Company Reports

June-quarter sales and gross margins of Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor topped guidance. Both firms cited demand for peripheral chips in AI applications as the largest driver, and price hikes will continue.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation by building a capacity of about 50,000 wafers per month each year. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

We assess the impact on our coverage of Taiwan Semiconductor Manufacturing Company, United Microelectronics, SMIC, and Hua Hong Semiconductor after Huawei revealed its approach to improving chip performance, called Tau Scaling Law. SMIC and Hua Hong shares jumped on the news.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation by building a capacity of about 50,000 wafers per month each year. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

Semiconductor Manufacturing International and Hua Hong reported March quarter sales that slightly exceeded management guidance. Both firms plan to hike prices in the coming quarters as demand for artificial intelligence noncomputing chips strengthens, and non-AI demand spills over to China.

DeepSeek released a preview of its V4 model, 15 months after introducing R1—widely known as the "DeepSeek Moment." DeepSeek claims V4's capabilities largely match US models.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation by building about 50,000 wafers per month capacity each year. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

Semiconductor Manufacturing International Corporation, Hua Hong Semiconductor, and GlobalFoundries reported December-quarter sales that exceeded management guidance. They noted mature node chips are recovering from a multiyear inventory clearance and outlined varying tailwinds from AI.

For the December quarter, Semiconductor Manufacturing International Corporation guided for a 0%-2% rise in sales and a 2- to 4-percentage-point decline in gross margin from the previous quarter. The firm said customers are cautious about placing orders due to the scarce and expensive memory supply.

SMIC plans to buy out the 49% minority interest of its subsidiary Semiconductor Manufacturing North China (Beijing) Corp, or SMNC, by issuing shares at CNY 74.20 apiece. The final consideration has not been determined, and the deal is subject to shareholder and regulatory approval.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation by building about 50,000 wafers per month capacity each year. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

Hua Hong and Semiconductor Manufacturing International's June quarter revenue and gross margin exceeded guidance. Both firms enjoyed pretariff rush orders on top of localization demand. The duo expects sequential volume and average selling price increases in the September quarter.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation by building about 50,000 wafers per month capacity each year. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

Average selling prices, or ASP, of Hua Hong and Semiconductor Manufacturing International have fallen sequentially in the first quarter of 2025 as demand in anticipation of US tariffs was weaker than expected. Hua Hong shares slumped 9% and SMIC shares plunged 5% on May 9.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

SMIC's fourth-quarter 2024 revenue was no surprise at USD 2.21 billion, up 2% sequentially. Gross margin rose more than we expected by 215 basis points from the prior quarter to 22.6% due to higher prices from rush smartphone-related orders.

Even though Semiconductor Manufacturing International Corp. is subject to US export controls, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.

We view the latest US export controls by the Commerce Department as having minimal impact on the foundries under our coverage. As such, we leave our fair value estimates on TSMC, UMC, GlobalFoundries, SMIC, and Hua Hong Semiconductor unchanged at TWD 1,380, TWD 70.00, USD 42.00, HKD 14.00, and HKD 16.50 per share, respectively. TSMC and UMC remain our top picks for the sector.

Chinese foundries Hua Hong and Semiconductor Manufacturing International Corporation shared the 2025 outlook at their third-quarter earnings call that bears little surprise. Hence, we retain our fair value estimates on SMIC at HKD 14 and Hua Hong at HKD 16.50, respectively. Both companies are overvalued, in our view, as the market may have overestimated the extent of average selling price recovery, assuming a gradual recovery in automotive and industrial markets in 2025. Also, the market can be overbullish on the impact of fiscal stimulus on the duo. We still regard Taiwanese foundries TSMC and UMC as better semiconductor manufacturing plays.

Mature-process foundries Globalfoundries, Hua Hong, Semiconductor Manufacturing International Corporation reported upbeat second quarter of 2024 earnings in the past week. Our Fair Value Estimates on GF and Hua Hong are unchanged at $42 and HKD 16.50 respectively, and on SMIC raised to HKD 14 from HKD 10.80. We find GF and Hua Hong to be fairly valued as their 2025 recoveries have been priced in and there is little change to our long-term view. SMIC remains overvalued after our fair value estimate hike, as we have little confidence in its long-term profitability given its heavy capital spending in the next few years. All three foundries have little to benefit from artificial intelligence until late 2025, in our view. We prefer Taiwanese foundries TSMC for its dominance in cutting-edge nodes and UMC for its disciplined approach balancing utilization and profitability.