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Potential investors in Arm’s IPO have raised concerns about the British chip designer’s exposure to China after the company warned of “significant risks” in the country.

Managers of four separate funds considering investing in Arm told the Financial Times that the prospectus for a planned Nasdaq listing in September confirmed some of their concerns about the global semiconductor industry at a time when relations between Washington and Beijing have soured.

Arm revealed in Monday’s IPO filing that it gets a quarter of its revenue from China, and warned it was “particularly vulnerable” to economic and political risks, including tensions between China and the U.S. or Britain.

Some investors said the issues overshadowed SoftBank’s claim that Arm would benefit from demand for chips that have driven U.S. chipmaker Nvidia to $1 trillion in market value.

“When you read carefully the risks that Arm is flagging here, there is a lot of risk that investors need to digest,” said one institutional investor, who said they hadn’t yet decided whether to invest in an IPO. “They’re asking the market to buy a product that they acknowledge has considerable China risk, but at Nvidia multiples, and that’s going to take some effort.”

Arm, whose designs are in 90% of the world’s smartphones, was valued at $64 billion in an internal deal earlier this month by SoftBank Group Corp. and the Vision Fund, the investment vehicle it manages.

A woman is looking at her mobile phone
Arm is preparing to go public in the U.S. amid growing concerns about the direction of the Chinese economy and geopolitical tensions over control of key technologies such as chips © Charly Triballeau/AFP via Getty Images

A big issue for some investors is the warning in the prospectus that neither Arm nor SoftBank has control over the operations of their China operations.

The prospectus warns: “Although we rely heavily on them through our commercial relationship with Arm China, both as a source of revenue and as a channel to important (Chinese) markets, Arm China operates independently of us.” Any direct ownership of Arm China Management rights or board representation.

David Gibson, an analyst covering SoftBank at MST Financial, said the China risk described in the prospectus was greater than the market expected, and also pointed to deteriorating licensing payments from clients.

“These royalty revenues have been under pressure in the second half of the year, adding to concerns about Arm’s long-term growth,” he said.

Arm’s business has already suffered due to rising tensions between Beijing and Washington. Chinese companies are unable to buy some of the most advanced chip designs because of U.S. export controls, so more and more Chinese companies are making chips using lower-cost designs from competitors. Arm China’s second-quarter sales fell 16% year-on-year to $139 million.

“Management is expecting a slowdown in Chinese revenue 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 more. High growth required for high valuations.”

The complexity of Arm’s Chinese ownership also raises red flags. The joint venture’s ousted chief executive, Allen Wu, has launched a series of lawsuits against the company, but still controls about 15 percent.

Arm acknowledged in its IPO filing that “several lawsuits” brought by Wu and his colleagues could still have a “material adverse impact” if Chinese courts rule against its local partners and force changes to Arm China’s governance or management structure .

Additional reporting by Tim Bradshaw in London

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