SMIC: The 'Hot' Valuation Meets the 'Cold' Answer Sheet, Is the Revaluation Path in Jeopardy?

$SMIC(00981.HK) $SMIC(688981.SH) On the evening of August 7, 2025, Beijing time, SMIC released its second-quarter financial report for 2025 (ending June 2025) after the Hong Kong stock market closed. The key points are as follows:

1. Overall Performance: Revenue & Gross Margin, both declined. SMIC achieved a revenue of $2.2 billion in the second quarter of 2025, compared to the market expectation of $2.16 billion, a quarter-on-quarter decline of 1.7%, within the guidance range of a 4-6% quarter-on-quarter decline.

The company's gross margin in the second quarter of 2025 was 20.4%, reaching the upper limit of the guidance range (18-20%), and the market consensus expectation (19.7%).

This quarter's performance declined quarter-on-quarter, mainly due to unexpected issues in annual production line maintenance and equipment improvements, as well as a decline in demand in downstream markets such as PCs, smart home, and consumer electronics.

2. Detailed Analysis of Three Core Indicators: Revenue, Gross Margin, and Capacity Utilization. In terms of revenue, through volume and price decomposition, the decline in SMIC's revenue this quarter was mainly due to a decrease in average product prices.

Due to factors such as early stocking of 8-inch wafers, the proportion of 8-inch wafer shipments continued to increase this quarter, structurally lowering the average product price. The company's product shipments increased by 4.3% quarter-on-quarter, while the average product price decreased by 5.7% quarter-on-quarter.

3. Business Progress: Driven by domestic substitution, the company's current revenue in China remains stable at over 80%. This quarter, only the mobile phone business and industrial and enterprise business saw quarter-on-quarter growth, while other segments (PC, consumer electronics, etc.) declined.

Even the mobile phone business only grew by 1.7% quarter-on-quarter this quarter, far below the double-digit quarterly growth of the past two years. The domestic market had the support of state subsidies in the first half of the year, but this did not significantly boost the company's performance, as demand for electronic terminals was quite sluggish.

4. Expense and Capital Expenditure: The company's operating expenses mainly come from R&D expenses and administrative expenses. This quarter, R&D expenses remained flat year-on-year, while administrative expenses increased by 17.6% year-on-year, due to increased expenses related to factory openings.

This quarter's capital expenditure was $1.885 billion. Despite sluggish downstream demand, the company maintained high capital expenditure. Under the influence of rising capital expenditure in recent years, the company's depreciation and amortization expenses in the first half of the year increased by 13%.

5. SMIC's Guidance for Next Quarter: The company expects third-quarter 2025 revenue to increase by 5-7% quarter-on-quarter, corresponding to $2.32-2.36 billion, with market expectations at $2.37 billion; next quarter's gross margin is expected to be 18-20%, with market expectations at 21.1%.

Dolphin Research's Overall View: Weak Fundamentals, Semiconductor Friction 'Forces' Valuation

Although SMIC's revenue and gross margin this quarter both met previous guidance expectations, both figures still declined quarter-on-quarter. Management also mentioned that the company was affected by unexpected issues in annual production line maintenance and equipment improvements, which directly impacted this quarter's performance.

From the company's guidance for the next quarter, both revenue and gross margin expectations are below market expectations, indicating the current sluggish downstream demand. Even with the support of state subsidies, the company's PC and consumer electronics businesses have already declined this quarter.

However, SMIC is unique in that it is not only affected by business fundamentals, but its main focus points include:

a) Industry Cycle Level: Unlike TSMC's advanced processes, SMIC's current performance still mainly comes from traditional fields, with AI demand having little impact on the company.

As for the traditional mobile phone and PC markets, this quarter only saw single-digit year-on-year growth, indicating a slow recovery. The company's management also believes that demand visibility in the second half of the year is low, and after the early stocking demand in the smartphone and PC fields, they hold a cautious attitude towards year-end customer demand;

b) Domestic Substitution and Sino-US Friction: The increase in domestic substitution demand can fill the company's capacity utilization rate during the semiconductor industry's downturn, thereby smoothing the cyclical impact. With the help of domestic demand, SMIC continues to narrow the gap with Samsung (the second-largest global wafer foundry).

