SMIC shares drop on firm's profit warning
HK Standard - Saturday, September 24, 2005

Mark Lee

Semiconductor Manufacturing International Corp, China's largest chipmaker, said slower growth in shipments and selling prices during the third quarter will mean lower-than-predicted profit margins following delays in the group's plans for a new technology rollout.

Semiconductor Manufacturing International Corp, China's largest chipmaker, said slower growth in shipments and selling prices during the third quarter will mean lower-than-predicted profit margins following delays in the group's plans for a new technology rollout.
The news sent SMIC shares tumbling by as much as 5.3 percent Friday before finishing the day down 3.3 percent at HK$1.45.

"It is more bad news for the company," a Shanghai-based analyst for a regional investment bank said. "Although the company blamed this on a delay in equipment installation, it probably also reflects slower orders in the quarter."

SMIC now expects third-quarter gross profit margins of 7-9 percent, not the 12-15 percent it had previously forecast. SMIC reported its gross profit margins fell to just 2.3 percent in the second quarter as net losses widened to US$40.4 million (HK$315.12 million) from US$30 million in the first three months of the year.

The company now expects chip shipments to increase by 6-7 percent in the third quarter compared with the second. Earlier it had forecast quarter- on-quarter growth of up to 9.5 percent. SMIC shipped 330,000 eight-inch equivalent wafers in the second quarter, 16 percent more than in the first quarter.

SMIC said third-quarter average selling prices are expected to increase by 3-5 percent compared with the second, less than the 10 percent it previously forecast. Lower prices for DRAM (dynamic random access memory) chips, and a delay in installing new equipment capable of making higher- priced products, were to blame, SMIC said.

Given the latest SMIC guidance, the analyst said he is raising his projection for SMIC's third-quarter net loss to as much as US$30 million.

The delay in new equipment installation meant capital spending in the third quarter would be US$120 million to US$160 million. SMIC had previously budgeted for capital spending of up to US$240 million in the quarter as part of its annual capex budget of US$1.1 billion. SMIC's capex was more than US$2 billion last year.

Falling chip prices, induced by a glut in global supply, and high depreciation costs have seen Shanghai-based SMIC slip back into the red this year.

"A turnaround will only arrive when a move to more advanced technologies drives an increase in average selling prices," the analyst said.

Unlike larger rivals, SMIC sells less custom-made chips and more DRAMs, which face greater price volatility.