Semiconductor Manufacturing International Corp's (SMIC) management changes will likely hit its financial performance over the next year and spark some consolidation in China's fragmented chip sector, analysts believe.

Shares of SMIC, the largest contract chipmaker and the fourth biggest global contract chip maker, lost nearly a tenth of their market value on Monday after resuming trade following a top management reshuffle.

The shares, which resumed trade on Monday after being suspended since June 30, fell 9.5 percent to close at HK$0.57, versus the Hang Seng Index's 0.45 percent decline.

China's chipmakers, such as SMIC and Grace Semiconductor, have lagged global top players such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and United Microelectronics Corp (UMC) in technology and sales.

"The top management changes will lead some major clients to cancel some orders. These cancelled orders could be huge and will likely hit margins," said Vincent Gu, a Shanghai-based senior analyst at research firm iSuppli.

"I'm expecting these difficult times to carry on for the next couple of years," Gu said, forecasting a 13-16 percent fall in SMIC's revenues this year from last year's $1.55 billion.

In comparison, TSMC's annual sales in 2010 were NT$420 billion ($14 billion) and UMC's were NT$120 billion.

Over the past month, Shanghai-based SMIC, founded by Taiwan-born Richard Chang, announced a series of management changes, including the passing of its chairman and shareholders voting its chief executive off the board.

SMIC, headquartered in Shanghai, appointed Zhang Wenyi from Shanghai Hua Hong Group Co as chairman and acting chief executive officer following the death of Chairman Jiang Shangzhou and the resignation of CEO David Wang.

Wang quit SMIC last week after failing to win reappointment as company director at a shareholders meeting last month. Shareholders, including government-owned Datang Telecom and China's sovereign wealth fund China Investment Corp, voted against Wang's re-election.

"The changes are due more to politics than the fundamentals of the company. David Wang was performing quite well and didn't make any major mistakes," said a Taipei-based chip analyst who declined to be identified due to the sensitivity of the issue.

"The slowdown in foundry shipments in the second half of 2011 combined with yield issues, push-out of ramp-up plans and changes in top management would not only weigh down sentiment, but worsen the already stretched financials of the company," CLSA analyst Vaibhav Dhasmana said in a report released on Monday.

Some analysts said Zhang's appointment could help trigger a merger between SMIC and Hua Hong NEC in a sector made up of many small players.

"I think the move is political and there is even a possibility that the central government wants to consolidate the sector. China doesn't need so many small foundries," the Taipei-based analyst said.

Michael Clendenin, managing director at research company RedTech Advisors in Shanghai, said Wang clashed with investors including Datang Telecom over strategy.

"David is a very forceful guy, and I can't see him backing down if he thinks he has a strategy that would work," said Clendenin. Wang, the former Applied Materials Inc executive who joined SMIC in 2009, had planned to focus SMIC on the production of flash memory chips, a move opposed by Datang, according to Clendenin.

Edith Kwan, a manager at SMIC's investor relations department, said Wang resigned for "personal reasons," and declined to comment on the possible disagreement with shareholders

Reuters - Bloomberg

(HK Edition 07/19/2011 page2)