SMIC reported 2Q25 results with revenue up 16% YoY, slightly above mid-point guidance, supported by subsidy-driven demand growth and accelerated domestic substitution. GPM was at 20.4%, beating the high end of guidance thanks to packed UTR offsetting D&A pressure. However, SMIC’s 3Q25 revenue and GPM guidance turned out to be a miss (revenue +c.6% QoQ vs consensus +7% QoQ, GPM c.19% vs consensus 21%) implying management’s conservative view towards 2H25, citing risk of smartphone demand softness and new capacity pressure. We expect investor sentiment on domestic substitution theme to resume as the global narratives are now moving back to local for local or facing a 100% tariff. Meanwhile, the GPT-5 launch will likely sustain AI capex demand and SMIC is the only domestic advanced- node player to go to. We maintain BUY with a new TP of HK$56.7 based on 2.8x P/B.
Key Factors for Rating
2Q25 results mixed: revenue grew 16% YoY but decreased 2% QoQ to US$2,209m, beating mid-point guidance by 3%, due to shipment growth of analog, CIS and RF for domestic substitution. GPM declined 2.1ppts QoQ to 20.4%, exceeding high-end guidance of 20%, thanks to 2.9ppts QoQ UTR increase. However, ASP of US$874 was down 6% QoQ due to wafer price discount upon quality issue. OPEX ratio increased 4.8 ppts QoQ to 13.5%, due to higher level of R&D activities, G&A for start-up cost and government funding decline. Therefore, NI of US$133m was below BOCIe and consensus by 16% and 20% respectively.
3Q25 guidance soft: mgmt. guided 3Q25 revenue to grow 5-7% QoQ, c.1ppt below consensus of +7% QoQ and 3Q25 GPM to be 18-20%, c.2ppts below consensus of 21%. The overall soft guidance came with management’s comment on strong demand and high UTR to sustain with shipment and ASP both to increase QoQ, leading us to believe that the ASP increase may come softer than market expected, in order to maintain a high UTR at the backdrop of more online capacity in 2H25.
Domestic analog and PMIC fabless drive long-term growth. Mgmt. noted decent demand from: 1) connectivity (including Wi-Fi, Bluetooth, and base stations), 2) memory ancillary ICs (e.g., PMIC and MDIC), 3) recovering China demand for EV and industrial, 4) higher penetration rate of fast charge IC and other ICs despite of saturated smartphone end market. In particular, SMIC expects to benefit from China analog and PMIC fabless gaining global market share.
Tariff dynamics and GPT-5 launch could be positive catalysts. The global localisation trend to mitigate supply chain and tariff risk should remain opportunities for SMIC. In addition, the GPT-5 launch could reignite industry enthusiasm for GenAI capex and benefit SMIC given its unique position in domestic GPU production.
Key Risks for Rating
Sino-US relationship and supply risk; intensifying price competition in mature node; slow advanced node breakthrough; macro and end demand risks.
Valuation
We fine tune our model slightly to factor in high UTR/shipment with a soft ASP. As a result, we keep our revenue and EPS estimate largely unchanged. As the recent Nvidia backdoor and Intel CEO drama show, politics dynamic is moving back to the domestic substitution trail. Maintain SMIC BUY with a new TP of HK$56.7 based on 2.8x P/B (was 2.4x P/B).