SMIC (Minutes): Mobile phone and other expectations revised downward, prices will continue to decline

SMIC (0981.HK/688981.SH) released its Q1 2025 financial report after Hong Kong market close on May 8, 2025 Beijing time (as of March 2025):

Below are the earnings call minutes for SMIC's Q1 2025. For financial analysis, please refer to "SMIC: Guidance Goes 'Boom', When Will 'Made-in-China Chips' Break Through?"

I. $SMIC(00981.HK) Key Financial Highlights

1. Overall Performance:

a. Operational Results: Revenue of $2.247 billion, up 1.8% QoQ; Gross margin of 22.5%, down 0.1 ppt QoQ; Operating profit of $310 million; EBITDA of $1.292 billion with EBITDA margin of 57.5%; Net profit attributable to shareholders of $188 million.

b. Balance Sheet: Total assets of $48 billion, cash and equivalents of $4.6 billion; Total liabilities of $15.7 billion, total debt of $11.3 billion; Shareholders' equity of $32.2 billion; Debt-to-asset ratio of 34.9%, net debt-to-equity ratio of -4.5%.

c. Cash Flow: Net cash from operations of -$160 million, investing activities (cash change) of $1.328 billion, financing activities net cash of -$354 million.

2. Q2 Guidance: Revenue expected to decline 4%-6% QoQ with stable shipment volume but lower ASP. Gross margin projected at 18%-20%, 1 ppt below prior guidance due to increased equipment depreciation.

3. Equity Matters: Critical period for capacity expansion requiring continued investment, resulting in negative free cash flow; 2025 capex to remain flat, prioritizing capital allocation to core businesses to enhance competitiveness.

II. $SMIC(688981.SH) Earnings Call Details

2.1 Management Commentary

1. Overall Revenue: $2.247 billion, up 1.8% QoQ but missing guidance, mainly due to fab production volatility lowering ASP, with impact expected to persist into Q2.

2. Revenue Breakdown:

a. By Business: Wafer sales accounted for 95.2% (up ~5% QoQ). 8-inch and 12-inch wafer revenue grew 18% and 2% QoQ respectively.

b. By Region: China (84%, stable), US (13%), and EMEA (3%). Overseas revenue grew QoQ despite headwinds.

c. By Application: Smartphones (24%), PCs/tablets (17%), consumer electronics (41%), and IoT (8%) remained stable; Industrial/auto revenue grew >20% QoQ, contributing 10% vs 8% previously.

3. Growth Drivers:

a. Geopolitical shifts accelerated customer orders.

b. Domestic policy boosted commodity demand and industrial/auto inventory replenishment.

c. Strong auto electronics traction with ecosystem partners.

4. Technology Platforms:

a. BCD, MCU and specialty memory demand robust, related platforms revenue up ~20% QoQ.

b. Small-size AMOLED display drivers in shortage; 40nm display driver chips in mass production.

c. Expanding CIS/ISP capacity for more orders.

5. Capacity: Utilization at 89.6% (+4.1 ppt QoQ), with 8-inch catching up to 12-inch levels.

6. Strategy: Fundamentals unchanged with high utilization and supply chain localization. H2 outlook uncertain especially late Q3 onward; focus remains on core business resilience.

2.2 Q&A

Q: Impact of new US tariffs since April 2 on equipment procurement and customer demand?

A: Tariff impact is manageable (<1% currently) through negotiations and diversified supply chains.

Q: Sustainability of demand post-Q2?

A: Front-loading orders due to tariff uncertainty provide limited boost given capacity/logistics constraints. Market adjustments typically occur Aug-Sept.

Q: How does the "Stay Focused" strategy guide pricing/capex?

A: Unplanned fab maintenance and equipment issues temporarily impacted yields, but these are one-time. SMIC won't chase unproven expansions, prioritizing core competitiveness.

Q: Why did R&D spending drop to $150M in Q1?

A: Temporary shift to production for urgent orders. Annual R&D budget remains 8%-10% of revenue.

Q: How is SMIC boosting revenue per employee?

A: Higher utilization (+4.1 ppt) and automation (8-inch output up 18% with flat headcount). Non-core functions like dormitories are being spun off.

Q: What does "One Center, Global Operations" mean geopolitically?

A: Supporting global clients without overseas fabs. International revenue to grow further in 2025.

Q: 3-5 year capacity roadmap?

A: Steady annual addition of ~50k 12-inch wafer capacity ($7.5B capex, 82%-85% for equipment). Maintains >90% utilization and 20%+ gross margin floor.

Q: ASP vs cost dynamics?

A: ASP down 5% annually but no aggressive price cuts. Yield issues are temporary.

Q: PC/tablet revenue decline?

A: Smartphone/PC shipments may disappoint, leading to inventory adjustments. Panel oversupply pressures prices but SMIC won't lead discounting.

Disclaimer: Dolphin Research Disclosures