Chip maker SMIC may ease up on acquisitions to focus on growth

PUBLISHED : Monday, 05 June, 2017, 10:06am
UPDATED : Monday, 05 June, 2017, 11:21pm

With a new leader at its helm, Semiconductor Manufacturing International Corp (SMIC) may pull back on efforts to target its next strategic corporate acquisition, while sharpening focus on its existing production strategy.

SMIC, mainland China’s largest contract chip maker, announced last month the appointment of Zhao Haijun as the company’s new chief executive, replacing Chiu Tzu-yin.

“I don’t think the new chief executive will be aggressive in mergers and acquisitions,” Bernstein Research senior analyst Mark Li told the South China Morning Post.

“We welcome the new chief executive’s vow to keep SMIC on the same strategic course. Striking a balance between growth and profitability, we believe, is the only workable strategy in the long run.”

Zhao will likely be busy with fully integrating the operations of LFoundry, the Italian contract chip manufacturer that SMIC acquired for 49 million (US$55 million) in June last year, according to Li.

He also expected Zhao, who previously served as chief operating officer at SMIC, to further develop the company’s growing chip-fabrication business using so-called 28nm (nanometre) process technology, which is used for high end applications such as microprocessors, high-speed networking chips and graphics processors.

Chip maker SMIC posts steady first-quarter earnings growth amid market headwinds

“Our 28-nanometre [business] is ramping up and reached 5 per cent of wafer revenue in the first quarter, representing a growth of 39 per cent quarter on quarter,” Zhao said in a conference call with analysts last month.

Shanghai-based SMIC posted a 13.7 per cent increase in net profit to US$69.8 million in the three months ended March 31, up from US$61.4 million in the same period last year, as demand for its 28nm fabrication process ramped up.

Revenue grew 25 per cent to US$793.1 million from US$643 million a year earlier.

Zhao also said SMIC has become a market leader in car-related CIS chips because of the LFoundry acquisition. CIS refers to complementary metal-oxide semiconductor image sensor.

Since the mainland is the world’s largest car market, China’s chip design companies “have the incentive to explore ways to break into the supply chain, and SMIC may benefit from this in the long term”, Zhao said.

Revenue for the three months to June, however, is projected by the company to decline from 3 per cent to 6 per cent quarter on quarter due to seasonal inventory adjustment by its customers and muted growth in mainland China’s huge smartphone market.

SMIC and Shanghai Huali Microelectronics Corp are the two leaders among mainland contract chip foundries in the local development of 28nm process production, according to market research firm TrendForce.

Structurally, SMIC remains a key beneficiary of China’s semiconductor growth
Bernstein Research senior analyst Mark Li

But their output still pales in comparison with those of larger international contract chip manufacturers with fabrication plants on the mainland. TrendForce estimated Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest chip foundry, had 66.7 per cent of the global 28nm production capacity last year.

TrendForce said the long-term growth of China’s semiconductor market has drawn the interest of major contract chip manufacturers that want to bolster their competitive position there. TSMC, for example, will start operating its Nanjing fab next year.

“Structurally, SMIC remains a key beneficiary of China’s semiconductor growth,” Bernstein’s Li said. “The domestic fabless [market] continues flourishing at a rate of 20 per cent every year and SMIC derives half of its revenue from these [fabless chip design firms].”

Li pointed out that he mainland Chinese government is keen to reduce the country’s dependency on imported chips, so lower margins at SMIC will likely be tolerated.