Socionext: rare Japan chip listing comes just as sector peaks

A chip company has completed the biggest initial public offering in Japan so far this year. Shares in microprocessor designer Socionext rose more than 11 per cent on its Tokyo debut on Wednesday despite market declines. The pop is more a reflection of the lack of new listings in the local market than the long-term prospects of Socionext.

The company, which develops customised systems-on-chips, has enjoyed growing demand for its designs amid a boom in the automotive chip market in recent years. The gains come even after the shares priced at the top of the marketed range.

This is a surprisingly good time for Socionext to float in Japan, where there has been an 80 per cent decline in funds raised through public offerings this year. This means pent-up demand from investors, who have piles of cash to deploy. The yen fell to fresh 24-year lows on Wednesday, improving the competitiveness of exports. That should help Socionext overseas. 

The shares remain fairly priced. Gains on Wednesday would give the company a valuation of over ￥320bn ($2.2bn). Its enterprise value of around 3 times total revenues is less than a third of the industry average. It has few rivals at home.

The outlook for chip designers as a group is less rosy. Recently announced US curbs on China’s access to technology means a cut in demand. The market is saturated. It is dominated by chip designers STMicroelectronics, NXP Semiconductors and Arm.

There are signs of an inventory glut for lower-end chips. Average contract prices for chips fell as much as 28 per cent in the third quarter on rising levels of inventory. 

That means companies will cut spending on chip designs and production. Sector stocks look set to continue their downward trend. This started in March this year. The valuation of bigger, more established peers will become more attractive. The conclusion investors should come to is that Socionext’s peer group is expensive, not that Socionext is cheap.