Hua Hong Semiconductor (HK: 01347) shares are up 6.8% in Hong Kong this morning. Which is an odd reaction to the news that it is about to issue many more shares. Normally - as is usual with most things, not just stocks - the more of something there is around then the less each one is worth. So, the usual reaction to a new share issue is that the old shares go down in value. Yet here we've exactly the opposite happening.
For the cause here really is that issuance of more Hua Hong stock: “China's second-largest chip foundry, Hua Hong Semiconductor Ltd (1347.HK), said it had received Shanghai Stock Exchange approval for a planned public share sale worth $2.6 billion, which would be the year's biggest mainland listing so far.” That's pretty substantial issuance there. The background to this is: “comes amid a capital raising rush by Chinese chipmakers as Beijing seeks self-sufficiency in an escalating technology war with Washington.” a capital raising ruch is one way of putting it - chip fabs simply eat capital, a full scale and modern one is running in the $8 to $10 billion range these days. The reason for that should be fairly obvious. The raw material for silicon chips is a bit of copper plus some beach sand - no, really, just sand. Almost all of the cost is in fact in the capital required to build the plant to do the transformation.
Hua Hong Semiconductor share price from Hong Kong Stock Exchange To economic types the big interest here is that Hua Hong is going to tap domestic Chinese capital - the listing and IPO will be on the Shanghai exchange, not Hong Kong or US and so on. That means not just domestic manufacture of the semiconductors but the financing from domestic capital as well. There's a certain economic interest in seeing how deep that domestic capital pool actually is and how much of it wants to be in semiconductors.
In the detail and in the right now the point here though is that yes, semiconductor companies inside China are going to need vastly more capital in order to create that entirely domestic industry. This should - more shares in issue are indeed more shares in issue - depress the stock prices of the domestic semiconductor manufacturers. Yet here we have such a stock price rising on being allowed to issue more shares, raise more capital. Which tells us that the permission to be allowed to issue more shares is a valuable permission. The constraint on capital raising is that issuance of that permission - that why the shares rise on the news of the issuance of the permission.
It is an oddity but that's just how that economy works.
