SMIC, NetEase Look Sharp in Q4 中芯国际和网易业绩是个好兆头
Following earnings reports earlier this week that showed advertising business stabilizing at Baidu (Nasdaq: BIDU) and Sohu (Nasdaq: SOHU), we’re getting even more upbeat results from online game operator NetEase (Nasdaq: NTES) and leading Chinese chip maker SMIC (HKEx: 981; NYSE: SMI), which points to a broader Chinese economic recovery. I’ll be honest and say I’m most encouraged by the news from SMIC, which for years has had huge potential but always failed to realize that potential due to management and other internal issues. The year 2011 saw the company suffer through a bruising power struggle, after which the 2 men at the center of the struggle were both thrown out of the company and a new experienced CEO was brought in to try and finally put the company on more solid footing.
The new CEO has now been in his position for more than a year, and his efforts at closing underperforming facilities and building up a solid customer base finally seem to be bearing fruit, based on the company’s latest results. Most importantly, SMIC reported a very respectable quarterly profit of $40 million in last year’s fourth quarter, marking its third consecutive quarterly profit after years of losses under previous managers. (results announcement)
What’s more, the quarterly profit is showing a positive trend of growing, with the latest $40 million figure easily topping the profits of $12 million and $7 million in the previous 2 quarters. The company also managed to post record revenue of $486 million in the fourth quarter, up nearly 70 percent over the previous year.
Shareholders welcomed the report, bidding up SMIC’s New York-traded shares by nearly 8 percent after the results came out. The company’s Hong Kong listed shares have also more than doubled since Last July, right around the time SMIC first started reporting profits. The latest results show that SMIC is slowly closing the gap between itself and the world’s second largest contract microchip maker, Taiwan’s UMC (Taipei: 2303), which reported its fourth-quarter revenue grew at a much slower 7 percent to about $800 million. If current trends continue, I see more potential upside for SMIC’s long underperforming stock, and even the possibility that it could pass UMC to become the world’s second largest contract chipmaker over the next 3 years.
Moving on, let’s take a quick look at NetEase, one of China’s leading online game operators, which provided a pleasant surprise for investors by returning to growth in the fourth quarter after seeing its growth stall in the previous period. (results announcement) NetEase’s profit and revenue both grew about 10 percent in the latest reporting quarter, including similar growth for its core online game business that accounts for about 85 percent of revenue.
That was a big improvement over last year’s third quarter, when revenue and profits were flat or down slightly. NetEase shares also rallied after it released the report, up 3 percent in after hours trade. The big theme in these results, coupled with more cautiously upbeat reports earlier in the week from Baidu and Sohu, is that China’s economy appears to have bottomed out and may be poised for a rebound later this year. On an individual basis, the new, better performing SMIC looks best positioned to take advantage of that rebound. Meantime, NetEase could also benefit as consumers relax and start spending more money on discretionary items like online games.
Bottom line: SMIC’s latest results show the company may be set for strong growth this year, while NetEase’s return to growth also bodes well for the company in 2013.
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