SMIC’s Financial Pulse: Growth, Capacity Expansion, and Margin Woes

The latest earnings report from Semiconductor Manufacturing International Corporation (SMIC) reveals a paradoxical narrative that underscores both the company’s resilience and its looming challenges. On the one hand, quarterly profit surged 61 % thanks to a sharp uptick in wafer shipments, cementing SMIC’s position as China’s largest contract chipmaker. On the other hand, the firm openly warns that aggressive capacity expansion—necessary to meet surging demand for AI‑centric chips—will exert significant pressure on profit margins through a steep rise in depreciation costs.

Profitability Surges Amid Strong Wafer Demand

SMIC’s profit jump is no trivial headline. A 61 % increase in quarterly earnings signals that the company’s integrated‑circuit foundry and technology services are operating at full throttle. The surge is directly attributable to higher wafer shipments, reflecting robust market demand for both mainstream and high‑performance semiconductors. In a sector where capacity constraints frequently translate into premium pricing, SMIC’s ability to scale output without compromising quality is noteworthy.

Capacity Expansion: A Double‑Edged Sword

Despite the profit lift, SMIC’s management has cautioned that the very investments fuelling growth will soon erode margins. Across multiple reports—from Bloomberg to the Economic Times—SMIC acknowledges that its capital‑expenditure (CAPEX) spree will lead to a 30 % increase in depreciation expenses this year. The company’s chief executive explains that while rapid CAPEX has driven swift revenue growth, it has also diluted gross‑margin performance due to the “substantial depreciation” burden.

This tension is not confined to a single market. Korean media (yna.co.kr) highlighted that SMIC foresees a “margin pressure” increase this year, mirroring the concerns voiced by European outlets (energia.gr) and Asian platforms (kr-asia.com). Even the Hong Kong Stock Exchange’s own analyst coverage (CLSA) notes that the firm’s gross‑profit‑margin guidance slightly misses consensus expectations, further corroborating the margin compression narrative.

AI Chips and the Risk of Idle Capacity

Beyond the immediate financial metrics, SMIC’s strategic positioning in the AI chip arena introduces a longer‑term risk factor. Bloomberg and The Edge Malaysia report that SMIC warns of “rushed AI capacity” potentially leading to idle data‑center resources. The company’s observation—that enterprises may compress a decade’s worth of capacity building into a year or two—underscores a market dynamic where supply can outpace demand if demand forecasts are overly optimistic. An oversupply of AI chips could force SMIC to maintain high utilization rates, but at the cost of higher depreciation and capital costs.

Revenue Outlook: Flat Growth Amid Shifting Demand

While the fourth‑quarter sales record of US$9.3 B in 2025 and a 4.5 % QoQ increase in 4Q revenue (as per CLSA) suggest a strong performance, SMIC’s own guidance indicates flat revenue growth for the first quarter of 2026. The decline in low‑end orders, which partially offsets the surge in AI‑chip demand, is a clear signal that the market’s appetite for cheaper chips is waning. This duality—high‑end AI demand versus low‑end order shrinkage—creates a precarious balance for SMIC’s top line.

Market Reaction and Investor Sentiment

SMIC’s shares reflected this mixed messaging. Following the earnings release, the stock fell by 3.6 % at 12:35 HK time, a reaction mirrored by a 2.55 % drop on the day’s trading volume. Analyst reports from AASTocks and MarketScreener note that while revenue guidance remains in line with market consensus, the slight miss in gross‑profit‑margin guidance and the warning of future depreciation hikes have tempered investor enthusiasm.

Conclusion

SMIC’s recent financial disclosures paint a picture of a company riding a wave of strong wafer shipments and AI‑chip demand, yet simultaneously grappling with the cost of scaling its production footprint. The 61 % profit jump is undeniably impressive, but the accompanying rise in depreciation and the risk of idle AI capacity suggest that SMIC’s path to sustained profitability will hinge on its ability to balance aggressive expansion with disciplined cost management. For investors and industry observers, the key question remains: can SMIC navigate this tightrope without sacrificing the very margins that make its business model viable?