China’s biggest chip maker reports near 80% profit drop, with exec warning of ‘gray rhino effect’
“” Geopolitical factors have brought duplication of construction and uncertainty of supply chain to the industry’s medium- to long-term development and have brought the Gray Rhino effect. “”
That was a top executive from China’s biggest chip maker, Semiconductor Manufacturing International Corp.
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speaking as the company’s shares slid 6% in Hong Kong on Friday following results that showed plunging profits and weak sales.
The largest China foundry, which manufactures chips designed by other companies, reported that its third-quarter net profit fell 76.7% to $93.9 million, versus expectations of $173.9 million from analysts polled by FactSet. Revenue totaled $1.621 billion, up 3.9% sequentially but down 15% on a year-over-year basis. Analysts had been looking for $1.626 billion.
SMIC also said gross margins slipped to 19.8% in the third quarter from 20.3% in the second quarter.
Looking ahead, SMIC said fourth-quarter revenue should grow by 1% to 3%, but that gross margins will “be dragged by the continuous depreciation pressure of the new capacity, which is expected to be in the range of 16% to 18%.”
It plans to raise capital expenditures to around $7.5 billion.
In a call with analysts on Friday, co-CEO Zhao Haijun blamed geopolitical factors and supply chain issues for a so-called “gray rhino effect,” referring to a known unknown or highly likely threat that is largely being ignored.
“All segments of the industry supply chain are exploring ideologies and paths, and we are also maintaining cautious observation and persistent attempts,” he said on a conference call.
Like other chip makers, the partially state-owned SMIC has been grappling with weak demand amid a slowing global economy and supply-chain issues. It has also been under U.S. sanctions since 2020.
Haijin said the start of overseas destocking of chips, notably for mobile phones and consumer-related integrated circuit chips, came later than on the domestic side. While that trend remains “difficult,” it has enabled China sales to make up a greater portion of the company’s overall revenue.
China accounted for 84% of SMIC’s revenue in the third quarter, up from about 80% in the second quarter.
Haijin added that the market appears to have “stabilized,” with demand for mature foundries, such as SMIC’s, expected to grow next year due to falling inventories.
“However, we haven’t seen drivers and momentum for significant growth for the market. [It still] need[s] to wait for the recovery of global macroeconomics. We think this is the fundamental situation for the coming year,” he said.
The Shanghai-baed company’s results were slightly puzzling, given that SMIC should have benefited from building Huawei’s 7-nanometer Mate Pro chip, which has been “selling very well,” Jenny Hardy, portfolio manager at GP Bullhound, told clients in a note.
“The decline in profitability is no real surprise to us — we questioned how profitably SMIC could build 7nm chips (or whether Huawei is paying for it), but we are surprised at the lackluster sales, which were down 15%” from a year before, she said.
Hardy said SMIC’s comments about destocking among international clients run counter to what she’s heard elsewhere. “We wonder if actually SMIC is losing share at international clients (perhaps now viewed as too politically sensitive?),” she said.
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