SMIC: Guidance for a major "crash," when will "domestic chips" break through?

Semiconductor Manufacturing International Corporation (SMIC) (0981.HK/688981.SH) released its Q1 2025 financial report (for the period ending March 2025) after the Hong Kong stock market closed on May 8, 2025, Beijing time. The key points are as follows:

1. Overall performance: Gross margin is decent, but revenue performance is poor. SMIC achieved revenue of USD 2.247 billion in Q1 2025, a quarter-on-quarter increase of 1.8%, which is below the guidance range (quarter-on-quarter growth of 6-8%) and below market expectations (USD 2.36 billion). $SMIC(00981.HK) had a gross margin of 22.5% in Q1 2025, exceeding the upper limit of the guidance range (19-21%) and better than the market consensus expectation (19.1%). The company's performance growth this quarter was mainly driven by customers in consumer electronics, automotive, and industrial sectors stocking up on 8-inch wafers in advance.

2. Detailed observation of three core indicators: revenue, gross margin, and capacity utilization. The revenue growth was primarily due to an increase in wafer shipments, with a decline in average product prices. Affected by the advance stocking of 8-inch wafers, the proportion of 8-inch wafer shipments increased this quarter, structurally lowering the average product price. The company's product shipment volume increased by 15% quarter-on-quarter, while the average product price decreased by 11.5%.

3. Business progress: Consumer electronics and industrial and automotive sectors are the main sources of growth. Driven by national subsidy policies, the company's consumer electronics business revenue grew by 5.8% quarter-on-quarter this quarter, stabilizing above USD 800 million. The revenue share from industrial and automotive sectors continued to rise, reaching 9.6% this quarter. Revenue in the U.S. and Asia-Europe regions both increased this quarter, while the revenue share from China fell to 84%. Dolphin Research believes that some overseas customers stocked up in advance due to factors such as tariffs.

4. Guidance for the next quarter: SMIC expects a quarter-on-quarter revenue decline of 4-6% for Q2 2025, corresponding to USD 2.11-2.16 billion, far below market expectations (USD 2.43 billion); gross margin is expected to be 18-20%, lower than market expectations (21.3%).

Dolphin Research's overall view: The financial report is not ideal, and the guidance is even more "bleak."

Although Semiconductor Manufacturing International Corporation (SMIC) performed well in terms of gross margin this quarter, its revenue was significantly lower than previously guided expectations. Specifically, the company's wafer shipments increased by 15.1% quarter-on-quarter, while the average selling price of products experienced a double-digit decline. This was mainly due to an increase in the shipment of 8-inch wafers this quarter, which structurally drove down the average selling price of products. Despite the decline in average selling price, the gross margin was still maintained at 22.5%, primarily due to the scale effect brought about by the increase in product shipments, which diluted costs.

In contrast to this quarter's data, the company's guidance for the next quarter is more "bleak." The guidance provided indicates that both revenue and gross margin are expected to decline. Based on this earnings report, Dolphin Research speculates that the growth in 8-inch wafers this quarter was mainly driven by overseas customers stocking up in advance due to tariffs and other influences. If this impact is not considered, even looking solely at revenue from the Chinese market, although there are supportive policies such as national subsidies, downstream demand remains relatively sluggish, and the decline in the second quarter is not "sudden."

For SMIC's operational situation, the market mainly focuses on three aspects: revenue, gross margin, and capital expenditure: ① Revenue can bring growth expectations; currently, the company has firmly secured the third position in the global foundry market; ② Gross margin reflects industry position and bargaining power, as well as profitability. Currently, the company's gross margin is still around 20%, which shows a significant gap compared to TSMC (58.8%). As an industry follower, the company's profitability is more affected by industry fluctuations; ③ Capital expenditure reflects the confidence of a challenger but can also lead to increased costs. Currently, the impact of depreciation on profitability (unit depreciation/product average price) is about 35.6%. Since the company's total capital expenditure for the year will remain above $7 billion, this will also put pressure on gross margin.

This earnings report and the guidance for the next quarter from SMIC both demonstrate the pressure the company faces in its current operations. If the company does not adjust its capital expenditure plan from last year, it will be difficult for the gross margin to see significant improvement. Considering the company's current market value of HKD 360.6 billion (USD 46.5 billion), the corresponding PE for the company's after-tax operating profit in 2025 is about 40 times (assuming the industry rebounds in the second half of the year, with annual revenue growth of 10%, gross margin increasing by 2.9 percentage points, and capital expenditure of $7.4 billion).

