Semiconductor Manufacturing, Financial Review, Technology Advances, Guidance

Semiconductor Manufacturing International Corporation (NYSE: SMI) is one of the leading semiconductor foundries in the world and the largest and most advanced foundry in mainland China. SMI provides integrated circuit (IC) foundry and technology services on process nodes from 0.35 micron to 28 nanometers. Headquartered in Shanghai, China, SMI has an international manufacturing and service base.

On November 14th, the company announced results for the quarter ended September 30, 2017. The company delivered another quarter of muted performance. Though it was in line with management’ guidance and grew 2.5% quarter over quarter. The sequential growth came mainly from the broad-based recovery in smartphone-related shipments. By process node, 28nm wafer revenue increased 38.9% quarter over quarter, and 0.18um grew 33.8% quarter over quarter.


Results Vs. Original Guidance:

Also, the Q4 guidance from management remained muted with revenue target between $777.4M to $792.8M (as against an expectation of $830.05M); gross margin, 18% to 20%; non-GAAP operating expenses, $204M to $210M.

Following this, analysts tracking the stock have revised their ratings, and subsequently, a number of investors and hedge funds have recently modified their holdings of the stock. On Nov 16th Jefferies, downgraded Semiconductor Manufacturing from Buy to Hold and suggested a median price target of $5.75.  Latest analyst standings on the stock are 1 Buy and 3 Underperform.

In three years preceding 2017, SMI had grown revenue and profitability on high utilization, and in these two years, it entered a period of transition as it prepares its technology and facilities for the next stage of growth. In the near-term, the company’s growth drivers include: 28nm, flash memory, fingerprint sensors, and power management ICs. In the long-term, it works to speed up execution and focus its resources on key technology platforms, in which it strives to be the “foundry-of-choice.”

The management is focusing on its investment into strategic areas that support the long-term growth, profitability, and viability of its business. With its strengthened team, focused direction, and strong position in China, SMIC is expected to execute on its targets and benefit from the opportunities in the IC market.

About the company: Semiconductor Manufacturing International Corporation (NYSE: SMI; SEHK: 981) is one of the leading semiconductor foundries in the world and the largest and most advanced foundry in mainland China. In China, SMI has a 300mm wafer fabrication facility (fab) and a 200mm fab in Shanghai; a 300mm fab and a majority-owned 300mm fab for advanced nodes in Beijing; 200mm fabs in Tianjin and Shenzhen; and a majority-owned joint-venture 300mm bumping facility in Jiangyin; additionally, in Italy SMI has a majority-owned 200mm fab. SMIC also has marketing and customer service offices in the U.S., Europe, Japan, and Taiwan, and a representative office in Hong Kong.

Market potential and drivers: The company’s business and marketing risk profile are expected to leverage on Rapid Growth of China IC Market and the incredible rise of IoT, Internet of things in our everyday life.

The offtake is expected to be driven by significant Domestic China IC Consumption (Domestic China IC consumption accounts for 2/5 of worldwide consumption) with Forecast IC purchases by local brands ~ $83B in 2017

Recent announcements:

In September, SMI announced the successful fabrication with the first domestically designed manufactured MBIoT in China with ZTE. This MBIoT can be widely used in smart meters, shared bikes, smart applications, smart CD and others

It also announced the availability of the low power platform for IoT using its 55 ultra-low power processes. The platform is optimized for functionality common in IoT designs such as voice recognition, face detection, and sensor fusion.

In addition, SMI announced with Chengdu Analog Circuit Technology, the availability of analog IP solution using 55 nanometers, eFlash technology engineered for very low power IoT applications that need low [indiscernible] and extended battery life.


3rd Quarter 2017 Financial Results:

Revenue and Profitability:

  • In third quarter 2017, SMI’s revenue was $770 million, an increase of 2.5% quarter-over-quarter, mainly due to the increase of wafer shipment. Gross margin was 23%, a decrease of 2.8 percentage points primarily due to lower fab utilization which was 83.9%. Non-GAAP operating expenses were $184 million. Profit for the period attributable to SMIC was $26 million, while non-controlling interest was $5 million.


  • At the end of third quarter of 2017 cash on hands including other financial assets were $1.7 billion. Gross debt to equity ratio was 52%, and net debt to equity ratio was 24%. Regarding cash flow, SMIC generated $420 million of cash from operating activities in the third quarter.


Guidance for the fourth quarter:

Long-term vision: SMI’s management positions itself as the long-term viable foundry partner of choice in China. It hopes to establish comprehensive technology roadmap with its customers on mature and advance nodes. To meet some of the increased future demands of customers, it must accelerate execution and narrow down technology gap.


Key risk factors and potential stock drivers:

The company continues to be in its transition period for the second year and the positive results of the management team rebuild, refocus on expansion and technology is critical for its business risk profile.

The company has had experienced margin erosions due to change in product mix and a sharp increase in R&D spending. Therefore, management’s ability to ramp up profitability while sustaining revenue growth would be a critical stock sensitivity factor for the company.

The company has had incurred significant CapEx in the past, causing a burden on its overall liquidity and financial flexibility. The trend in CapEx cycle (along with possible funding pattern) would be a stock sensitivity factor over the medium term.

SMI’s business is highly competitive. It faces significant competition that it anticipates will continue to intensify. If the company is not able to maintain or improve its market share, its business could suffer.


Stock Chart:

  • On Friday, November 24th, 2017, SMI closed at $7.59 (down 1.43%) on an above average volume of 686,837.00 shares exchanging hands. Market capitalization is $7.09 billion. The current RSI is 52.47
  • In the past 52 weeks, shares of SMI have traded as low as $4.49 and as high as $9.14
  • At $7.59, shares of SMI are trading above its 50-day moving average (MA) at $6.77 and above its 200-day moving average (MA) at $6.01.
  • The present support and resistance levels for the stock are at $7.46 & $7.70 respectively.



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