TELECOMS: Unigroup Eyes MediaTek, Chip Plant Construction

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Bottom line: Unigroup’s aim of building a telecoms and memory chip giant through strategic tie-ups and plant construction could provide challenges for global leaders like Qualcomm and Samsung.

Unigroup affiliate eyes new chip factory

Tsinghua Unigroup has leaped from obscurity to become a major headline grabber over the last 2 years, by snapping up a series of global and domestic assets aimed at building a Chinese chip maker that could someday rival the likes of Qualcomm (Nasdaq: QCOM) and Intel (Nasdaq: INTC). That spending binge continues this week with 2 new headlines, led by comments from Unigroup’s top executive saying he would consider a bid for Taiwan’s MediaTek (Taipei: 2454), one of world’s top makers of chips used in smartphones. In the other headline, a China-listed Unigroup affiliate has just said it plans to raise up to 80 billion yuan ($12.7 billion) to build new chip plants.

All of this comes just a week after Unigroup announced another $600 million deal to purchase a quarter of Taiwan’s Powertech (Taipei: 6239), which engages in the relatively low-end business of test and assembly services for microchips. (previous post) These latest headlines are the clearest indication yet that Unigroup and its affiliates have strong backing from Beijing. I say that because most of the funds being raised in a newly announced private placement by Tongfang Guoxin Electronics (Shenzhen: 002049) are coming from state-run sources. 

Such government connections could make it difficult for Unigroup to convince skeptics in Washington and Taipei that it’s a purely commercial entity. As a result, many of the bigger deals that Unigroup is pursuing could ultimately be blocked on national security grounds, and the company may have to settle for building up its own chip empire using know-how acquired through strategic alliances.

That strategy appears to be taking shape based on these 2 latest headlines, starting with the massive 80 billion yuan fund-raising plan by Tongfang Guoxin, which is also part of Tsinghua, China’s leading sciences university. Tongfang disclosed the plan in a stock exchange filing, saying it would aim to sell up to nearly 3 billion shares for 27.04 yuan each. (English article; company announcement)

Of the 8 companies that would buy shares in the private placement, 6 were controlled by Tsinghua Holdings, another business affiliate of Tsinghua University that would also be the controlling shareholder of Tongfang Guoxin after the deal. The filing adds that at least 60 billion yuan, or three-quarters of total raised, would go to the building of plants to make memory chips.

MediaTek in Focus

Next there’s the other Unigroup news that came out earlier this week when the company’s talkative Chairman Zhao Weiguo said he would be interested in acquiring MediaTek, a world leader in lower-cost smartphones microchips that compete with higher-end products from Qualcomm. (Chinese article) Zhao reportedly said he would be interested in combining MediaTek with Spreadtrum and RDA Microelectronics, 2 smaller China-based chip design houses that Unigroup acquired in 2013 at the start of its buying spree.

MediaTek later responded that it would be interested in cooperating with Unigroup, in acknowledgement that an actual takeover would almost certainly be vetoed by Taiwan on national security grounds. With a current market value of about $13 billion, MediaTek would be large but not impossible for Unigroup to purchase. After all, Unigroup was also reportedly mulling a larger $23 billion bid for leading US memory chip maker Micron (Nasdaq: MU) earlier this year, and only abandoned the effort due to political sensitivities.

I’ve previously said that Unigroup’s efforts looked a bit fragmented as they come in a wide range of areas. But these latest headlines provide the clearest indication yet that it wants to build up a design and manufacturing base for telecoms and memory chips using know-how acquired from a range of strategic partners.

Those partners include not only Spreadtrum and RDA, but also Intel, which formed an equity tie-up with Unigroup last year and is now converting one of its China chip plants for memory chip production. (previous post) The combination of all these partners and easy access to billions of dollars in government cash could be a potent one, meaning global leaders like Samsung (Seoul: 005930), Micron and even Qualcomm could soon be looking at a formidable new competitor on the global stage.

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