May 9, 2024

SMIC Profit Misses Estimates on Weak Chinese Consumer Sentiment

Bloomberg News, Bloomberg News

A logo atop the Semiconductor Manufacturing International Corp. (SMIC) headquarters in Shanghai, China, on Tuesday, March 23, 2021. SMIC will build a $2.35 billion plant with funding from the government of Shenzhen, the first major project to emerge from China’s masterplan to match the U.S. in advanced chipmaking. Photographer: Qilai Shen/Bloomberg , Bloomberg

(Bloomberg) -- Semiconductor Manufacturing International Corp. expects its average selling price to fall this quarter as chipmakers increase capacity, raising the alarm about growing price competition in the global market.

SMIC Co-Chief Executive Officer Zhao Haijun said domestic rivals are cutting prices to poach its customers. The company, which counts Huawei Technologies Co. among its clients, warned that would hurt its sales.

“We face the situation that we may lose tens of millions of dollars worth of orders when our competitors use lower pricing to lure away many of our strategic customers,” Zhao told analysts in a post-earnings call on Friday. “Our average selling price is likely to fall every quarter though it is not going to be a big drop.”

Both the US and European Union have expressed concerns about China’s legacy chip capacity buildout, supported by Beijing’s subsidies, out of the fear that Chinese suppliers could dump these components on the global market and hurt their domestic industries.

SMIC is planning about $7.5 billion in capital expenditure this year, flat from 2023, Zhao said. Global chipmakers’s race to build more plants will peak in 2025, and the pace will slow after that due to concerns over excessive supplies, he added.

Zhao’s comments reflected heating competition in China’s so-called legacy chip market as more plants are being built to meet demand created by emerging technologies including smart vehicles. While legacy chips do not use the latest technology for production, they are still required in a wide range of products from smartphones to electric vehicles to power display and manage use of energy amongst other essential functions. China’s advanced semiconductor capabilities have been limited due to a US-led multinational campaign to restrict its access to cutting-edge equipment.

On Thursday, SMIC posted weaker-than-expected quarterly profit due to sluggish macroeconomic conditions in China.

Net income was $71.8 million in the three months ended in March, compared to the average analyst estimate of $76.8 million, according to a company filing on Thursday. Revenue totaled $1.75 billion, versus analysts’ projection of $1.69 billion.

SMIC is critical to China’s ability to produce advanced chips as the US tries to curb its biggest geopolitical rival’s tech advancements. China’s largest contract chipmaker produces semiconductors used in a wide range of products including smartphones, home appliance and EVs, but domestic demand for those products has been tepid.

Consumer sentiment remained weak in the past quarter, hamstrung by a prolonged slump in the property market. Smartphone shipments in China fell 6.2% in March according to the latest monthly report from the China Academy of Information and Communications Technology, dropping for the second consecutive month.

The Shanghai-based chipmaker may still get a boost in revenue from making advanced processors for Huawei Technologies Co. later this year.

The firm expects its revenue to rise by 5%-7% on quarterly basis in the April-June quarter, it said in the exchange filing.

SMIC may see AI and smartphone chip orders from Huawei double this year, according to Bloomberg Intelligence analysts Charles Shum and Sean Chen, though the company will still face production challenges. US officials including Secretary of Commerce Gina Raimondo have also repeatedly said Huawei and SMIC cannot make advanced chips at scale.

What Bloomberg Intelligence Says:

SMIC may double advanced process nodes revenue this year on strong demand for Huawei’s AI server chips and new Kirin 9010 chip which will power Huawei’s new smartphone flagship models: the Pura and Mate Series. Yet the revenue gains may only lift gross profit by a low single-digit percentage due to lithography tool production yield challenges.

—Bloomberg Intelligence analysts Charles Shum and Sean Chen

The Pura 70 series Huawei unveiled in April sports a 7-nanometer processor made by SMIC. It is a slightly upgraded version of the 7nm chip SMIC made for the Mate 60 Pro model introduced in 2023.

Huawei’s smartphone shipments surged 70% in the first quarter, research firm Counterpoint estimated. The Pura 70 series sold out within two days of their launch, according to Jefferies analysts led by Edison Lee.

Read more: Huawei’s New Phone Runs Latest Version of Made-in-China Chip

--With assistance from Kathy Chen and Gao Yuan.

(Adds comments throughout from the analyst call on Friday)