Under the influence of Sino-US friction, SMIC's domestic revenue share has exceeded 80%, with limited room for further improvement. The company's further improvement is constrained by breakthroughs in advanced processes and AI fields. The domestic demand brought by Sino-US friction can smooth the company's cyclical fluctuations and enhance confidence in self-control, to some extent driving valuation improvement.

SMIC's Hong Kong stock valuation has increased from 2 times PB to the current 2.6 times PB, mainly due to the recent impact of Trump's tariff policy: the US will impose a 100% tariff on imported semiconductor products, but companies that have committed or initiated procedures to manufacture related products in the US can be exempted, which will further promote the establishment of autonomous and controllable semiconductor industry chains in various countries.

c) Southbound Funds Situation: Fully Reflecting the Pricing Attribute of Domestic Capital. If SMIC (Hong Kong stock price) and the proportion of southbound holdings are placed together, the correlation between the two trends can be clearly seen. As the proportion of southbound holdings has risen again recently, SMIC's stock price has also increased.

Dolphin Research previously discussed SMIC in detail in "An Alternative Perspective on SMIC: How Big is the Faith Gap Behind the Hong Kong A Price Difference?": The company is still in a catch-up phase, requiring continuous external blood transfusion to expand capacity. Before key technological breakthroughs, this is a "policy loan + government capital + social capital" black hole business model.

For foreign investors, apart from stock price changes, there is currently no visible return on investment in the company's operations. The entry of domestic capital is partly accompanied by long-term faith and partly by the strategic pattern of "assisting the country".

From an investment perspective, Dolphin Research believes that SMIC is essentially a heavy asset company with options for "self-control and technological breakthroughs". Recently, in the context of a sluggish traditional semiconductor industry, the stock prices of peers such as UMC and GlobalFoundries have continued to decline. In the absence of significant breakthroughs in advanced manufacturing, SMIC's counter-trend rise is mainly catalyzed by the recent US semiconductor tariff event.

If only considering SMIC's operational situation, and referencing the valuations of UMC and GlobalFoundries, the company's relatively reasonable valuation range is around 1-2 times PB. During the previous industry downturn, SMIC's Hong Kong stock valuation once fell to around 0.8 times PB.

Previously, driven by optimistic expectations of domestic AI such as Deepseek and Sino-US friction factors, the company's valuation reached a relatively high level of 2.88 times PB at the beginning of the year.

Recently, the company's valuation has increased again against the trend, mainly due to the impact of semiconductor friction events. If there are further escalations in friction events, it is still expected to further assist in the phased improvement of valuation. Apart from event catalysts, the company's valuation also fell below net value during previous operational downturns.

Overall, SMIC's current performance fundamentals are still quite sluggish, with no signs of significant improvement. The current company valuation does not reflect the company's operational situation, but more reflects the valuation under the catalysis of events such as Sino-US friction and domestic AI stories. Purely from an operational perspective, in the absence of substantial breakthroughs in advanced manufacturing and no improvement in the industry, the company's relatively reasonable valuation range is 1-2 times PB.

However, under the influence of Sino-US friction and semiconductor faith, the company's valuation has achieved a counter-trend increase. Even in the absence of substantial breakthroughs in advanced processes, if related frictions intensify or semiconductor self-control is further strengthened, it may still boost valuation in the future.

For investors, the current stock price mainly does not reflect the company's operational situation, but more reflects the game of events and the support of faith. Future attention should be paid to the company's management's outlook on operations and views on semiconductor friction. Dolphin Research will also release detailed minutes.

Here is Dolphin Research's detailed analysis of SMIC:

I. Core Metrics of SMIC: Revenue, Gross Margin, and Capacity Utilization Rate

Core Metric 1: Revenue

In Q2 2025, SMIC achieved revenue of US$2.21 billion, a QoQ decrease of 1.7%, falling within its guidance range (QoQ decrease of 4-6%). This was primarily due to unexpected issues arising from annual production line maintenance and equipment improvements, as well as a decline in demand from downstream markets such as PCs, smart home devices, and consumer electronics.

