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Semiconductors

Top China chipmaker SMIC says sales to grow despite US sanctions

Co-CEO Zhao says chip shortage will last at least until end of 2021

Chinese chipmaker SMIC has seen revenue grow on strong demand and rising prices.   © Getty Images

TAIPEI -- China's top contract chipmaker Semiconductor Manufacturing International Co. on Friday said its second-quarter revenue could jump as much as 40% on the year despite continuing uncertainty stemming from U.S. sanctions on the company.

SMIC forecast revenue of between $1.29 billion to $1.31 billion for the April-June period, 19% higher at the top end of guidance from the previous quarter, and 40% higher year-on-year, mainly due to a supply shortage that prompted the company to raise prices of its products.

The chipmaker said its full-year growth momentum would likely exceed its previous forecast in February of "mid-to-high single-digit" revenue growth. However, CFO Gao Yonggang said SMIC would refrain from revising the forecast as its inclusion on a U.S. trade blacklist could still "bring a lot of uncertainties to its procurement of American items and technologies for the second half of 2021."

Washington added SMIC to its so-called Entity List late last year, citing links with the Chinese military, allegations that the chipmaker has constantly denied. The addition to the trade blacklist restricts its use of American technologies without a license. SMIC was also named as a military-linked company by the U.S. Defense Department, which restricts American investors from buying the Chinese company's shares.

Zhao Haijun, the company's co-CEO, said at its first-quarter earnings call on Friday that the current chip supply shortage will last until at least the end of this year. He also outlined two main challenges facing the company.

"On one hand, market demand is strong. Our current capacity cannot fulfill customer needs and every market segment faces shortages, from power management chips, radio frequency components, image sensors, driver ICs to microcontroller units, specialty memory, and other applications," Zhao said. "On the other hand, certain restrictions on the company's supply chain, caused by being added to the U.S. Entity List, have created a lot of uncertainties in operational continuity."

Zhao said his company and suppliers have worked very hard over the past few months to apply for licenses to legally resolve the supply chain continuity issue. He added however that the U.S. blacklisting will pose higher risks for the development for the company's advanced production development

"There are still a lot of uncertainties ... but we've seen positive progress and the progress is much better than we saw from three months ago," Zhao said.

In March, SMIC said it will jointly invest in a $2.35 billion project with the Shenzhen government in the southern Chinese city from 2022, which will have a planned production capacity of 40,000 wafers per month. Zhao said currently the shell of the plant has been completed, but the procurement of the equipment could be delayed due to U.S. restrictions. The company is also expanding capacity in Shanghai and Beijing.

Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker, is also ramping up capacity. Last month it announced it will invest $2.89 billion to expand its capacity for mature chip production technologies in the Chinese city of Nanjing, which could directly compete with SMIC.

SMIC's Zhao said his company is not too concerned about the aggressive expansion across the industry because demand is surging in many areas, including Wi-Fi chips, image sensors and application processors used in a wide range of connected devices such as smart vacuum robots.

Zhao said his company's expansion plans are flexible, as many tools can be shared between different production technologies, such as 28-nanometer and 40-nanometer production tech. The numbers refer to the width between transistors on a chip, with a smaller number generally indicating a more advanced product.

"We do see some uncertainties in the 28-nanometer node because last year there was still an oversupply of 30% globally ... but this year we see booming demand because various application processors and Wi-Fi chips consume the capacity. We also see a huge supply-demand gap in 40-nanometer technologies, mainly for radio frequency chips and microcontroller chips. Our production capacity adjustment can be very flexible."

Based on the current business outlook and demand, SMIC's revenue for the second half of 2021 could be as high as $2.4 billion, or 30% more than in the first six months, the company said.

For the first quarter, SMIC beat its guidance and generated revenue of $1.1 billion, up 22% from a year ago, thanks to strong demand and increasing sale prices, the company said. Net profit rose 148% to $159 million from a year ago, while its gross margin for the period was 22.7%, outperforming its forecast of 17% to 19%.

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