Economic Observer reporter Zheng Chenye

On the evening of August 13th, SMIC (688981. SH/00981. HK) announced its second quarter performance for 2026.

According to the financial report, in the second quarter, SMIC achieved sales revenue of 3.006 billion US dollars, a year-on-year increase of 36.1% and a month on month increase of 20%, with single quarter revenue exceeding 3 billion US dollars for the first time; The gross profit margin was 25.3%, an increase of 5.2 percentage points compared to the previous period; The net profit attributable to the parent company was 479 million US dollars, a year-on-year increase of 261.7%.

This performance is higher than SMIC's previous guidance. In May of this year, SMIC's guidance for the second quarter was a 14% to 16% month on month increase in revenue and a 20% to 22% gross profit margin.

For the third quarter, SMIC expects a month on month revenue growth of 2% to 4% and a gross profit margin of 26% to 28%, with the lower limit of the gross profit margin guidance higher than the actual level in the second quarter.

The company stated in the announcement that looking ahead to the second half of the year, the industry promotion and spillover effects generated by artificial intelligence will continue, bringing widespread demand for integrated circuit manufacturing.

On the morning of August 14th, SMIC held a second quarter performance briefing, where joint CEO Zhao Haijun responded to market concerns about the reasons for exceeding revenue expectations, the pace of price increases, and the direction of AI demand.

All new prices will be implemented in the third quarter

In the second quarter, SMIC sold 2.869 million wafers, an increase of 14.4% compared to the previous quarter. The monthly production capacity increased from 1.0783 million wafers to 1.0965 million wafers during the same period, with a capacity utilization rate of 93.7%.

The growth rate of shipments is significantly faster than the growth rate of production capacity. Where did the extra shipments come from?

Regarding this issue, Zhao Haijun responded at the performance briefing that a portion of the extra shipments came from internal scheduling within the production line. Customers requested early and accelerated delivery, which is known as "pulling and shipping" in the industry. In the second quarter, SMIC tilted its manufacturing capacity towards wafers that are close to completion on the production line, accelerating the completion of the final process for these wafers. The number of wafers newly put into the production line (referred to as "new wafers" in the industry) slowed down accordingly, and increased delivery to customers while maintaining the same total production capacity.

The other part comes from the net increase in production capacity itself. A new production line takes an average of about 16 months from equipment entry and installation to customer end product production. SMIC's investment in production capacity in previous years is gradually increasing in various factory areas.

He also stated that SMIC will not continue to pull shipments in the third quarter, but will return the production line to a steady operation, "meeting customer pull requirements while ensuring healthy operation of the production line." The growth in revenue will mainly be reflected in prices, and the shipment volume will not increase significantly.

The average sales unit price of SMIC wafers in the second quarter increased by 5.7% compared to the previous quarter, but this increase has not fully reflected its new prices negotiated this year. Zhao Haijun introduced that SMIC's pricing starts from the time the wafer is taken offline (after completing all manufacturing processes and going offline). Many of the wafers shipped in the second quarter were taken offline in the first quarter or even the fourth quarter of last year, and the previous prices were still implemented; All wafers shipped in the third quarter will be subject to the new price.

That is to say, the new price was only partially realized in the second quarter, and the full realization will not be realized until the third quarter. The contribution of the price increase to the company's revenue and gross profit margin will be more fully reflected at that time.

In addition, the price increase does not cover all products, and the extent of coverage depends on the prosperity of each segmented market. Zhao Haijun explained that in February and March of this year, SMIC negotiated a round of price increases for some products with customers based on industry trends; Mobile phone chips and DDIC (Display Driver Chips) have not increased in price so far, and customers in these industries are facing difficulties this year. SMIC has worked together to overcome these challenges.

