China's SMIC posts Q2 loss, but says demand recovering

SMIC posted a larger-than-expected loss for the second quarter, but says industry prospects look brighter for the months ahead.

Semiconductor Manufacturing International (SMIC) has reported a loss for the second quarter, but claims that after six months of weak semiconductor demand, things are finally looking up.

Despite a generally weak market for chip makers, SMIC reported its second-quarter revenue rose 26.5 per cent compared with the same period last year, to $US280 million. However, that wasn't enough for the company to turn a profit. SMIC reported a larger-than-expected loss of $US40 million for the second quarter, compared with a profit of $US34 million last year.

Based in Shanghai, SMIC is China's largest semiconductor manufacturer and the world's third-largest contract chip maker. The company's two larger rivals, Taiwan Semiconductor Manufacturing and United Microelectronics, both posted net profits for the second quarter.

"The loss is really worse than our expectations," an analyst at Sun Hung Kai Investment Services, Helen Lau, said.

Lau had expected SMIC to post a second-quarter loss of $US21 million.

The loss came despite rising wafer shipments, SMIC said.

Second-quarter wafer shipments totalled 330,499 units of 200 millimetre-equivalent wafers, an increase of 64 per cent over the same period last year.

However, this increase in wafer shipments didn't keep pace with increases in SMIC's total manufacturing capacity. The company said its capacity utilisation rate during the second quarter was 87 per cent, compared to 99 per cent one year earlier.

Falling prices hurt SMIC's bottom line during the second quarter. The average selling price of finished wafers fell from $US1034 per wafer during the second quarter of 2004 to $US829 per wafer during the second quarter of 2005, SMIC said.

The company blamed the drop in average selling prices to lower prices for dynamic RAM (DRAM) chips and general industry softness.

Despite a poor showing during the second quarter, SMIC said the outlook for the months ahead was brighter.

"The second quarter of 2005 marked what we believe to be the trough of the current semiconductor cycle," SMIC said in a statement. "We believe that the second half of 2005 will be a period of financial growth and improvement."

SMIC expects to see wafer shipments rise between 7.5 per cent to 9.5 per cent during the third quarter.

Average selling prices were expected to rise by up to 10 per cent, it said.

Based on this outlook, the company said it had increased its capital expenditure (capex) budget for the year to $1.1 billion, from a previous forecast of $1 billion.

However, Sun Hung Kai's Lau did not find the company's outlook encouraging.

"They seem very cautious about their capex and [wafer] shipments," she said.

Lau noted that the expected single-digit increase in third-quarter wafer shipments would represent a slower increase than during the second quarter, when wafer shipments rose 16 per cent over the first quarter.

SMIC's outlook indicated that an expected rebound in semiconductor demand during the second half of the year might not be very strong, Lau said.

It recently announced the appointment of Yang Yuan Wang, chief scientist of the Microelectronics Research Institute at Beijing University, as chairman of the company's board of directors.

Wang would replace company founder Richard Chang, who would remain as chief executive officer of the company, SMIC said.

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