SUPERNEWS

Macro

SMIC's Profit Plunges 68.9%, Warns of Tougher Chip Battle

SMIC faces a 68.9% profit drop amid fierce chip industry competition, despite technological strides and a 19.7% revenue increase.

By Barry Stearns

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5/10, 00:19 EDT
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Key Takeaway

  • SMIC's Q1 net income fell 68.9% to $71.79 million, missing estimates, amid "fierce" competition and a record low gross margin of 13.7%.
  • Despite U.S. sanctions, SMIC beat revenue expectations with $1.75 billion and plans no dividends for 2023 to invest in competitiveness.
  • Expects Q2 revenue to rise by 5%-7%, but gross margin may drop further due to increased depreciation from capacity expansion.

Intense Competition in Chip Industry

Semiconductor Manufacturing International Corporation (SMIC), China's largest contract chipmaker, reported a significant drop in its first-quarter profit, missing expectations due to intense competition within the chip industry. The company's net income plunged 68.9% from a year earlier to $71.79 million, falling short of LSEG analysts' average estimate of $80.49 million. This downturn is attributed to fierce competition and market-driven pricing for commodity products. Despite these challenges, SMIC emphasized its commitment to advancing technology platforms in mainland China, aiming to leapfrog one to two generations ahead.

Financial Performance and Market Strategy

SMIC's gross margin fell to 13.7% in the quarter, marking the lowest level in nearly 12 years, according to LSEG data. However, revenue saw a 19.7% increase from the previous year to $1.75 billion, as customers stocked up on chips, surpassing the LSEG estimate of $1.69 billion. To combat competition and secure its market position, SMIC is focusing on capacity construction and R&D investments, opting not to pay dividends for 2023. The company projects a 5% to 7% revenue increase in the second quarter, albeit with a potential further dip in gross margin to between 9% and 11%.

Navigating US Sanctions and Technological Advances

SMIC has been on a U.S. trade blacklist since 2020, which restricts its access to certain U.S. technologies. Despite these sanctions, SMIC has made strides in technology, as evidenced by its production of a 7-nanometer chip found in Huawei's Mate 60 Pro smartphone, which supports 5G connectivity. This development is significant, considering that leading chip manufacturers like TSMC and Samsung began mass-producing 7-nanometer chips in 2018 and have since advanced to 3-nanometer chips.

Management Quotes

  • SMIC:

    "Competition in the industry has been increasingly fierce and the pricing for commodity products basically follows the market trends." "The company fulfills its [long-term view] through constructing quality technology platforms that leap here in mainland China by one to two generations." "In the first quarter, the IC [integrated circuits] industry was still in the recovery stage and customer inventory gradually improved. Compared to three months ago, we have noticed that our global customers are more willing to build up inventory." "[To] ensure that the company maintain its leading position in fierce market competition and maximize the protection of investor interest ... the company plans not to pay dividends for the year 2023." "We believe that as long as there’s demand from customers along with our technology and capacity readiness, we can ultimately be bigger, better and stronger despite the fierce competition." "Along with the increase in capacity scale, depreciation is expected to rise quarter by quarter. So the gross margin is expected to decline sequentially."