SMIC Shows Strong Q2, Eyes Set on Long-term Growth

Someday, SMIC hopes to become a global supplier of advanced microprocessors alongside TSMC.
Aug. 06, 2021 21:43
SMIC Shows Strong Q2, Eyes Set on Long-term Growth

SMIC has just reported solid Q2 performance, and it's time to check in with China's chip development market. How far has China advanced in building the chip since Washington waged its tech war? Still lagging behind the world's major foundries, China is slowly but surely paving way toward reaching its goal of achieving 70% self-sufficiency.

SMIC Recuperates After Sanctions

Semiconductor Manufacturing International Corp. (HKEX: 0981; STAR: 688981), China's biggest chipmaker, blacklisted in the United States, this week revealed strong Q2 results and continued expansion.

The chipmaker booked revenue of $1.3 billion in the second quarter, an increase of 43% year-over-year and 22 from the first quarter. Gross profit was $405 million compared to $248.6 million a year ago; gross margin was 30.1%, an improvement from 22.7% in the first quarter and 26.5% at the same time a year ago.

SMIC was included on the so-called "Entity List" in December 2020 among other companies the Trump administration claimed have ties to China's military. The inclusion meant that U.S. investors will be prohibited to back the companies with capital. At the time, SMIC said the blacklisting has "no significant impact on the company's operations." However, uncertainties remain.

The CFO of SMIC, Gao Yonggang, said in the statement the Q2 results were better-than-expected, but the company "still faces impact brought by the Entity List, and there are still uncertainties with our expectations in indicators."

In the third quarter, SMIC said it expects to post quarter-over-quarter revenue growth of between 2% and 4% and gross margin in the range of 32% to 34%. The annual revenue growth target is about 30%.

Slowly Moving Toward Becoming Global Supplier

So far, according to the Institute of Computing Technology in Beijing, China has mastered the production of the 28nm chip, used in 5G, EVs, UHV, AI, and other technologies. Now, as the institute's assistant director Yungang Bao says, China prepares to enter mass production of 14 nanometer (nm) chips next year. For the nation, that will mean an industrial upgrade, a step closer to the high-end processors, and further alleviation of the chip shortage.

"Domestic 14nm mass production will not only accumulate experience in higher-end chip technology in China's tough manufacturing process but also lay a solid foundation for the self-sufficiency rate of domestic chips to reach 70% by 2025," Bao said in a forward-looking statement.

At the same time, China continues to develop the 7nm chip, which would significantly reduce its dependence on other countries. For Beijing, developing the advanced microchip has been a key goal as geopolitical tensions and sanctions have left the nation somewhat stranded at a time of the global chip shortage.

But the 7nm node is still several years behind its advanced competitors. IBM (NYSE: IBM) created its first 2nm chip in May. The world's biggest foundry, Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), is working on its 2nm node and expects to reach production in 2023. TSMC is currently mass-producing its 5nm chips – and recent reports show the lines are running at full capacity. Other manufacturers, among them South Korea's Samsung Electronics and Intel (Nasdaq: INTC), are also ahead.

For now, China still lags behind the world's top chip makers, but it's a matter of time, as the country throws its resources into the sector. Once China does build its advanced microchip, however, it hopes to supply the globe alongside TSMC and help overcome mass chip shortage. 

SMIC, China, Chips