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SMIC is targeting mid to high single digit annual revenue growth amid muted demand in the domestic smartphone market this year. Photo: SCMP handout

Chip maker SMIC lowers 2017 revenue growth target

Mainland China’s largest contract chip manufacturer is hit by weak China smartphone demand and customer transition to new production technology process

Semiconductor Manufacturing International Corp (SMIC), mainland China’s largest contract chip maker, is now targeting “mid to high single digit” annual revenue growth amid muted demand in the domestic smartphone market this year.

That forecast marks a sharp decline from the Shanghai-based company’s earlier guidance of a 20 per cent year-on-year increase in revenue growth, as analysts expect market conditions to remain challenging in the second half of this year.

Shares of SMIC were down 10.4 per cent to close at HK$7.96 on Wednesday.

SMIC chief executive Zhao Haijun predicted the company’s revenue to be flat or up by 3 per cent quarter-on-quarter in the three months to October 31.

“The challenges we are facing this year include node transition, pricing environment, customer inventory, market uncertainty and new technology execution,” Zhao said in a conference call with analysts on Wednesday.

Node transition refers to the move by certain SMIC clients to the so-called 28-nanometre semiconductor manufacturing process from the older processes, such as the 40nm and 0.18um [micrometre] technology nodes.

“We see continued weakness in 40nm due to the transition to 28nm and muted demand in China’s smartphone market, and in 0.18um due to a major fingerprint sensor customer [of SMIC] losing market share,” said Jefferies equity analyst Rex Wu.

Citi Reseach analyst Roland Shu said in a report that SMIC had mitigated the impact of that transition by introducing new chip products, such as image processors and light-emitting diode drivers.

SMIC’s second-quarter net profit missed a consensus forecast from Bloomberg’s survey of analysts’ estimates of US$45.9 million. Photo: Shutterstock
SMIC reported on Tuesday evening lower-than-expected earnings for the quarter ended June 30.

Its second-quarter net profit tumbled 62.9 per cent to US$36.3 million, down from US$97.6 million in the same period last year, due to lower wafer shipments and increased operating expenses.

The challenges we are facing this year include node transition, pricing environment, customer inventory, market uncertainty and new technology execution
Zhao Haijun, SMIC

That missed the US$45.9 million consensus forecast from a Bloomberg survey of analysts’ estimates.

Revenue was up 8.8 per cent to US$751.2 million from US$690.2 million a year earlier, but fell short of the market’s consensus estimate of US$762.5 million.

Zhao acknowledged that most of SMIC’s year-on-year revenue growth by application in the second quarter came from the automotive and industrial segments, which was generated by its LFoundry operation. LFoundry is the Italian integrated circuit manufacturer that SMIC acquired for 49 million (US$57.7 million) last year.

In the second quarter, SMIC saw sales to customers in North America accounted for 41.8 per cent of its quarterly revenue, up from 26.5 per cent in the same period last year.

Sales to customers in mainland China made up 45.3 per cent of second-quarter revenue, down from 52 per cent a year earlier.

“Although the near-term outlook is not as seasonally expected, we’re working diligently to maintain our position as the [chip] foundry-of-choice in China,” Zhao said.

Jefferies' Wu pointed out that SMIC's 28nm production capacity was ramping up, and is "on track to reach high single-digit [revenue] contribution by the end of this year".

This article appeared in the South China Morning Post print edition as: Chip maker cuts revenue guidance as net drops
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