SMIC Q2 sales revenue increased by 16.2% year-on-year, while net profit decreased by 19% | Financial Report Insights

SMIC delivered a mixed Q2 report card. Although revenue maintained a strong year-on-year growth trend, net profit saw a significant decline, and the Q3 guidance is relatively cautious, exposing the real challenges faced by this wafer foundry giant.

SMIC released its Q2 financial report on Thursday, with key points as follows:

Profitability

• Q2 revenue was USD 2.209 billion, a decrease of 1.7% quarter-on-quarter, but an increase of 16.2% year-on-year; revenue for the first half of the year was USD 4.46 billion, a year-on-year increase of 22.0%.
• Gross profit was USD 450 million, a quarter-on-quarter decrease of 11.1%.
• Gross margin was 20.4%, a quarter-on-quarter decrease of 2.1 percentage points, but a significant increase of 6.5 percentage points compared to the same period last year; the gross margin for the first half of the year was 21.4%, a year-on-year increase of 7.6 percentage points.
• Net profit was USD 132.5 million, a year-on-year decrease of 19%, and below the market estimate of USD 167.1 million.
• Capacity utilization rate was 92.5%, a quarter-on-quarter increase of 2.9 percentage points.

Core Business Progress

• 12-inch wafers accounted for 76.1%, with consumer electronics applications reaching the highest at 41.0%.
• Business in China accounted for 84.1%, with smartphone applications accounting for 25.2%.
• Monthly capacity increased to 991,000 wafers (8-inch equivalent), a quarter-on-quarter growth of 1.8%.

Guidance

• Q3 revenue guidance is expected to grow by 5%-7% quarter-on-quarter, with gross margin guidance of 18%-20%, while the market expectation is 21%.
• Capital expenditure is USD 1.885 billion, a significant increase of 33.2% compared to Q1, indicating active capacity expansion.

Revenue Growth Slows but Year-on-Year Performance Remains Impressive

Q2 revenue was USD 2.209 billion, a slight quarter-on-quarter decrease of 1.7%, but the year-on-year growth of 16.2% is still noteworthy. More importantly, the cumulative revenue for the first half of the year was USD 4.46 billion, a substantial year-on-year increase of 22.0%, indicating that the company's overall growth trajectory remains solid.

In terms of structure, 12-inch wafers accounted for 76.1%, slightly lower than Q1's 78.1%, but still the main revenue driver. On the application side, consumer electronics accounted for as high as 41.0%, smartphone applications accounted for 25.2%, and industrial and automotive applications accounted for 10.6%, an increase from 8.1% in the same period last year, reflecting the company's penetration in high-value application areas.

In terms of regional distribution, the China region accounted for 84.1%, remaining basically flat with Q1, while the U.S. region accounted for 12.9%, showing a slight increase. This structure has a certain defensive nature in the current geopolitical environment.

Gross Margin Has Adjusted but Remains at Historically High Levels

Q2 gross margin was 20.4%, a quarter-on-quarter decrease of 2.1 percentage points, but still a significant improvement from 13.9% in the same period last year. The gross margin for the first half of the year was 21.4%, a year-on-year increase of 7.6 percentage points, indicating a structural improvement in the company's profitability.

The quarter-on-quarter decline in gross margin was mainly influenced by two factors: first, other manufacturing costs increased from USD 942 million in Q1 to USD 1.008 billion, a growth of 7.0%; second, the slight decline in revenue diluted the absorption of fixed costs It is worth noting that the capacity utilization rate increased from 89.6% in Q1 to 92.5%, which typically benefits gross margin improvement, but the actual gross margin still declined, indicating that cost pressures cannot be ignored.

Significant Increase in Operating Expenses Exposes Expansion Pressure

Q2 operating expenses were $299 million, a staggering increase of 52.4% quarter-on-quarter and a 68.1% year-on-year growth, becoming the largest expectation gap in the financial report.

Specifically:

• R&D expenses were $182 million, a quarter-on-quarter increase of 22.2%
• General and administrative expenses were $189 million, a quarter-on-quarter increase of 26.5%, mainly due to increased startup costs
• Other operating income was $85.1 million, a quarter-on-quarter decrease of 25.0%, due to reduced government funding income

Operating profit was $151 million, a quarter-on-quarter drop of 51.3%, and the operating profit margin fell from 13.8% in Q1 to 6.8%, reflecting the cost control challenges the company faces during rapid expansion.

Cautious Expectations Revealed in Q3 Guidance

The company’s guidance for Q3 revenue growth of 5%-7% quarter-on-quarter is relatively positive, but the median guidance for gross margin of 18%-20%, at 19%, is lower than Q2's 20.4%, indicating that management holds a cautious attitude towards profitability.

This guidance may reflect several realities: first, intensified industry competition puts pressure on prices; second, the cost impact during the ramp-up period of new capacity; third, the transitional impact of product structure adjustments.

Cash Flow Improvement but Surge in Capital Expenditures

Q2 cash flow from operating activities was $1.07 billion, a significant turnaround from -$160 million in Q1, showing a recovery in the business's ability to generate cash.

However, capital expenditures were $1.885 billion, a 33.2% increase from $1.416 billion in Q1, reflecting that the company is still actively expanding production. Monthly capacity increased from 973,000 wafers to 991,000 wafers (8-inch equivalent), and the pace of capacity expansion has not slowed.

Cash and cash equivalents totaled $5.08 billion, along with financial assets, bringing total liquid funds to $13.05 billion, providing ample ammunition for continued expansion.

Updating