China's leading semiconductor foundry, SMIC, says this year will prove to be challenging for the company, which will see reduced margins and profits (via DigiTimes and TrendForce). These warnings come just after SMIC posted better-than-expected financial results for the fourth quarter of 2023, but the semiconductor firm apparently expects economic and political developments to impact its business. SMIC's stock price has dropped roughly 20% over the last month, showing that the market is, at best, tepid about SMIC in 2024.
It might seem surprising that SMIC itself is so negative about its future prospects, especially since it outperformed analyst expectations for the fourth quarter of last year, seeing a small uptick in revenue but an even greater increase in net revenue compared to predictions. SMIC was likely able to beat expectations thanks to Huawei's orders for 7nm smartphone chips, perhaps the most cutting-edge processors that SMIC makes.
However, the company's fourth-quarter earnings are only good compared to its third-quarter earnings, which were very poor, and the rest of the year in general. The fourth quarter was the only one of the year that saw any revenue growth, and compared to 2022's fourth quarter, the gross margin (which is crucial for profitability) halved to 16.4% and was still lower than any other quarter in 2023. For the entire year, SMIC saw its revenue shrink by 13% to $6.3 billion, and its net profit cut in half to $900 million. The average gross margin for 2023 was 19.3%.
Concerning 2024, things look like they'll get even worse. SMIC co-CEO Zhao Haijun has warned that business might slow down due to declining orders for smartphone chips. Some of the company's customers have already placed all their orders for the entire year, and they aren't saturating the foundry's production capabilities. This means lower margins, which for the first quarter of 2024 are expected to be 9% to 11%, even lower than last quarter. However, SMIC does at least expect its revenue to increase by a mid-single-digit percentage, which would be an improvement.
The stock market has been pretty mixed for SMIC this week; the stock price rose on Tuesday thanks to the company's fourth-quarter earnings announcement, but today, it fell back to where it was on Monday. It's hard to say how much of this reversal was due to SMIC's warnings as many traders sell into price spikes, but the company's stock price is down about 42% since November when it announced its third-quarter results.
Though SMIC has invested much into its 7nm node and is working on 5nm and even 3nm process technology, the Chinese foundry is still largely dependent on its mature nodes, like 28nm. Although the market for simpler semiconductors produced on more mature nodes is large, its growth potential is basically nonexistent, and the margins for mature processors are generally poorer than for chips made on advanced nodes. Without a decent volume of high-margin smartphone orders, SMIC's revenue and especially its profits could see a substantial reduction.
China's economy is a key factor in decreasing demand for SMIC's chips. The Chinese economy has performed poorly since the COVID-19 pandemic and has suffered from a high amount of debt and deflation, both of which ultimately hurt consumer spending. China's real estate market is especially in trouble with the liquidation of Evergrande, one of the country's largest property developers.
U.S. sanctions are also taking a toll, especially on SMIC, which is under scrutiny for selling chips to Huawei. Though both companies are based in China, the House Foreign Affairs Committee chairman argues that since SMIC uses U.S. technology for its processes, the foundry needs an export license. Such charges could impact SMIC's business abroad, meaning the foundry would need to rely even more on a slowing Chinese economy.