However, SMIC itself has particularities: first, the company is in a follower position, and a gross margin of around 20% is hardly sufficient to support the company's high capital expenditure, resulting in often negative free cash flow; second, as the leading foundry in mainland China, the company also bears the strategic significance of building a domestically controllable semiconductor industry chain. Therefore, the current valuation cannot be viewed solely from the "PE" perspective. When the industry cycle improves, the company's performance and gross margin will significantly increase, and the company can be viewed from a PE perspective; however, when unexpected events such as trade frictions occur, SMIC's strategic value will attract more market attention.

The following is Dolphin Research's detailed analysis of Semiconductor Manufacturing International Corporation (SMIC):

1. Core Indicators of SMIC: Revenue, Gross Margin, and Capacity Utilization Rate

Core Indicator 1: Revenue

In the first quarter of 2025, SMIC achieved revenue of $2.25 billion, a quarter-on-quarter increase of 1.8%, significantly below the guidance range (quarter-on-quarter growth of 6-8%). Although the company's wafer shipments saw a double-digit growth quarter-on-quarter, the price side experienced a significant decline.

Analyzing from the dimensions of volume and price, the main influencing factors for SMIC's revenue growth this quarter are:

1) Volume Dimension: SMIC's wafer shipments (equivalent to 8-inch) reached 2,292 thousand pieces, a quarter-on-quarter increase of 15.1%;

2) Price Dimension: SMIC's revenue per wafer (equivalent to 8-inch) was $980, a quarter-on-quarter decline of 11.5%.

From the volume and price breakdown: Although the shipment growth rate reached 15% this quarter, the average selling price of the company's products saw a significant decline, mainly due to the increased proportion of relatively low-priced 8-inch products shipped this quarter, which structurally lowered the company's average selling price.

Looking ahead to the second quarter of 2025, SMIC has provided a revenue guidance of a quarter-on-quarter decline of 4-6%, corresponding to $2.11-2.16 billion, significantly below market consensus expectations (quarter-on-quarter growth of 3.2%). In fact, the growth in the previous quarter mainly came from the advance stocking of 8-inch wafers, while 12-inch wafers have already begun to decline. The guidance for a decline in the second quarter directly indicates the sluggish state of downstream demand.

Core Indicator 2: Gross Margin

In the first quarter of 2025, SMIC's gross margin was 22.5%, a quarter-on-quarter decline of 0.1 percentage points, better than market consensus expectations (20.7%), exceeding the upper limit of the guidance range (19-21%).

To analyze the reasons for the change in SMIC's gross margin this quarter, we can break down the company's cost structure:

Gross Margin per Wafer = Revenue per Wafer - Fixed Costs per Wafer - Variable Costs per Wafer

1) Revenue per Wafer: SMIC's revenue per wafer (equivalent to 8-inch) was $980, a quarter-on-quarter decline of $128 per wafer.

2) Fixed Costs per Wafer (Depreciation and Amortization): This quarter, the fixed costs per wafer (equivalent to 8-inch) were $349, a quarter-on-quarter decline of $47 per wafer. Due to the company's high capital expenditures, depreciation and amortization increased by 1.5% quarter-on-quarter, reaching $800 million. Due to a 15% quarter-on-quarter increase in wafer shipments this quarter, the fixed cost per wafer has decreased under the influence of economies of scale.

3) Variable cost per wafer (other manufacturing expenses): The variable cost per wafer (equivalent to 8 inches) this quarter is $411, a decrease of $51 per wafer quarter-on-quarter, also diluted by the rapid increase in shipments.

4) Gross profit per wafer: The gross profit per wafer for SMIC this quarter (equivalent to 8 inches) is $221, a decrease of $30 per wafer quarter-on-quarter.

By breaking down the costs, it is found that although the average selling price of the company's products has declined this quarter, the unit cost of the company has also been significantly diluted under the influence of economies of scale, resulting in the company's gross profit margin remaining basically flat quarter-on-quarter.

Looking ahead to the second quarter of 2025, SMIC has provided a quarterly guidance of a gross profit margin of 18-20%, which is significantly lower than the market expectation (21.3%). Combined with the company's expected decline in revenue, Dolphin Research believes that the company's wafer shipments will face pressure in the next quarter. Without the boost from economies of scale, the unit cost of the company's products will increase, leading to a decline in gross profit margin.

Core Indicator 3: Capacity Utilization Rate

The capacity utilization rate indicator not only reflects SMIC's quarterly operating conditions but also reflects the trend of prosperity in the entire wafer manufacturing industry. Especially during relatively sluggish periods in the semiconductor sector, paying attention to the capacity utilization rate helps to grasp the supply and demand changes in the company and the industry.

In the first quarter of 2025, SMIC's capacity utilization rate was 89.6%, and the company's capacity utilization rate has rebounded this quarter. Considering the company's revenue structure and guidance for the next quarter, Dolphin Research believes that the rebound in the company's capacity utilization rate this quarter is mainly driven by some customers stocking up on 8-inch wafers in advance, while overall downstream demand remains sluggish.

