SMIC – Good News Bad News
China’s largest foundry SMIC (688981.CH) reported stronger than expected 1st quarter sales of $1.1b, up 12.5% q/q and up 22% y/y and gross profit of $250.1m, up 41.5% q/q and up 7.1% y/y, with gross margins increasing from last quarter’s 18.0% to 22.7% in 1Q, although down from the 25.8% GM seem in 1Q ’20. The company shipped 1.559m 8” wafer equivalents, up 10.1% from the previous quarter and up 10.8% y/y at a utilization rate of 98.7%, up from 95.5% in 4Q and up slightly from 98.5% seen in 1Q last year. The company expects sales to increase by 17% - 19% in 2Q and gross margins to increase to between 25% and 27%. SMIC had given full year guidance in February, expecting sales to increase in the mid to high single digits and for gross margins to be in the mid-teens, now indicating that they expect to beat that guidance for the year, but given the uncertainties in the industry, they declined to give a new forecast. The company pointed to a number of product segments that were out of stock currently, including power management, RF, drivers for MCUs, CIS image sensors and certain storage products, and expected that 15nm, 18nm, and 40nm nodes would be the tightest. SMIC also indicated that it has tried to migrate some products to less tight nodes, but in reality the overall capacity remains constant and that at such high utilization rates, the migration results are relatively small.
While the good news certainly was good, as this was the company’s 2nd best quarter ever, management did indicate that while negotiations were heading in the right direction, it was expecting that the US restrictions placed on the company last December by the previous administration, could delay the mass production timeline of the company’s new $2.35b 28nm/40nm foundry project in Shenzhen that was announced in March and could also delay the planned expansion of its 8” and 12” fabs, which were expected to see 45,000 wpm and 10,000 wpm increases this year. With expected delays, the expansion contribution will be pushed to the back end of 2H and will likely be less than expected for the full year because of the delays in procuring equipment. While that is certainly distressing for SMIC, they still gave 2021 guidance a boost, even under these circumstances.
Given that SMIC is the 4th largest global foundry, despite the political optics of lessening the hold the US has over equipment vendors that supply SIC, the global semiconductor shortage affects the US economy in many visible and some less visible ways. Automotive plant shutdowns, higher device prices, and potential end-user product shortages will capture more headlines than allowing SMIC to build capacity. While eventually equipment trade license grants would come to light and be promoted by anti-China trade groups, granting trade licenses, especially for 28nm equipment, would be a more subtle way of helping to alleviate the semiconductor shortages without making visible public policy changes.
While the good news certainly was good, as this was the company’s 2nd best quarter ever, management did indicate that while negotiations were heading in the right direction, it was expecting that the US restrictions placed on the company last December by the previous administration, could delay the mass production timeline of the company’s new $2.35b 28nm/40nm foundry project in Shenzhen that was announced in March and could also delay the planned expansion of its 8” and 12” fabs, which were expected to see 45,000 wpm and 10,000 wpm increases this year. With expected delays, the expansion contribution will be pushed to the back end of 2H and will likely be less than expected for the full year because of the delays in procuring equipment. While that is certainly distressing for SMIC, they still gave 2021 guidance a boost, even under these circumstances.
Given that SMIC is the 4th largest global foundry, despite the political optics of lessening the hold the US has over equipment vendors that supply SIC, the global semiconductor shortage affects the US economy in many visible and some less visible ways. Automotive plant shutdowns, higher device prices, and potential end-user product shortages will capture more headlines than allowing SMIC to build capacity. While eventually equipment trade license grants would come to light and be promoted by anti-China trade groups, granting trade licenses, especially for 28nm equipment, would be a more subtle way of helping to alleviate the semiconductor shortages without making visible public policy changes.
SMIC Wafer Revenue By Application - Source: SMIC
SMIC Wafer Revenue by Technology - Source: SCMR LLC, SMIC
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