<p>SMIC delivered a mixed Q2 report card. Although revenue maintained a strong year-on-year growth trend, net profit saw a significant decline, and the Q3 guidance is relatively cautious, exposing the real challenges faced by this wafer foundry giant.</p>
<p>SMIC released its Q2 financial report on Thursday, with key points as follows:</p>
<p><strong>Profitability</strong></p>
<ul>
<li>Q2 revenue was USD 2.209 billion, a decrease of 1.7% quarter-on-quarter, but an increase of 16.2% year-on-year; revenue for the first half of the year was USD 4.46 billion, a year-on-year increase of 22.0%.</li>
<li>Gross profit was USD 450 million, a quarter-on-quarter decrease of 11.1%.</li>
<li>Gross margin was 20.4%, a quarter-on-quarter decrease of 2.1 percentage points, but a significant increase of 6.5 percentage points compared to the same period last year; the gross margin for the first half of the year was 21.4%, a year-on-year increase of 7.6 percentage points.</li>
<li>Net profit was USD 132.5 million, a year-on-year decrease of 19%, and below the market estimate of USD 167.1 million.</li>
<li>Capacity utilization rate was 92.5%, a quarter-on-quarter increase of 2.9 percentage points.</li>
</ul>
<p><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/03857627-ce21-4c57-86a5-5cbd71ca9c95.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/03857627-ce21-4c57-86a5-5cbd71ca9c95.png"/></p>
<p><strong>Core Business Progress</strong></p>
<ul>
<li>12-inch wafers accounted for 76.1%, with consumer electronics applications reaching the highest at 41.0%.</li>
<li>Business in China accounted for 84.1%, with smartphone applications accounting for 25.2%.</li>
<li>Monthly capacity increased to 991,000 wafers (8-inch equivalent), a quarter-on-quarter growth of 1.8%.</li>
</ul>
<p><strong>Guidance</strong></p>
<ul>
<li>Q3 revenue guidance is expected to grow by 5%-7% quarter-on-quarter, with gross margin guidance of 18%-20%, while the market expectation is 21%.</li>
<li>Capital expenditure is USD 1.885 billion, a significant increase of 33.2% compared to Q1, indicating active capacity expansion.</li>
</ul>
<h2>Revenue Growth Slows but Year-on-Year Performance Remains Impressive</h2>
<p>Q2 revenue was USD 2.209 billion, a slight quarter-on-quarter decrease of 1.7%, but the year-on-year growth of 16.2% is still noteworthy. More importantly, the cumulative revenue for the first half of the year was USD 4.46 billion, a substantial year-on-year increase of 22.0%, indicating that the company's overall growth trajectory remains solid.</p>
<p>In terms of structure, 12-inch wafers accounted for 76.1%, slightly lower than Q1's 78.1%, but still the main revenue driver. On the application side, consumer electronics accounted for as high as 41.0%, smartphone applications accounted for 25.2%, and industrial and automotive applications accounted for 10.6%, an increase from 8.1% in the same period last year, reflecting the company's penetration in high-value application areas.</p>
<p>In terms of regional distribution, the China region accounted for 84.1%, remaining basically flat with Q1, while the U.S. region accounted for 12.9%, showing a slight increase. This structure has a certain defensive nature in the current geopolitical environment.</p>
<h2>Gross Margin Has Adjusted but Remains at Historically High Levels</h2>
<p>Q2 gross margin was 20.4%, a quarter-on-quarter decrease of 2.1 percentage points, but still a significant improvement from 13.9% in the same period last year. The gross margin for the first half of the year was 21.4%, a year-on-year increase of 7.6 percentage points, indicating a structural improvement in the company's profitability.</p>
<p>The quarter-on-quarter decline in gross margin was mainly influenced by two factors: first, other manufacturing costs increased from USD 942 million in Q1 to USD 1.008 billion, a growth of 7.0%; second, the slight decline in revenue diluted the absorption of fixed costs
It is worth noting that the capacity utilization rate increased from 89.6% in Q1 to 92.5%, which typically benefits gross margin improvement, but the actual gross margin still declined, indicating that cost pressures cannot be ignored.</p>
<h2>Significant Increase in Operating Expenses Exposes Expansion Pressure</h2>
<p>Q2 operating expenses were $299 million, a staggering increase of 52.4% quarter-on-quarter and a 68.1% year-on-year growth, becoming the largest expectation gap in the financial report.</p>
<p>Specifically:</p>
<ul>
<li>R&amp;D expenses were $182 million, a quarter-on-quarter increase of 22.2%</li>
<li>General and administrative expenses were $189 million, a quarter-on-quarter increase of 26.5%, mainly due to increased startup costs</li>
<li>Other operating income was $85.1 million, a quarter-on-quarter decrease of 25.0%, due to reduced government funding income</li>
</ul>
<p>Operating profit was $151 million, a quarter-on-quarter drop of 51.3%, and the operating profit margin fell from 13.8% in Q1 to 6.8%, reflecting the cost control challenges the company faces during rapid expansion.</p>
<h2>Cautious Expectations Revealed in Q3 Guidance</h2>
<p>The company’s guidance for Q3 revenue growth of 5%-7% quarter-on-quarter is relatively positive, but the median guidance for gross margin of 18%-20%, at 19%, is lower than Q2's 20.4%, indicating that management holds a cautious attitude towards profitability.</p>
<p>This guidance may reflect several realities: first, intensified industry competition puts pressure on prices; second, the cost impact during the ramp-up period of new capacity; third, the transitional impact of product structure adjustments.</p>
<h2>Cash Flow Improvement but Surge in Capital Expenditures</h2>
<p>Q2 cash flow from operating activities was $1.07 billion, a significant turnaround from -$160 million in Q1, showing a recovery in the business's ability to generate cash.</p>
<p>However, capital expenditures were $1.885 billion, a 33.2% increase from $1.416 billion in Q1, reflecting that the company is still actively expanding production. Monthly capacity increased from 973,000 wafers to 991,000 wafers (8-inch equivalent), and the pace of capacity expansion has not slowed.</p>
<p>Cash and cash equivalents totaled $5.08 billion, along with financial assets, bringing total liquid funds to $13.05 billion, providing ample ammunition for continued expansion.</p>
<p>Updating</p>

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- SMIC reported mixed Q2 results, with revenue of $2.209 billion, a 1.7% quarter-over-quarter decline but a 16.2% year-over-year increase.  
- Net profit fell 19% to $132.5 million, below market expectations, while Q3 guidance suggests cautious growth with revenue expected to rise 5%-7% and gross margin between 18%-20%.  
- Despite rising operational cash flow and increased capital expenditure of $1.885 billion, the company faces challenges in cost control amid rapid expansion.

SMIC Q2 sales revenue increased by 16.2% year-on-year, while net profit decreased by 19% | Financial Report Insights