Based on the company's capacity utilization and shipment situation this quarter, SMIC's total capacity reached 2,558 thousand wafers, a quarter-on-quarter increase of 9.8%. With an annual capital expenditure of $7-7.8 billion, the company's capacity continues to improve.

The company's capital expenditure this quarter was $1.416 billion, which has decreased both year-on-year and quarter-on-quarter. If the company continues to maintain its annual target of $7.33 billion, it will continue to increase capital expenditure in the subsequent quarters.

2. Business Perspective on SMIC

After reviewing the three core indicators, Dolphin Research and everyone will take a comprehensive look at SMIC's quarterly business situation:

2.1 In terms of various downstream markets

This quarter, SMIC's smartphone business revenue accounted for 24.2%, with quarterly revenue maintaining at $518 million. The consumer electronics business remains the company's largest source of revenue this quarter, accounting for 40.6% Driven by China's subsidy policy, the company's consumer electronics revenue has remained above $800 million for nearly three consecutive quarters (combined with Qualcomm's IoT business, which has seen a year-on-year growth rate of over 20% for the past three quarters). The company has segmented its previous businesses, with the computer and tablet business accounting for 17.3% this quarter, while the industrial and automotive business has increased to 9.6%.

The growth in the company's revenue this quarter is mainly driven by consumer electronics and industrial and automotive businesses, and is also the main source of the advance inventory for 8-inch wafers this quarter.

2.2 Revenue by Wafer Size

Since the first quarter of 2022, SMIC has stopped disclosing the revenue share of each process node and only reports the revenue share of 8-inch and 12-inch wafers, making it impossible to see the revenue changes for each node in detail.

This quarter, the revenue share of SMIC's 12-inch wafers was 78.1%, a slight decline. Specifically, looking at the revenue from the two sizes, the revenue from 12-inch wafers decreased by 1.3% quarter-on-quarter, while the revenue from 8-inch wafers increased by 14.9% quarter-on-quarter. The main source of revenue growth this quarter was the 8-inch wafers, as some customers made advance inventory purchases due to tariffs and other factors. Without the contribution from 8-inch wafers this quarter, the company's revenue would have faced a "decline."

2.3 Regional Distribution

SMIC has readjusted the criteria for regional revenue distribution, changing from the previous "North America/China Mainland and Hong Kong/Europe and Asia" to the current "China Region/US Region/Eurasia Region." Due to this adjustment, there are slight differences in the data.

From this quarter's regional revenue, the revenue from the China Region has fallen to 84.3%, but it remains the company's largest source of revenue. Additionally, the company's revenue in the US Region and Eurasia Region increased by 44% and 58% quarter-on-quarter, respectively.

Considering the growth in the company's wafer structure this quarter, Dolphin Research believes that the quarter-on-quarter growth of the company's 8-inch wafers mainly comes from US and Eurasian customers (such as Qualcomm) making advance inventory purchases to cope with the uncertainties of tariffs and other factors.

3. Operating Data of SMIC

3.1 Operating Expenses

From the perspective of operating expenses, SMIC's operating expenses this quarter were $196 million, a decrease, mainly due to a significant reduction in the company's R&D expenses this quarter. The operating expense ratio has fallen to 8.7%.

Looking at the operating expenses for this quarter, research and development expenses were $149 million, general and administrative expenses were $149 million, and sales and marketing expenses were $11 million. Among them, the company's research and development activities decreased this quarter; general and administrative expenses decreased quarter-on-quarter, mainly due to the accrual of increased employee bonuses and the payment of related taxes for the disposal of joint ventures in the previous quarter.

3.2 Operating Indicators:

From the perspective of operating indicators, we mainly observe the company's inventory and accounts receivable:

SMIC's inventory this quarter was $3.048 billion, an increase of 3% quarter-on-quarter;
SMIC's accounts receivable this quarter was $1.15 billion, an increase of 36.6% quarter-on-quarter.

Combining the relationship between inventory & accounts receivable and revenue in the balance sheet, the inventory/revenue and accounts receivable/revenue ratios for this quarter were 135.6% and 51.1%, respectively. From the perspective of operating indicators, SMIC's inventory ratio has slightly rebounded, remaining stable over the past three quarters. Compared to historical situations, although the inventory level has fallen from its peak, it is still at a relatively high position.

Combining the company's inventory and capacity utilization data, there is a certain correlation between the two, which can reflect the trend of the company's operational changes. When the inventory/revenue ratio significantly increases, the company lowers its capacity utilization to below 80%. As the inventory falls from its peak, the company's capacity utilization has also increased. Currently, the company's inventory/revenue ratio remains at a relatively high level of 136%, and the company's capacity utilization for this quarter is 89.6%.

