By Yelin Mo and Nausheen Thusoo
(Reuters) -China’s SMIC on Friday shrugged off a more than 70% drop in net third-quarter profit, saying it expected Chinese semiconductor demand to stabilise soon, and increased its annual capital expenditure forecast to about $7.5 billion.
Shares in the company slumped by over 7% on its earnings, and those of smaller peer Hua Hong Semiconductor fell by more than 10% after analysts said Hua Hong’s third-quarter results missed expectations.
Their results echoed others such as Taiwan’s TSMC and Germany’s Siltronic, who have faced similar earnings pressure from a slowdown in the semiconductor industry.
High interest rates and persistent inflation have forced businesses to tighten their tech budgets, while U.S. restrictions on Chinese chip companies are weighing on the sector.
SMIC co-CEO Zhao Haijun said in an earnings call on Friday that an expected strong rebound in the semiconductor market had not yet arrived, and that the market has yet to bottom out. However, he noted that high inventories in China had returned to healthier levels.
“Going forward, we believe the demand for semiconductors will rely heavily on the manufacturing capabilities provided by local firms. We are highly confident that the substantial capacity we have developed will be needed by our clients,” Zhao said.
SMIC had said it expected capital expenditure in 2023 to be roughly flat compared with 2022, which came in at about $6.35 billion.
“SMIC is obviously betting on an improvement in conditions next year by continuing with its capacity-expansion plans,” said Shanghai-based semiconductor analyst Stewart Randall of the consultancy Intralink.
Randall noted that SMIC has been accelerating purchases of chipmaking equipment from Western suppliers. He believes that is because the company may face further restrictions on such purchases because of U.S. sanctions limiting such sales to China.
Backed by funding from Beijing, SMIC is China’s best hope for becoming a global leader in chip manufacturing that can rival TSMC, the industry’s largest foundry.
The company was targeted by U.S. export restrictions last year, but analysts recently said it had manufactured an advanced chip found in Huawei’s new Mate 60 Pro smartphone.
SMIC has not commented on that development and the company was not asked about it on the call.
Zhao said the company’s growth has partly benefited from geopolitical tensions and supply chain reconfigurations. This has led to an increase in market share for some of SMIC’s customers, implying that more local chip design firms are choosing SMIC to manufacture their chips.
Revenue for the third quarter fell to $1.62 billion from $1.91 billion a year ago.
SMIC expects a gross margin of between 16% and 18% in the fourth quarter, compared with 19.8% in the third quarter
(Reporting by Yelin Mo in Beijing, Nausheen Thusoo in Bengaluru; Editing by Devika Syamnath and Gerry Doyle)
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