The allocation of production capacity also has a priority order. The first principle given by Zhao Haijun in this regard is the mutual commitment between the past and the customer. It's not like a latecomer suddenly appearing and offering a higher price, and then we go ahead and do it, "he said. In the part where the quality has reached the level of the industry's top tier, but the OEM price is still significantly lower than the first tier, SMIC will negotiate with customers and demand price recognition, but" SMIC is never the first to raise prices, nor is it the one that has risen the highest.

In addition, a part of SMIC's improvement in gross profit margin in the second quarter came from optimizing product structure, which means transferring production capacity that customers do not currently need to stock at full capacity to more scarce products.

Zhao Haijun gave an example that the company will reduce the investment of some logic circuits, such as shifting to the production of MCU (microcontroller) and storage chips used in IoT devices, and will also shift the production capacity of display drivers that do not require a large amount of inventory to the production of NOR Flash (a type of flash memory chip that can directly read and execute code, commonly used for device startup).

It is worth noting that the increase in gross profit margin of SMIC in the second quarter was achieved against the backdrop of a significant increase in depreciation - the company is currently in the period of expansion investment, and depreciation is accrued quarterly once equipment is put into operation. SMIC listed the depreciation increase corresponding to unit revenue as the core influencing factor of gross profit margin changes at its performance meeting in February this year, and provided guidance for a depreciation increase of about 30% year-on-year in 2026.

Regarding depreciation, the latest information provided by Zhao Haijun is that the newly added depreciation each quarter has a drag on the gross profit margin of about 4 to 5 percentage points. Excluding this factor, the gross profit margin in the second quarter actually increased by 9 to 10 percentage points compared to the first quarter, with the contribution of price increases being greater than that of product structure optimization.

As for the higher increase in net profit than operating profit - SMIC's operating profit in the second quarter was $534 million, a month on month increase of 115.6%, lower than the month on month increase of 142.7% in net profit - the reason is external to operations. Wu Junfeng, Senior Vice President and Financial Head of SMIC, stated at the briefing that the second quarter profit includes one-time gains from changes in fair value of affiliated companies and financial assets, which are uncertain in the third quarter.

Regarding the outlook for the third quarter, Zhao Haijun stated that after offsetting the impact of new depreciation and summer electricity costs, the gross profit margin is expected to continue to increase compared to the previous quarter, and the capacity utilization rate after including new production capacity is expected to remain around 95%. In addition, SMIC will reserve about 5% of its production capacity for research and development, and will not compress this proportion for shipment. He also stated that SMIC's orders have been received in the fourth quarter and at the end of the year, and the current achieved prices, gross profit margins, and capacity utilization rates can be sustained.

He also emphasized, "We have not seen the possibility of (wafer foundry) price reduction within this year

Shortage spreads to mobile phone chips

The order can be received at the end of the year, provided that the demand can continue. Regarding this, Zhao Haijun's summary at the performance briefing was that AI first drives "both ends" and the growth rate is "far beyond imagination".

The "two ends" are divided according to the process, which refers to the precision of the circuit processing on the chip. The smaller the nanometer number, the more advanced the process.

Among them, one end is the most advanced processing power chip, such as GPU (Graphics Processing Unit, currently the mainstream AI computing power chip), which integrates as many transistors as possible in a very small area and must use the most advanced process; On the other hand, there are analog circuits in the most mature manufacturing processes, which process continuous signals such as voltage, current, and sound. The key to this type of chip is precise control and tolerance of voltage and current, and it is not sensitive to how small the transistor is. The commonly used manufacturing process is measured in hundreds of nanometers, which was finalized many years ago and is still in use today. Power management chips are the most widely used category among them.

Between the two ends mentioned above are processes such as 40 nanometers and 28 nanometers, which are much finer than the processes commonly used in analog circuits, but far from meeting the requirements of computing power chips. A large number of conventional logic chips in consumer electronics are concentrated in this process. In Zhao Haijun's view, this type of process mainly benefits from the spillover effect of AI, that is, the production capacity at both ends is first filled by AI orders, and the demand that cannot be accommodated flows to the middle, and the trend of price increase is also transmitted accordingly.