3.3 EBITDA Indicator:

From the EBITDA perspective, SMIC's earnings before interest, taxes, depreciation, and amortization this quarter were $1.29 billion, continuing to improve.

Breaking down the indicators, SMIC's earnings before interest, taxes, depreciation, and amortization mainly come from the release of operating profits and depreciation and amortization. The calculated profit margin (before interest, taxes, depreciation, and amortization) for this quarter remains at 57.5%. Due to the characteristics of heavy assets in the manufacturing industry, a large portion of the company's profits is eroded by depreciation and amortization.

Dolphin Research's historical articles on SMIC:

Earnings Report Season

February 10, 2025 conference call “SMIC (Minutes): Capital Expenditure Plan Remains the Same as Last Year”

February 10, 2025 Financial Report Review: SMIC: With "National Subsidy" in Hand, Can It Withstand the Cycle?

November 8, 2024 Conference Call: SMIC: The Potential Risk for Next Year is "Increment Without Price Increase" (24Q3 Conference Call)

November 7, 2024 Financial Report Review: SMIC: Can It Bear the Hopes of the Whole Village?

August 9, 2024 Conference Call: SMIC: 12-inch Capacity is Nearly Full (24Q2 Conference Call Minutes)

August 8, 2024 Financial Report Review: SMIC: Spreading Wings Against the Wind, Delivering Explosive Guidance

May 10, 2024 Conference Call: SMIC: Annual Revenue Growth Will Exceed Industry Average (24Q1 Conference Call)

May 9, 2024 Financial Report Review: SMIC: Long Valley, Finally Close to Breaking Through

February 7, 2024 Conference Call: The Reshuffling of Mature Processes Requires 4-5 Years (SMIC 4Q23 Conference Call)

February 6, 2024 Financial Report Review: SMIC: Counter-Cyclical Expansion, Leading to Guidance Collapse

November 10, 2023 Conference Call: W-Shaped Trend, Recovery May Be Delayed by a Year (SMIC 3Q23 Conference Call)

November 10, 2023 Financial Report Review: SMIC: The Cycle is Long, Waiting for the Favorable Wind

August 11, 2023 Conference Call: The Increment in Mobile Phones Actually Comes from "Trade-in"? (SMIC 2Q23 Conference Call)

August 11, 2023 Financial Report Review: “Mild” SMIC: How Long Until Recovery?

May 12, 2023 Conference Call: 12-inch Urgent Orders, Semiconductor Begins Structured Recovery (SMIC 23Q1 Conference Call)

May 11, 2023 Financial Report Review: SMIC: Chip Cycle Can't Hide the Alpha Light

February 10, 2023 Conference Call: High Depreciation Pressures Gross Margin, Improvement Depends on Second Half (SMIC 22Q4 Conference Call Minutes)

February 10, 2023 Financial Report Review: SMIC: Decline is Obvious, But Is Bad Now Good?

November 11, 2022 Conference Call: Despite Semiconductor Downturn, Capital Expenditure Remains Uncut (SMIC 22Q3 Conference Call)

November 11, 2022 Financial Report Review: SMIC: Long-term Belief, Yet Can't Escape the “Cycle Curse”

August 12, 2022: Semiconductors Enter Downturn Cycle, How Will SMIC Respond? (22Q2 Conference Call Minutes)

August 11, 2022: Price Increases Stalled, SMIC Stubbornly Faces “Cycle Disaster”

May 13, 2022 Conference Call: Limited Impact from Pandemic, Semiconductor Shows Structured Shortage (SMIC Conference Call Minutes)

May 12, 2022 Financial Report Review: Pandemic Kneels, Market Kneels? SMIC's Performance Doesn't “Kneel”

February 11, 2022 Conference Call: Alpha Beyond Industry Price Increases, SMIC Expands Production Again

February 10, 2022 Financial Report Review: SMIC: The "Rise" Continues, Performance Remains Strong | Read Financial Report

November 12, 2021 Conference Call: What Did SMIC's Management Discuss After Unexpected Performance Decline?

November 11, 2021 Financial Report Review: Stop Questioning the Cycle Peak, SMIC Remains Strong!

August 6, 2021 Conference Call: How Does SMIC's Management View the 21Q2 Financial Report?

August 5, 2021 Financial Report Review: SMIC: The Rising Chinese "Chip" Power

In-depth

December 29, 2022: Semiconductor Avalanche? True Resilience Only Comes After the Most Severe Decline

June 24, 2022 Industry Depth: Order Cuts, Order Cuts, Order Cuts, Is the Semiconductor Industry Really About to "Change"?

July 16, 2021 Company Depth: SMIC (Part 2): The Undervalued Chinese "Chip"

July 9, 2021 Company Depth: SMIC (Part 1): Discussing the Leading Chip Attack Strategy

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure