Date
21 January 2017
Chipmakers are is still losing money while manufacturers of smartphones and other mobile devices are making a killing in the market. Photo: Xinhua
Chipmakers are is still losing money while manufacturers of smartphones and other mobile devices are making a killing in the market. Photo: Xinhua

What’s keeping investors from embracing chipmakers?

There have been many articles recommending stocks to readers, but how could the truly valuable ones be that many?

The more useful suggestions are those that recommend the opposite — avoid stocks with a high chance of losing money.

As long as you don’t lose money, you can wait for profit to come someday.

Investors chased Semiconductor Manufacturing International Corp. (SMIC, 00981.HK) when it listed in Hong Kong in 2004.

It successfully raised more than HK$13 billion (US$1.67 billion) but it recorded losses in six of the next 10 years, wiping out more than HK$10 billion of market capitalization.

The company also issued new shares worth about HK$7 billion during the period at half the listing price.

Nonetheless, the stock continues to trade robustly and some analysts have even recommended it.

So when individual investors are compared to sheep, it’s not for nothing.

Is the semiconductor industry benefiting from the global trend of smart investing?

Why are chip companies still losing money while makers of smartphones and other mobile devices are making a killing in the market?

The reason is that investors buy into companies, not industries.

Different companies in the same industry can have different performances on the stock market.

The semiconductor industry is too complicated and only insiders can figure it out.

Which is why shareholders often ask themselves if they really want a company they don’t understand.

By contrast, there are only three carriers and a few internet giants that dominate the mainland’s internet industry.

Will it be easier to pick a stock in this sector?

Missing a chance to make money is not the same as losing it.

In the case of SMIC, why would anyone buy a stock they don’t understand?

Volatility, frequent sales of new shares — none of these is good news.

Investors are better off investing in industries with a high threshold.

Although demand for chips is high, chipmakers will not succeed unless they continue to invest in research and development.

Let’s look at two industry leaders — Taiwan Semiconductor Manufacturing Co. Ltd. and Qualcomm.

The former has risen about 150 percent in the past decade while the latter has grown less than 30 percent.

The semiconductor industry is not an isolated case. 

In fact, most industries are not very competitive in the free economy.

The great era of Chinese exports is past and commodity prices are coming back down to earth.

Commodities such as iron, cement, coal and aluminum have become standard products.

The only thing manufacturers can do is wage a price war. In the past, frequent shortages pushed up prices.

But the commodity super cycle peaked in 2011. Since then, we have seen how the share prices of commodity traders have performed.

Meanwhile, utilities companies only have to win the competition once and avoid it for a very long time.

Don’t you think you have a better chance to make a profit by putting your money in competitive businesses?

This article appeared in the Hong Kong Economic Journal on Sept. 23.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/RA

Columnist at the Hong Kong Economic Journal

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