are likely finding out that the semiconductor market is much, much harder than the LED and solar markets which were relative pushovers.

The cost of an LED “fab” and complexity of process is not even a rounding error as compared to making a 128 level NAND chip.

It is likely that getting to yield, meaning getting to revenue, let alone profitability will likely be a lot longer and a lot harder than many in China likely anticipated after the cakewalk in LED and solar.

This means that many Chinese firms could have miscalculated when they would have been able to pay back debt and could find themselves in a cash crunch needing to extend credit terms out some more years/months.

We don’t know what caused Tsinghua’s issue but breaking the faith was not good as their bonds fell all the way down to 68 cents on the dollar at one point. (we don’t think equipment vendors would like to take 68 cents on the dollar owed them).

In the end, Tsinghua, like some US financial firms in 2008/9, is too big/important to fail and the Chinese government will step in at some point. The question is when and how and who will get hurt in the collateral damage

Could the US administer a “Coup de Grace”?
Part of the outgoing, “Scorched earth” policy

It is abundantly clear that the outgoing administration has embarked on a scorched earth policy for various reasons. Much of the scorched earth has been directed at international relations such as potentially attacking Iran, recalling troops and trying to make good on other campaign promises. Trade with China has been talked about as one such target.

The SMIC embargo, announced shortly before the election certainly was effective at hurting China’s chip ambition. Could the embargo be extended to memory, which is certainly capable of potential military “dual use technology” as a parting shot on the way out the door? Or maybe a blanket embargo? If there were a time to hurt China, the lame duck session is it.

The stocks

Most all semi stocks have been super hot as demand continues to be strong. The Tsinghua news is mildly positive for other memory makers as it will likely weaken and or slow China’s memory ambitions and ability to crush memory pricing.

It is likely not all that negative for equipment companies as they have even survived the SMIC embargo without so much as a scratch.

If anything, it may be a hidden positive as it will likely moderate memory spending which drives the notorious boom bust cycles in memory.

TSMC continues to be a huge winner. Micron seems in fine shape as well and would be happy to see Tsinghua go the way of Jinhua, even though we don’t think that will happen.

Equipment companies may see a hiccup or two in revenue recognition but not likely more than that unless things really go off the tracks, like the US upping the ante. While a possibility, we think the administration seems too pre-occupied with other fights with too little time left on the clock.

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