SEMICONDUCTOR Manufacturing International Corporation’s (SMIC) stock has more than doubled over the past two months on an expected boost from China’s self-reliance push, even amid risks tied to competition and geopolitical tensions.
Shanghai-listed shares of China’s largest outsourced chipmaker are up 120 per cent from a September low, trouncing global sector names including Nvidia and Taiwan Semiconductor Manufacturing Company. The mainland stock has outperformed SMIC’s Hong Kong shares by almost 50 percentage points, underscoring stronger demand from onshore Chinese investors.
Expectations for Donald Trump’s presidency have pumped up shares of SMIC and local peers as beneficiaries of China’s drive to localise manufacturing. Some analysts and fund managers caution that the stocks now look expensive, while China’s chip industry faces ongoing issues of economic malaise and restricted access to crucial technologies.
“There is a lot of speculative buying and the trading is based on news events instead of fundamentals,” so volatility should be expected, said Xiang Xiaotian, a director at Shanghai Chengzhou Investment Management. “The main trading thesis is domestic substitution as Chinese companies will need to turn to local chipmakers.”
China has been outspending other nations on chips as it struggles to narrow the wide technology gap with Western nations. Expected benefits from Beijing’s latest pledges of stimulus have served as an additional catalyst for SMIC and domestic peers including Hua Hong Semiconductor whose onshore shares are up 78 per cent from their September low.
SMIC forecast higher-than-expected sales growth for this quarter as its competitive prices lured local chip designers, according to Bloomberg Intelligence. More broadly, China foundries “bottomed out earlier” than other global manufacturers of less-advanced chips, Counterpoint Research wrote in a note in August.
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Even if demand for these so-called legacy semiconductors used in auto and industrial applications improves, however, China remains far behind in artificial intelligence (AI) and other advanced areas due to US-led restrictions that prevent it from acquiring the most advanced manufacturing equipment. For example, Huawei Technologies’s ambitions to create more powerful chips have hit major snags because of US sanctions, sources familiar with the matter said.
“Artificial intelligence is a small blessing for SMIC and Hua Hong,” Morningstar analyst Phelix Lee wrote in a report. The pair may not be moving quickly enough to capture demand for high-end power chips used in data centres, he said, adding that if Chinese AI startups lose access to advanced processors that would also hurt demand for peripheral chips supplied by SMIC and Hua Hong.
Meanwhile, SMIC’s outsized share-price gain is likely to drive increased scrutiny of its earnings and other metrics. Some observers also note the potential for rivals such as TSMC to lower prices for making legacy chips, putting pressure on SMIC’s pricing power.
“We acknowledge the stronger localisation demand and gross margin sustainability of SMIC,” Morgan Stanley analysts including Charlie Chan wrote in a note. “However, we believe the competition from foundries may get more intense in 2025. In addition, SMIC’s trading valuation does not look attractive to us.”
The Hong Kong-listed stock is trading at a forward price-to-book ratio of 1.2 times, above its three-year average level of 0.9 times. Valuation based on book value is seen as more useful than earnings-based multiples for evaluating asset-heavy, cyclical businesses such as chip foundries.
SMIC and Hua Hong both look overvalued, “as the market may have overestimated the extent of average selling price recovery”, Morningstar’s Lee said. “Also, the market can be overbullish on the impact of fiscal stimulus.” BLOOMBERG
