SMIC Puts Turmoil Behind It — Again 中芯国际又走出内讧

By newsdoug on February 9, 2012

SMIC at fork in the road for new turnaround SMIC (HKEx: 981; NYSE: SMI), China’s largest semiconductor chip maker that seems to hop from one internal crisis to the next, seems to be telling the world with its latest earnings that the days of trouble will soon be behind it. (Earnings announcement) The only problem is, we’ve heard this story before after previous crises, only to see the company sink yet again when the latest crisis emerges. For the moment, at least, investors seem to be giving the company the benefit of the doubt, bidding up SMIC’s New York-listed shares by nearly 5 percent after the results were announced on New York time. The results from the latest report tell a relatively straightforward story: the fourth quarter of 2011 was one that SMIC would probably rather forget, with both profit and margins falling squarely into the negative column, as revenue also fell both on a quarter-to-quarter and year-over-year basis. Clearly things weren’t moving in the right direction during the quarter, which was one of the first after SMIC named a new CEO after a bruising power struggle during the summer that saw first its previous capable CEO ousted, followed by the departure of the man who was angling to take his spot. (previous post) The turmoil took a toll on SMIC’s performance and stock, but the company did indeed look relatively well positioned to return to focusing on its turnaround after a new CEO was named. Of course, SMIC wants people to focus on its first quarter guidance for now rather than its poor fourth-quarter results, and investors seem to be doing that. It forecast its gross margins will return to positive territory in the current quarter, while revenue is expected to return to a growth track as well. Equally important, the company’s report shows several trends that look promising for its future. In one, its customer base is becoming increasingly China-based, with China now accounting for 34 percent of its sales versus just 31 percent the previous quarter. This shift is something that SMIC should have been doing all along, as its China base is obviously a strong point, unlike the competitive US and European markets where it has to compete with much stronger rivals in TSMC (Taipei: 2330; NYSE: TSM) and UMC (Taipei: 2303; NYSE: UMC). The other trend that looks good is the growth of business from fabless chip makers, which are usuallly the most profitable customers. All of this looks good, and I have to admit I’m cautiously optimistic that SMIC has finally learned its lesson from all its internal issues and may finally be able to focus on becoming a profitable company again. Then again, the company has shown positive signs in the past, only to sink back into the red due to internal turmoil. Let’s hope this time it can finally escape that cycle.

Bottom line: SMIC’s latest earnings show encouraging first-quarter guidance, but the company will need to avoid more internal strife to complete its turnaround.

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