Analyzing the main factors influencing SMIC's revenue decline this quarter from the perspectives of volume and price:

1. From a volume perspective, SMIC's wafer shipments (8-inch equivalent) reached 2.39 million units this quarter, a QoQ increase of 4.3%.

2. From a price perspective, SMIC's average revenue per wafer (8-inch equivalent) was US$924 this quarter, a QoQ decrease of 5.7%.

From a volume-price breakdown: Although affected by events like equipment improvements, the company's shipments still saw a QoQ increase this quarter. However, the company's average selling price (ASP) for products showed a significant decline this quarter, mainly because the proportion of relatively lower-priced 8-inch products in shipments increased, structurally pulling down the company's ASP.

Looking ahead to Q3 2025, SMIC has provided quarterly revenue guidance of a 5-7% QoQ increase, corresponding to US$2.32-2.36 billion. This is lower than the market consensus expectation (10% QoQ increase). Although there is demand from companies pre-stocking 8-inch wafers, revenue from 12-inch wafers has seen QoQ declines for two consecutive quarters. Considering the downstream markets, even if some customers prepare inventory for the peak season in the second half of the year, demand remains relatively weak.

Core Metric 2: Gross Margin

In Q2 2025, SMIC's gross margin was 20.4%, a QoQ decrease of 2.1 percentage points (pct). This was higher than the market consensus expectation (19.7%) and reached the upper limit of its guidance range (18-20%).

Breaking down the company's cost structure to analyze the reasons for SMIC's gross margin changes this quarter:

Gross Profit per Wafer = Revenue per Wafer - Fixed Cost per Wafer - Variable Cost per Wafer.

1. Revenue per Wafer: SMIC's average revenue per wafer (8-inch equivalent) this quarter was US$924, a QoQ decrease of US$56/wafer.

2. Fixed Cost per Wafer (Depreciation and Amortization): Fixed cost per wafer (8-inch equivalent) was US$314 this quarter, a QoQ decrease of US$34/wafer. The company's depreciation and amortization for this quarter was US$750 million. With QoQ growth in shipments, the fixed cost per wafer was further diluted.

3. Variable Cost per Wafer (Other Manufacturing Expenses): Variable cost per wafer (8-inch equivalent) was US$422 this quarter, a QoQ increase of US$11/wafer. Affected by equipment maintenance and improvements, the company's other manufacturing expenses increased this quarter.

4. Gross Profit per Wafer: SMIC's gross profit per wafer (8-inch equivalent) was US$188 this quarter, a QoQ decrease of US$33/wafer.

Through the cost breakdown, it was found that the company's gross profit per unit declined this quarter, mainly due to the drop in average selling price. The company's gross margin returned to around 20% this quarter.

Looking ahead to Q3 2025, SMIC still provided a quarterly gross margin guidance of 18-20%, which is lower than the market expectation (21.1%). Combined with the company's revenue guidance, it is expected that the company's shipments will rebound next quarter, but the average selling price of products will remain under pressure.

Core Metric 3: Capacity Utilization Rate

The capacity utilization rate not only reflects SMIC's quarterly operating performance but also sheds light on the overall prosperity trend of the wafer manufacturing industry. Especially during a relatively sluggish period for semiconductors, monitoring the capacity utilization rate helps to grasp changes in supply and demand for the company and the industry.

In Q2 2025, SMIC's capacity utilization rate was 92.5%, continuing its rebound this quarter. Considering the company's revenue structure and next quarter's revenue guidance, Dolphin Research believes that the rebound in the company's capacity utilization rate this quarter was mainly driven by some customers' early stocking of 8-inch wafers, while demand from major downstream markets (e.g., smartphones, PCs) remains relatively weak.

Based on calculations of the company's capacity utilization rate and shipments this quarter, SMIC's total capacity reached 2.584 million wafers, a QoQ increase of 1%. As the company's annual capital expenditures have remained above US$7 billion in recent years, its production capacity has continued to expand. SMIC's capital expenditure this quarter was US$1.885 billion. If the company continues to maintain its full-year target of over US$7 billion, it will increase the intensity of capital expenditure in the second half of the year.

