SMIC shares plunge nearly 7% after disappointing earnings report

In a recent earnings report, Semiconductor Manufacturing International Corporation (SMIC), the largest contract chipmaker in China, posted a first-quarter revenue of $2.24 billion. This represented a 28% increase from the previous year but was below analysts' expectations, leading to a nearly 7% drop in share price. The company also noted a significant increase in profit attributable to shareholders, soaring 162% year on year to $188 million, though this also fell short of market forecasts. Despite the earnings miss, analysts pointed out that SMIC's utilization rate was nearly 90%, indicating robust domestic demand for semiconductors, especially due to the growth in smartphone and consumer electronics production. However, the firm faces challenges as its gross margin is projected to decline ranging 18% to 20%, down from 22.5% in the previous quarter. The earnings call revealed that although profit figures exceeded the previous year's performance, they did not meet the firm’s own anticipated targets. During the call, company representatives attributed their growth in wafer shipments—up 15% quarter on quarter and 28% year-on-year—to factors such as geopolitical shifts and increased domestic manufacturing demand driven by government policies. 84% of SMIC's first-quarter revenue came from Chinese customers, highlighting their strong domestic market presence. Yet, the decreasing research and development spending, which fell to $148.9 million from $217 million the previous quarter, raises concerns about future growth and innovation potential. The firm is strategically positioned as a key player in China's ambition to build a self-sufficient semiconductor supply chain, underscored by the substantial government investment in the sector. Nevertheless, the uncertainty stemming from the U.S.-China trade conflict and its impacts on demand poses further challenges for SMIC, making the outlook for the rest of the year less predictable.