Zhao Haijun mentioned at the performance meeting in May this year that SMIC does not produce AI main chips such as GPUs, but has a large number of customers in supporting fields such as power management and data transmission.

This time, he gave an example at the meeting that a computing power cabinet with 72 GPUs can use over 16000 power supply and power management devices alone; The supporting chips directly related to computing power, including logic circuits, BCD (the mainstream process platform for manufacturing power management chips), and transceiver chips for optical modules, are all in short supply.

He also mentioned that Chinese Internet companies have significantly increased their hardware investment, and the subsequent offline volume that customers are negotiating is far greater than SMIC's original expectations. In addition, SMIC currently divides its products into five major application scenarios, which may be further subdivided into six to seven in the future. One of them is AI supporting chips, which will be separately disclosed in the revenue classification as early as next quarter.

Most of SMIC's mature analog circuit production capacity is concentrated on the 8-inch production line. 8 inches refers to the diameter of the wafer, and the 8-inch production line is an earlier generation production line. In contrast, the 12 inch production line has been updated, and there are more chips that can be cut from a single chip. But the reason why demand is concentrated on older production lines is related to the characteristics of simulating products with multiple varieties and small batches.

Zhao Haijun explained that overseas simulation leading enterprises often have two to three hundred thousand models, among which the single high demand variety is moving towards 12 inches; However, for small batch models with a supply cycle of up to ten years and uninterrupted supply, some only require about 100 pieces per month, and it is not economical to organize production on a 12 inch production line, so they can only stay on an 8-inch production line.

In addition, Zhao Haijun also stated that due to the continuous decline in the terminal market for mobile phone chips and panel driver chips, few people in the industry have been willing to undertake them since last year. However, as production capacity is gradually shifted to more scarce AI related products, customers who design these chips are unable to obtain production capacity and are currently negotiating with SMIC for next year's production capacity and prices.

In addition to production capacity, customers are also concerned that the manufacturing, packaging testing, and packaging material processes will continue to increase prices next year. Zhao Haijun said that customers should prepare more goods now to avoid not being able to obtain production capacity next year, and even if they do, the price will be higher.

This situation has already been reflected in the regional structure of income. In the second quarter, the revenue share of SMIC China increased to 90.2%, with a month on month growth of 22% in revenue amount, the largest increase among all regions. SMIC attributed this to the strong demand for AI supporting chips, overseas order return, and continued strengthening of localized manufacturing. During the same period, in terms of application classification, the proportion of industrial and automotive revenue increased to 16.5%, making it the category with the largest year-on-year increase among all applications.

The demands of customers are also changing the expansion pace of SMIC. Zhao Haijun introduced that according to the previously announced project, SMIC's depreciation was originally expected to peak in 2027, and it can be calculated in any quarter; However, since February this year, customers have exceeded SMIC's forecast for production capacity at the beginning of the year and have requested that it reserve production capacity. SMIC is currently adding equipment to existing spaces in various factory areas, and the expansion plan has been correspondingly raised. The time when depreciation reaches its peak will also be moved later.

According to the financial report, SMIC's depreciation and amortization in the second quarter amounted to 1.212 billion US dollars. Wu Junfeng introduced at the meeting that the company's annual depreciation will be close to 5 billion US dollars. In addition, SMIC's total capital expenditure in the first half of the year was 3.4 billion US dollars. According to the previously provided plan, the annual capital expenditure is approximately 8.1 billion US dollars, roughly the same as in 2025.

In Zhao Haijun's view, the industry has announced the construction of data centers and the procurement of GPUs. Therefore, the newly built advanced chip factories will not be wasted. Every GPU or computing power ASIC (specialized chip customized for specific purposes) produced must be matched with corresponding analog circuits, power chips, and optical modules.

The demand we see now can be seen until the end of next year, "he said.

(Author Zheng Chenye)