Alibaba & Nvidia – Government hassles.

Alibaba: a bail-out to win favour?

• The fact that news of an Alibaba-led consortium being the lead contender to bail out failed chipmaker Tsinghua Unigroup sent the shares down 5% tells investors everything they need to know about this transaction.
• Tsinghua Unigroup is just another example of how problematic China’s strategy to become self-sufficient in semiconductors has become.
• While the rest of the industry is experiencing unprecedented demand for its products which combined with shortages should lead to excellent profitability, Tsinghua is flirting with bankruptcy.
• This is a classic sign of a very badly run company just like Lucent which was unable to make any money during the internet boom between 1999 and 2000.
• Tsinghua Unigroup is a fabless semiconductor company that is jointly owned by Tsinghua Holdings (ultimately state-owned) and Beijing Jiankun, a private investment company
• It has made a series of acquisitions over the last 8 years including Spreadtrum (mobile chips), Lixens (French RFID & biometrics chips), and H3C Technologies (cloud infrastructure provider bought from HP) in order to accelerate China’s evolution to self-sufficiency in semiconductors.
• Tsinghua’s debt maturities stand at just over RMB80bn which are due within 1 year which in the original plan for the company should have been easily paid down.
• However, the strategy has obviously gone so badly wrong, that retiring this debt will bankrupt the company and it would appear that no one wants to roll the debt to a longer maturity.
• Despite strong state backing, it is clear that President Xi’s administration does not want to bail it out and is leaving this to the private sector whom I suspect have been “encouraged” to bid.
• Alibaba has no need of this white elephant having recently produced a cutting-edge chip for servers which it is designing itself for TSMC 5nm manufacturing process.
• In fact, I suspect that it would be a negative value contributor to the overall value of Alibaba given Tsinghua’s torrid history and current financial predicament.
• However, this failure is a thorn in the side of the government as well as an embarrassment, and if Alibaba is seen to be clearing up this mess, then this may improve its standing as a good corporate citizen.
• This would greatly lessen the risk of further regulatory censure (which I think is already very low) and allow the company to continue thriving.
• Taken in that light and given how much value regulation has already cost Alibaba, this may be an investment worth making.
• In the grand scheme of things, this does not affect the investment case for Alibaba significantly which continues to be greatly skewed to the upside.
• I remain a holder.

Nvidia Q3 2021 – Arm wrestling with the state(s).

• Nvidia reported excellent results but now the FTC is raising concerns about its acquisition of Arm which just further increases the headache that this acquisition has become.
• Q3 2021 revenues / Adj-EPS were $7.1bn / $1.17 nicely ahead of forecasts of $6.81bn / $1.11 as the cloud and AI themes continue to drive sales and the shortage served to keep pricing high.
• Q4 2021 is also likely to be good with revenues of $7.4bn expected which is comfortably ahead of expectations which is what underpinned the 5% after-hours rally in the shares.
• However, now the FTC has now raised concerns with regards to the acquisition of Arm presumably following complaints from Qualcomm, Intel, and Microsoft who are the highest-profile opponents to the deal that I am aware of.
• While I do not think that the FTC will be the biggest hurdle to the deal, it will slow things up further and the Chinese regulatory process has only just begun.
• There are some reports that some of the users of Arm’s IP in China have raised concerns with the transaction which could mean further headaches.
• SoftBank will be keener than ever to get this transaction done because the rally in Nvidia’s share price since the deal was announced has increased the acquisition price from $38.5bn to $76bn.
• If the deal were to fail, the consequences would be pretty bad for SoftBank.
• I still think that a deal can be done as there are examples in the industry where issues like these have been successfully dealt with but the regulatory outlook is looking increasingly cloudy.
• Nvidia now has to deal with concerns from the UK, EU, USA, and probably China meaning pretty much everybody.
• The simplest solution to SoftBank’s ownership of Arm is to put it back where it found it on the London Stock Exchange, but it is now abundantly clear why SoftBank does not want to go down this road as it will never achieve $76bn on the LSE for Arm.
• The deal can close but it remains to be seen how the remedies that Nvidia puts through to keep the regulators quiet impact the benefits and synergies of having the two companies under one roof.
• The regulators remain by far the biggest hurdle to getting the deal done as the CMA and everyone else continue to demonstrate.