China's top chipmaker SMIC cautious on recovery expectations; shares dip

A logo of Semiconductor Manufacturing International Corporation (SMIC) is seen at China International Semiconductor Expo (IC China 2020) following the coronavirus disease (COVID-19) outbreak in Shanghai

By Brenda Goh

BEIJING/SHANGHAI (Reuters) -China's largest chipmaker SMIC said the global semiconductor industry was seeing some bright spots after a year-long slump, but growth would be mild as the demand recovery was insufficient to support a "strong and comprehensive" rebound.

While Semiconductor Manufacturing International Corp (SMIC) started receiving a surge in orders from the likes of smartphone and personal computer manufacturers late last year, it was cautious on whether this was sustainable, co-CEO Zhao Haijun told analysts on a conference call on Wednesday.

"We're worried that it is a case of 'eating away next year's food in advance'," he said, using a Chinese phrase.

"We are worried that there will be a decline in the second half of the year because all the orders for the second half of the year would have been shipped in the first half, so we are still quite cautious."

Shares in the company fell by over 4% in morning trading against a 1.28% rise in the Hang Seng Index after its cautious forecast and the 55% fall in fourth-quarter profit it reported that missed analyst expectations.

The global semiconductor industry entered a slump last year after a pandemic-driven shortage of chips turned into a glut as the economy slowed and demand for these products fell.

Optimism has been growing that the industry could recover in the coming year due to increased demand for products that use semiconductors, such as smartphones and other consumer electronics, in markets such as China.

SMIC entered the international spotlight last year when analysts said that the company had assisted Huawei in developing one of the most advanced chips ever manufactured domestically in China.

SMIC has also grabbed attention for its rapid capacity expansion. Through 2023, capital expenditure stood at $7.47 billion, 17.6% higher than in 2022. The company late on Tuesday said it expects capital expenditure to be roughly flat this year versus last year.

Hemmed in by U.S. technology export restrictions, SMIC has mainly focused on building factories to make mature technology chips, widely used in sectors such as autos and weapons, and hence has not benefited from the surge in artificial intelligence applications that some of its overseas rivals have.

Asked about the possibility of overcapacity, Zhao said SMIC believed it would remain competitive as its plans were based on long-term cooperation with customers, and that it still had scope for growth as its facilities only accounted for 5% of global production capacity.

SMIC said late on Tuesday fourth-quarter net income was $174.68 million, down from $385.53 million in the quarter a year ago and missing the average estimate of $277 million in an LSEG poll of analysts.

Revenue for the quarter rose 3.5% to $1.68 billion, slightly above the average revenue estimate of 1.66 billion yuan in the poll. Nearly 81% of that revenue came from the Chinese market.

SMIC expects a gross margin of between 9%-11% in the first quarter of this year, compared with 16.4% in the fourth quarter

of 2023.

($1 = 7.1895 Chinese yuan renminbi)

(Reporting by Brenda Goh in Shanghai; Additional reporting by Yelin Mo in Beijing, Editing by Louise Heavens and Muralikumar Anantharaman)