Has the Era of SMIC Arrived?

In recent developments within the semiconductor industry, SMIC (Semiconductor Manufacturing International Corporation) has released its performance report for 2024, showcasing a positive trajectorySeveral key indicators managed to surpass the company’s prior guidance range and significantly exceeded expectations set by various organizationsThe optimism expressed is further solidified by a relatively encouraging forecast for the first quarter of 2025, where projected revenues are set to reach between $2.34 billion and $2.38 billion, representing a quarter-on-quarter increase of 6% to 8%. This sustained growth hints at a burgeoning recovery in the semiconductor sector.

Before delving deeper into SMIC's successful performance metrics, it's worth addressing a curiosity that's been circulating among industry observersThere has been speculation that SMIC has achieved significant advancements in semiconductor fabrication, particularly with the much-debated 5-nanometer process technologyThis inquiry stems from unverified information that has recently gained traction online but does not hail from an official company communiqué.

The confusion surrounding this 5-nanometer process arises from a plethora of analyses and reports, particularly from Western media outlets, such as British news articles claiming that SMIC is expected to begin production of 5-nanometer chips by the end of this yearThese chips are rumored to be intended for Huawei's next generation of high-end smartphonesGiven the reputation of these news organizations, their reports have been widely referenced and accepted as credible by many.

Should these claims hold any truth, it would signal an impressive achievement for SMIC, as the complexity associated with developing 5-nanometer technology is substantialMost companies that have successfully navigated this challenge have utilized Extreme Ultraviolet (EUV) lithography equipment, something that SMIC has been unable to procure due to supply restrictions imposed by various geopolitical factors

Advertisements

Consequently, if SMIC were indeed to produce 5-nanometer chips, it would likely be through utilizing Deep Ultraviolet (DUV) lithography systems, which pose their own set of challenges.

Furthermore, there has been a recurring mention of the Kirin 9000s chip, a product associated with Huawei, which many are quick to link to SMIC's supposed 5-nanometer capabilitiesHowever, it’s essential to clarify that this particular chip leverages SMIC's N+2 technology rather than a true 5-nanometer processThe transistor density of SMIC's N+2 technology does not come close to matching that of TSMC's 5-nanometer process, which boasts a density of 171 million transistors per square millimeterOn the other hand, estimates regarding SMIC's N+2 technology vary widely, some suggesting a transistor density of as high as 145 million, while others claim it to be around 120 million.

While SMIC has not officially released specific figures concerning their current technological status, they are notably progressing, albeit constrained by the limitations of not having access to EUV technologyRelying on DUV technology inherently necessitates the use of multi-patterning techniques to enhance process precision and efficacyHowever, this multi-patterning approach complicates the manufacturing process, which may impact production yields and overall precision.

Given these challenges and the technological hurdles faced, the semiconductor manufacturer’s trajectory seems to be moving forwardAn assessment of SMIC’s performance for the year reveals a significant recovery post-2023’s downturnFor the third quarter of 2024, SMIC reported revenue of approximately $4.1879 billion, marking a year-on-year increase of 26.5%. Furthermore, the fourth-quarter performance report revealed an annual revenue of $8.03 billion, translating to a year-over-year growth of 27.7%, solidifying SMIC's status as the world’s second-largest semiconductor manufacturer after surpassing the $8 billion mark.

The stellar performance in the fourth quarter further accentuated its strength, with revenues reaching $15.9 billion, achieving a year-on-year increase of 31%. However, it’s noteworthy that the net profit attributable to shareholders fell below $1 billion, reflecting a 13.5% year-on-year decline, indicating that while revenue growth is robust, profit margins have not kept pace.

This discrepancy arises in part due to a rise in product pricing, with the average price for an equivalent 8-inch wafer in the fourth quarter rising to $1,108, an increase of $85 quarter-on-quarter

Advertisements

This factor contributed to a gross profit of $251 per wafer, showing an increase of $41 from the previous quarterYet, the fixed costs associated with wafer production have also risen due to depreciation, reaching $396 per wafer in the fourth quarter, a $72 increaseOther manufacturing costs yielded varied results—though the total manufacturing expense per wafer fell by $28, highlighting an overall intricate interplay of cost and pricing dynamics.

Another critical element influencing SMIC's profitability is the balance of 8-inch versus 12-inch wafer shipmentsAt certain points last year, the average price per wafer was around $900, primarily attributable to increased shipments of the less expensive 8-inch wafersHowever, as the demand for 12-inch wafers has surged, pushing prices higher, the shipping ratio of 8-inch wafers has experienced a declineFor example, in the fourth quarter, while shipments of 8-inch wafers amounted to only 1.99 million units, this marked a quarter-on-quarter decrease of 6%.

This trend is unlikely to reverse soon since the market's current demands predominantly favor 12-inch wafers, while the 8-inch sector remains in a state of stagnationAgainst this backdrop, a pressing concern arises regarding SMIC's substantial annual capital expenditures, which have led to considerable depreciationShould the 8-inch market not recover, the manufacturer will face significant pressure in maintaining competitive average costs.

Moreover, as capital investments continue to outstrip operational cash flow, the impending expansion of the 12-inch production lines—projected to require an impressive $7.33 billion—signals an overwhelming financial burdenThe company previously made hefty investments in its 8-inch production lines, and their profitability hinges heavily on either a revival in the 8-inch sector or rapid growth in the 12-inch segment to offset these costs.

Outside of capital expenditures, operational expenses in recent times have also swelled

Advertisements

In the fourth quarter, operational costs hit approximately $280 million, with research and development expenses accounting for a substantial portion of this at nearly $220 million, marking a year-on-year increase of 21%. This level of expenditure in R&D alone consumes a significant portion of potential profits, evidencing the financial strain on the company.

Interestingly, SMIC reports minimal sales or financial expenses, and while interest income provides some relief, the annual management expenses remain steep, reflective of their position within the manufacturing landscape and its accompanying developmental challengesThese high operational costs, particularly in R&D and management, result in a notably low net profit margin.

Pushing through depreciation and operational burdens, SMIC finds itself navigating a convoluted landscape marked by restrictions and competitive pressuresHowever, an optimistic perspective lies in the expansive domestic marketThe vastness of China’s market creates considerable demand flexibility for locally produced products capable of displacing foreign alternatives, ensuring SMIC’s output remains viableIndeed, the increasing contribution of domestic revenue to SMIC's bottom line further reinforces this view; by the fourth quarter of last year, income from Chinese markets accounted for more than 89% of its revenues, a figure that is expected to continue rising as local semiconductor alternatives become increasingly crucial.

Additionally, encouraging signs in the consumer electronics market, buoyed by recent incentives for consumption, hint at potential expansions in SMIC's smartphone and computing product linesFor instance, during the fourth quarter, the smartphone segment exhibited minimal fluctuations, but the computing and tablet market grew nearly by three percentage points, underscoring a slight yet positive shift in consumer demand.

In summary, SMIC's performance in 2024 can be characterized as fairly typical—while revenue and gross margin presentations reflect impressive gains, the net profit figures present a more sobering reality, one that has yet to converge with the revenue growth trajectory

Advertisements

Advertisements