Direct Coverage of SMIC's Earnings Call: Tariff Anxiety Prompts Customers to Procure in Advance, Mobile Phone Customers May Lower Stockpiling Targets in Q3

Semiconductor Manufacturing International Corporation (SMIC) announced its best-ever performance for the same period in history in Q1, with revenue growth approaching 30% and net profit attributable to shareholders of the parent company growing by over 160%. However, as the revenue growth fell short of the previously announced performance guidance, it faced market skepticism. After the market opened today, SMIC's A-share price remained sluggish, dropping by over 4%, while its Hong Kong shares once fell by more than 7.7%.

At the earnings conference held by SMIC before the market opened today, Zhao Haijun, the company's co-CEO, stated that the growth in performance was mainly driven by customers pulling forward shipments due to changes in the international situation, increased demand for bulk products driven by domestic policies such as trade-in consumption subsidies, and the bottoming out and restocking in the industrial and automotive industries. However, due to unexpected events that caused production fluctuations in Q1, the company's revenue growth fell short of expectations, and the impact would continue into Q2.

Unexpected Yield Fluctuations in Q1 Expected to Persist into Q2

In Q1 this year, SMIC's overall shipments were equivalent to 2.29 million 8-inch wafers, representing a 15% increase QoQ.

According to the performance guidance previously provided by SMIC, the QoQ revenue growth for Q1 2025 was expected to be between 6% and 8%. However, the actual QoQ growth was only 1.8%.

Regarding the revenue growth in Q1 falling short of expectations, Zhao Haijun explained that the main reason was production fluctuations at the company's factories, which led to a decrease in the average selling price (ASP) in the second half of Q1.

Zhao Haijun further explained that after the earnings conference held in February this year, unexpected situations occurred during SMIC's annual maintenance, affecting product process precision and yield. Meanwhile, during the equipment verification process, SMIC discovered that the performance and process capabilities of some equipment needed improvement, leading to fluctuations in product yield.

From the financial data, these events also directly triggered a series of chain reactions at SMIC in Q1, including a decrease in the average selling price, a significant increase in capacity utilization rate, and a reduction in R&D investment.

In terms of capacity, it was introduced that due to a large number of urgent orders from customers in Q1, SMIC increased the allocation of more capacity to production to support rapid customer shipments, resulting in an increase in the utilization rate of both 12-inch and 8-inch capacities. The overall capacity utilization rate in Q1 increased by 4.1 percentage points QoQ.

"Under such circumstances, the company's R&D and wafer testing speeds were somewhat constrained." In Q1 this year, SMIC's research and development expenditure decreased from US$217 million in Q4 2024 to US$149 million. However, Zhao Haijun also stated that with the continuous release of the company's capacity, R&D investment would recover in the future.SMIC previously insisted on allocating 8% to 10% of its revenue to R&D investment.

Additionally, after discovering production line issues in Q1, SMIC, while handling affected wafers and negotiating shipments with customers, chose to lower product prices at the receiving end to alleviate customer concerns, thereby impacting ASP (average selling price) and revenue.

However, Zhao Haijun emphasized that the aforementioned incident was an isolated event, and no fundamental changes had actually occurred for the company. The impact is expected to continue for the next four to five months (i.e., the first half of Q2 and Q3), with some time required subsequently to bring the quality and yield of production line wafers up to the highest standards.

Mobile phone customers may lower their stockpiling targets in Q3.

Regarding pricing strategies, Zhao Haijun stated that SMIC would remain steady and would not proactively lower prices to secure orders, aligning itself generally with peers. However, at the same time, Zhao Haijun noted that a downward trend in prices within the foundry industry could currently be observed.

In response to analysts' questions about current demand changes across different market applications, Zhao Haijun said that the market had previously anticipated significant growth in smartphones and computers, leading to substantial downstream customer stockpiling.

However, according to SMIC's observations in May this year, the industry's total shipment targets for mobile phones set at the beginning of the year were overly optimistic and are expected to be revised, with a potential downward adjustment in customer stockpiling targets in Q3. PC product sales have been stable but lack significant growth, and downstream stockpiling is nearly complete. Only if the company lowers prices will customers have further stockpiling intentions; otherwise, orders will decline. The overall panel market, including TVs and tablets, is experiencing oversupply.

These factors have exerted downward pressure on prices in the foundry industry.

In terms of platforms, Zhao Haijun stated that amid a broadly mild market recovery, demand for BCD, MCU, and specialty memory is robust, with overall revenue increasing by approximately 20% QoQ. In the high-voltage driver and HV-CMOS sectors, constrained by capacity, AMOLED small-screen display driver platforms utilizing 40nm and 28nm technologies are in undersupply. In image sensors and signal processors, SMIC has increased its deployment of technology platforms and capacity expansion to better meet the requirements of new products.

Responding to tariff impacts: Customers' advance procurement brings order growth.

Zhao Haijun said that after the emergence of new market factors this year, there have been no significant changes in the fundamentals of Q2 compared to Q1. Customers are responding calmly, and the company's capacity utilization rate remains high. The company has observed positive signals of a bottom-out rebound across various industries, including industrial and automotive sectors. The localization shift of the industry chain continues to strengthen, with more wafer foundry demand returning domestically. The market is experiencing anxiety triggered by changes in tariff policies.

"After the tariff policy was introduced, Semiconductor Manufacturing International Corporation (SMIC) conducted internal calculations and had in-depth discussions with suppliers and domestic and overseas customers. The government also engaged in close communication with the industry. In fact, the direct impact on the industry was very small, less than one percentage point," said Zhao Haijun. Due to the exemption of some tariffs and the establishment of a diversified supply, semiconductor industry foundries can absorb the impact of tariffs at the procurement level.

Due to uncertainty about the future, downstream customers hope to stock up on inventory before the tariff increase. Zhao Haijun stated that this demand has indeed led to an increase in orders this year, but overall, the impact on SMIC is relatively small. At least, sales in the second half of this year and next year will not be affected. According to his analysis, the main reasons are that SMIC's capacity is fully utilized, with no significant increase at present, and there are also transportation capacity constraints such as sea and air freight. "Procurement itself has brought about an increase and stability in orders, but it will not be the most significant part of SMIC's current revenue," he said.

Going forward, "it is worth paying attention to whether the tariff policy will have a hard landing, whether market stimulus and infrastructure inventory have overdrawn future demand, and whether demand for commodities will decline after price increases caused by the new tariffs," Zhao Haijun said.