US Lifts Trade Restrictions, Bars China's Largest Chipmaker SMIC
On September 26, SMIC (00981:HK, 688981:SH), China's biggest semiconductor foundry, was banned by the United States Department of Commerce from using any American technology, per industry sources.From now on, SMIC's suppliers will need to apply for a special license to continue their business with the chipmaker.
Favored by 5G, SMIC Raises Financial Projections
On October 15, SMIC announced it was to increase its growth projections for financials during the third quarter of 2020. The updated month-over-month growth for revenue is anticipated to range between 14% to 16%, risen from 1% to 3%, and the m-o-m growth for gross profit margin is expected to reach 23% to 25%, increased from 19% to 21%.
The favorable improvements come thanks to the changes in the product portfolio that are mainly led by the price inflation in the eight-inch wafer, and the increase in some other businesses, based on the company’s press release.
This allies to the statements from the co-CEO of SMIC, Zhao Haijun, made two months ago – that the application of 5G had brought higher demands for certain fine standards in chips, and therefore pushed up the price on the eight-inch wafer. SMIC will increase its monthly production by 30,000 pieces more on such wafers, and 20,000 more on the 12-inch ones.
In the second quarter of 2020, SMIC also performed well. The revenue increased year-over-year by 18.7% to USD 938 million, and the quarterly net income reached a historic high of USD 138 million. The gross profit margin in the first and second quarters was reported as 26.5% and 25.8%, respectively.
SMIC H-shares Up by 68.76% So Far in 2020
On July 16, 2020, SMIC's (688981:SH, 00981:HK) shares kicked off trading on the star market and its H-shares went down by 25.23%. After that, by September 23, 2020, SMIC's A-shares decreased by 32.2% compared with the closing price on the first trading day, during the same period, its H-shares went down by 29.9%.
Contrary to the performance of the stock price, SMIC made progress in terms of financial results. It realized a 29.4% and 329.8% increase in revenues and net profit in the first half of 2020. During the same period, net profits after deducting non-curring profit and loss increased from negative CNY 595.86 million to positive CNY 541.92 million.
There are several reasons for the differences between the performance of SMIC's stocks and financial results:
• SMIC cannot catch up with TSMC (2330:TW, TSM:NYSE). TSMC is the largest foundry in the globe with a 51.5% market share and is the only one company owning 5nm processing techniques. By now, SMIC is capable of 14nm node and accounts for 4.8% of the global foundry market. In 2019, TSMC's R&D expenditures were CNY 21.1 billion, five times that of SMIC.
• High valuation. The P/E value of SMIC's A-share and H-share is 146.82 and 46.77 while that of TSMC is 26.12. According to the recent performance of stocks in the mainland stock market, stocks with low-valuation increased while other stocks went down, entering an adjustment period.
• Possibility of being added into the entity list. On September 6, there was news saying that the United States government is considering to blacklist SMIC, and then on the next trading day, SMIC's H-shares and A-shares plunged by 23% and 11%. Considering that the company's technique contains American technologies and EUV machines for 7nm and less is still on the way, SMIC's situation is not that easy.
Although SMIC is the most advanced foundry in the Chinese mainland market, choosing an appropriate time to buy is more important. For now, waiting to see is a better option.
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The global tech and economic tussles are entering a new stage: the United States has reportedly launched an internal conversation on whether Shanghai-based Semiconductor Manufacturing International Corporation (00981:HK, 688981:SH) or SMIC, should be banned from using American technologies. The largest contract chipmaker in China's mainland was reportedly accused of working for the country's military sector.
Currently dominating the technology market worldwide, the US aims to impose hurdles in the path of the fast-growing challenger – China.
There are many examples of the world's second-largest economy's national champions that have become more than significant on a global scale. Huawei, for example, possesses plenty of advantages in the wireless sphere, so it shouldn't have been a surprise that the company has lately become the focus of the US government's suppression. SMIC is the fifth-largest foundry globally, with 4.8% of market share. It is also the largest fab with the most advanced processes – i.e. working at a 14nm-scale – among Chinese mainland chipmakers.
In addition, SMIC has won a large number of funds from the National Integrated Circuit Industry Investment Fund (dubbed the Big Fund), with the country's government has launched a set of policies supporting the development of the semiconductor domain. Apart from that, China has added the 'third-generation semiconductors' into its fourteenth five-year plan.
While those policies and plans show the Chinese government's ambitions of developing local semiconductor companies, they have been deemed too 'aggressive' by the US, which is clearly afraid of the new challenger achieving global technological supremacy.
From the first to the third generation semiconductor, the global industry chain has become mature with American technology flooding the whole chain. For instance, about 7% of TSMC's 7nm techniques originated in the United States. ASML's ratio is even larger. (TSMC is the world's largest semiconductor fab with over half of the global foundry market; ASML is the biggest photolithography system supplier planetwide.)
During the recent meeting with investors, SMIC's executives said (in Chinese) that the company would not be able to produce 14nm chips for Huawei, which means that the product lines of SMIC contain American technology.
Regardless of the purpose of the US government adding SMIC to the blacklist, the performance of the foundry's stock price has shown that the investors are mainly bearish on it. There are a few reasons:
• In the case of getting blacklisted by the US government, SMIC's business growth will become harder. In the high-tech space, the most cost-effective way is to follow the experienced predecessors' methods (and China has been doing this exceptionally well over the past few years). TSMC is currently serving clients at the 7nm and 5nm nodes, which was achieved by combining its own developments with American technologies. If SMIC is blacklisted, it will need to invent a different way, which means higher costs and a longer R&D period.
• SMIC's process techniques are lagging behind those of TSMC. TSMC is reportedly delivering 5nm chips while SMIC only started the mass-production of its 14nm devices at the end of 2019. Although 14nm is an important node in the contemporary digital system, the 5nm is necessary for the 5G rollout. Driven by the new generation of wireless, the market share of TSMC will increase.
• The valuations of Chinese high technology companies are currently overheated, which is widely known by the local retail investors: the semiconductor chip stocks have recently been sliding down.
While SMIC's possible ties with the Chinese military are under scrutiny, it is at risk of becoming a significant target in the long-lasting Huawei saga. Seems like it's not willing to take on this profile: the company said on September 5 that it has no relationship with the country's army forces and that its chips and services are designed "solely" for civilian and commercial uses.
The semiconductor industry is the foundation of the global technology ecosystem and, thus, an important future battleground. China and the United States are not likely to give up opportunities created by 5G and the progress across multiple industries. The mounting of massive tensions is just getting started.
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