II. SMIC from a Business Perspective

After reviewing the three key metrics, Dolphin Research will now provide a comprehensive overview of SMIC's quarterly business performance:

2.1 Downstream Market Segments

This quarter, SMIC's smartphone business revenue accounted for 25.2%, with quarterly revenue slightly increasing QoQ to US$527 million. Consumer electronics business remained the company's largest revenue source this quarter, accounting for 41%. However, even with the support of China's subsidy policies, the company's consumer electronics revenue experienced a QoQ decline this quarter. The company re-segmented its past "other businesses," with computer and tablet business accounting for 15% this quarter (a continued decline), and industrial and automotive business increasing to 10.6%.

Combining the performance of various downstream businesses, the company's QoQ revenue growth this quarter came from inventory preparation in smartphone and industrial & automotive businesses. The latter also primarily contributed to the QoQ rebound in 8-inch wafers. However, it's worth noting that the smartphone business only saw a QoQ increase of 1.7% this quarter, significantly lower than the double-digit QoQ growth observed in the same period over the past two years.

2.2 Wafer Sizes

Starting from Q1 2022, SMIC no longer discloses revenue breakdown by process node, only providing revenue proportions for 8-inch and 12-inch wafers, which prevents a detailed view of revenue changes for each node.

This quarter, SMIC's 12-inch wafer revenue accounted for 76.1%, continuing its decline. Specifically, looking at the proportion of the two wafer sizes and the company's revenue, SMIC's 12-inch wafer revenue declined by 4.2% QoQ this quarter, while 8-inch wafer revenue increased by 7.3% QoQ.

The company's revenue only declined by 1.7% this quarter, mainly supported by inventory preparation demand for 8-inch wafers from the industrial and automotive businesses. If not for the boost from 8-inch wafers this quarter, the company's revenue decline would have been more significant.

2.3 Regional Distribution

SMIC has re-adjusted its regional revenue distribution methodology, changing from the previous "North America / Mainland China & Hong Kong / Europe & Asia" to the current "China Region / Americas Region / Europe & Asia Region". Due to the methodology adjustment, there are slight data discrepancies.

From this quarter's regional revenue, the China Region maintained 84.1% of revenue, remaining the company's largest revenue source. Furthermore, the company's revenue share from the Americas Region and Europe & Asia Region remained at 12.9% and 3% respectively this quarter.

SMIC's revenue in the China Region this quarter was US$1.86 billion, a QoQ decrease of 1.9%. Even with the assistance of national subsidy policies, the domestic downstream market remains lukewarm, and the company lacks confidence in its operational outlook for the second half of the year.

III. SMIC from an Operational Data Perspective

3.1 Operating Expenses

From the perspective of operating expenses, SMIC's operating expenses this quarter were US$299 million, an increase, mainly due to the rise in the company's general and administrative expenses this quarter. Operating expenses as a percentage of revenue increased to 13.5% this quarter.

Breaking down operating expenses this quarter: R&D expenses were US$182 million, general and administrative expenses were US$189 million, and sales and marketing expenses were US$13 million. Among these, general and administrative expenses increased QoQ, mainly due to higher new fab startup costs this quarter.

3.2 Operating Indicators:

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

• SMIC's inventory this quarter was US$3.143 billion, a QoQ increase of 14.7%.

• SMIC's accounts receivable this quarter was US$1.21 billion, a QoQ increase of 5.2%.

Combining the relationship between inventory & accounts receivable and revenue in the balance sheet, inventory/revenue and accounts receivable/revenue for this quarter were 142% and 55% respectively. From the perspective of operational indicators, SMIC's inventory ratio has increased, which to some extent reflects the relatively low downstream demand.

3.3 EBITDA Indicator:

From an EBITDA perspective, SMIC's earnings before interest, taxes, depreciation, and amortization (EBITDA) this quarter was US$1.129 billion, a decrease.

Breaking down the indicators, SMIC's EBITDA mainly comes from the release of operating profit and depreciation & amortization. It is estimated that the EBITDA margin this quarter declined to 51.1%. The company's profit decline this quarter was mainly due to the pressure from decreasing gross margin and increasing general and administrative expenses.