Prospective investors in Arm’s initial public offering have raised concerns over the UK chip designer’s exposure to China, after the company warned of “significant risks” in the country.
Managers at four separate funds considering an investment in Arm told the Financial Times that the prospectus for the planned listing on Nasdaq in September confirmed some of their fears about the global semiconductor industry amid souring relations between Washington and Beijing.
Arm revealed in its IPO filing on Monday that it made a quarter of its revenues from China and warned that it was “particularly susceptible” to economic and political risks, including tensions between China and the US or UK.
Some investors said these issues overshadowed SoftBank’s pitch that Arm would benefit from the demand for chips that has propelled US chipmaker Nvidia to a $1tn market capitalisation.
“When you read through the risks that Arm has flagged here, it seems a lot for an investor to digest,” said one institutional investor who said they had yet to decide whether to invest in the IPO. “They are asking the market to buy what they admit are some pretty big China risks but at Nvidia multiples, and that will take some effort.”
An internal transaction earlier this month between SoftBank Group and its Vision Fund — an investment vehicle that the Japanese conglomerate manages — valued Arm, whose designs are in 90 per cent of the world’s smartphones, at $64bn.
One significant issue for some investors is a warning in the prospectus that neither Arm nor SoftBank controls the operations of its Chinese business.
“Despite our significant reliance on Arm China through our commercial relationship with them, both as a source of revenue and as a conduit to the important [Chinese] market, Arm China operates independently of us,” the prospectus warned, adding that Arm did not have any direct management rights or the right to representation on Arm China’s board.
David Gibson, an analyst who covers SoftBank at MST Financial, said the China risk described in the prospectus was larger than the market was expecting and also flagged deteriorating licence payments from customers.
“These royalty revenues have been under pressure in the second half of the period which increases those concerns of growth for Arm longer term,” he said.
Arm’s business has already been rocked by growing tensions between Beijing and Washington. Blocked from buying some of its most advanced chip designs because of US export controls, Chinese companies are increasingly moving to make chips using rival low-cost designs. Sales from Arm China in the second quarter dropped 16 per cent year on year to $139mn.
“Management expects China revenue to moderate going forward,” said Kirk Boodry, a SoftBank analyst at Astris Advisory in Tokyo. “But it also puts more pressure on the rest of the world to deliver the high growth needed for higher valuations.”
Complexity surrounding the ownership of Arm China has also raised red flags. The joint venture’s ousted chief executive Allen Wu has launched a number of lawsuits against the company and remains in control of about 15 per cent of shares.
In its IPO filing, Arm acknowledged “several lawsuits” filed by Wu and his associates could still cause a “material adverse effect” if the Chinese courts decided against its local partner and forced changes to Arm China’s governance or management structure.
Additional reporting from Tim Bradshaw in London