Shares in Semiconductor Manufacturing International Corp (SMIC) jumped 10.98 percent yesterday on a news report that the Datang Telecom Group may buy a 20 percent stake in SMIC, China's biggest contract chip maker.

A SMIC spokeswoman declined to comment on the report, while Datang Telecom could not immediately be reached for comment. SMIC stock rose as high as HK$0.475 before easing slightly to HK$0.455.

The China Business News quoted an SMIC source as saying Datang Telecom Technology and Industry Group, an affiliate of the parent of Shanghai-listed Datang Telecom, intended to form a cooperative relationship with SMIC and to invest more than 2 billion yuan in the chip maker.

The report also quoted a source as saying Datang may buy 20 percent of SMIC but it remained unclear how much it might pay for the stake.

"That's good news. It will boost the company's cash flow but there's no big impact on improving the fundamentals," said Eric Chen, an analyst at BNP Paribas.

SMIC, which has been making a net loss for most of the past two years, has been affected by punishing price declines for DRAM, or memory chips, used mainly in personal computers. It is now focusing on producing logic and flash memory chips, but weak market conditions are not expected to improve significantly in the near future.

Chen said he was unsure whether SMIC would sell new or old shares. "If the company issues new shares, that will create dilution, but if a shareholder is looking to sell down shares, there might be a possibility that Shanghai Industrial is looking to offload its non-core business," he said, referring to a SMIC shareholder.

SMIC said in late March it was in advanced talks with strategic investors, sparking a rise in its shares from an all-time low. The shares surged a further 42 percent on April 15 as talk heated up that the struggling firm was close to selling a stake to a major investor to sustain it during an expected downturn in the chip sector.

The shares subsequently gave back those gains and dipped to a fresh all-time low of HK$0.395 early this month. Despite Tuesday's news report and the shares' rebound, some analysts remained cautious.

"Even if the report is true, the fact remains that the company is still faced with a number of challenges and will continue to make losses unless there is some significant asset injection," said Castor Pang, a strategist with Sun Hung Kai Financial.

Reuters

(HK Edition 07/23/2008 page3)