SMIC: Under Fire From All Directions 中芯国际亏损显示其内外交困

By newsdoug on November 9, 2011

SMIC braces for long winter After a year and a half of strong performance that saw it shed its laggard image to become a profitable company under the leadership of a strong new CEO, SMIC (HKEx: 981; NYSE: SMI), China’s top microchip maker, is suddenly returning to its old ways as it comes under assault from forces both inside and outside the company. The sharp turnaround is painfully clear in SMIC’s latest results, which saw it drop sharply into the loss column — territory it was well familiar with for most of its life until CEO David Wang led it into profitability following his arrival at the struggling firm in late 2009. (English article) But perhaps more worrisome than its swing into the loss column was its sharp drop in revenues, which fell 24 percent as gross margins also plunged to near zero. The company has been in a near constant state of turmoil since the spring of the year, when internal politics led to Wang’s sudden ouster despite his stellar performance at turning SMIC around. (previous post) The situation finally settled down, but not after wreaking havoc on both SMIC’s operations and its share price, which has lost half its value since April and fell another 6 percent after the latest results were announced earlier this week. To be fair, SMIC has been the victim of forces outside the company as well, as the highly cyclical microchip sector heads into a new downturn following more than a year of strong growth — a factor that tends to hit weaker players more than the stronger ones. Industry leader TSMC (Taipei: 2330; NYSE: TSM) recently reported its own third-quarter profit tumbled 35 percent as the industry showed signs of slowing. (English article) Adding to SMIC’s woes, TSMC has also announced $1 billion in new capital spending for the year ahead, and Chinese media are reporting that nearly all of that will go to expanding the company’s capacity in China, most likely in its facility near Shanghai not far from SMIC’s own headquarters. (Chinese article) With so many factors working against it, SMIC may indeed be looking at a long winter ahead and I would expect it to report at least another year of losses and most likely more before it can struggle back into the profit column.

Bottom line: A combination of internal and external forces working against SMIC will keep it in the loss column for at least the next year, and most likely much longer.

Enjoy this blog? Please spread the word :)