TMTPost -- The Hong Kong-listed shares of Semiconductor Manufacturing International Corporation (SMIC) surged as much as 9.5% before settling 4.9% higher Friday. The shares rallied last Friday after China’s top chipmaker posted much-better-than-expected earnings in the second quarter and upbeat guidance.

Credit：Xinhua News Agency

SMIC’s top and bottom line for the quarter ended June 2024 beat Wall Street estimates. SMIC’s revenue surged 21.8% year-over-year (YoY) to US$1.9 billion, while analysts projected the revenue to be US$1.84 billion. The revenue logged a 8.6% quarter-over-quarter (QoQ) increase, stronger than SMIC’s guidance range between 5% and 7%. The net income shed 59% YoY to US$164.6 billion but recorded a 10.6% QoQ rise, compared with analysts’ forecast of US$76.3 million. The gross profit fell 16.2% YoY to US$265 million, representing a 10.6% QoQ increase. The gross margin dropped 6.4 percentage points YoY to 13.9%, still topping SMIC’s guidance range between 9% and 11% and analysts’ estimated 11.2%. The margin slightly edged up 0.2 points from the previous quarter.

SMIC’s revenue in the second quarter was driven by continuing recovery of wafer shipments, which offsets a QoQ decline in prices.  SMIC shipped 2,112,000 units of 8-inch equivalent wafers, ring 17.7% from three months ago. SMIC that quarter earned US$900 per single 8-inch equivalent wafer, representing a 7.7% QoQ decline. Shipments reflected signs of a recovery in the global semiconductor industry after a prolonged slump that began in late 2022. the drop in ASP, or average selling price, is mainly due to the structural impact of the increase in demand for lower-priced 8-inch wafers.  

SMIC Co-CEO Zhao Haijun said his company has encountered a situation where some of our peers with excess capacity are using low prices to attract customers. "SMIC will not take the initiative to cut prices," Zhao told analysts in an earnings conference call on Friday. Zhao said the industry was experiencing some favourable trends which will last through the second half of the year. These included geopolitical tensions leading to local companies switching to local semiconductor suppliers for the Chinese market.

With the increase in downstream customers' demand, SMIC's performance improved during the second quarter, but was still at a relatively low level. Even though the performance is at troughs, SMIC maintains elevated capital expenditure. The company's capital expenditure that quarter was US$2.25 billion, with a YoY  increase of 30%. Based on financial results of ASML Holding NV,  customers of the world’s leading lithography machine manufacturer in mainland China still placed orders of ArF lithography systems on a large scale, much of which came from SMIC.

Compared with the results for the second quarter, SMIC reported more surprisingly better guidance for this quarter. It expected revenue in the third quarter to drop 13% to 15% QoQ. That suggests a revenue range between US$2.15 billion and US$2.19 billion, versus analysts’ projection of US$1.87 billion. SMIC also expected gross margin to be 18% to 20%, while analysts anticipated 12.08%.  

The revenue guidance signaled how downstream customers' purchases directly boost SMIC's shipments. The company is expected to further improve its revenue, fueled by the peak season for electronic products in the second half of the year.  The gross margin guidance justified the increase in utilization further led to the recovery of SMIC’s margin.