China's largest chipmaker, Semiconductor Manufacturing International Corp, reported a 123.4 per cent jump in third-quarter profit on Thursday, beating analyst expectations as strong demand for its chips lifted sales and margins.

Net profit reached $428.4 million in the three months to September, above the $418.4 million expected by analysts, according to LSEG data. Revenue rose 33.9 per cent from a year earlier to $3.19 billion, also ahead of the $3.09 billion forecast.

The results underline SMIC's recovery as China's biggest contract chipmaker benefits from domestic customers ordering more chips at home, even as US export controls continue to restrict its access to the most advanced manufacturing equipment.

Profit beats forecasts

Gross profit rose 82.3 per cent year on year to $953 million, while the gross margin surged to 29.9 per cent, up from 25.3 per cent in the second quarter and 22.0 per cent a year earlier. The margin improvement reflects fuller factories and a richer mix of products, with customers paying for more advanced production than a year ago.

Profit was, however, lower than in the second quarter in sequential terms, a reminder that the year-on-year surge flatters a weak comparison. SMIC's capital spending also fell sharply, to $1.09 billion in the third quarter from $1.84 billion in the second, as the pace of its capacity build-out eased.

The company is listed in Hong Kong and Shanghai and is China's most important foundry, making chips designed by other companies. Its performance is closely watched as a gauge of Chinese demand for semiconductors and of Beijing's push for self-reliance in a technology the United States has sought to restrict.

Margins and factory output

SMIC's factories ran almost flat out during the quarter. Monthly production capacity increased 1.8 per cent from the previous quarter to 1.1 million standard eight-inch equivalent wafers, while the utilisation rate, which measures how intensively a foundry's production lines are used, reached 97.3 per cent, up 3.6 percentage points from the second quarter.

The company shipped 3.03 million equivalent wafers in the September quarter, up 5.7 per cent from the previous quarter. SMIC said it was pursuing capacity expansion driven by customer demand, suggesting its order books remain full even as it adds new production lines.

High utilisation matters because chip factories carry enormous fixed costs. When lines run close to full capacity, each additional wafer sold contributes heavily to profit, which helps explain why margins improved so sharply even though revenue grew by only a third.

China still dominates sales

China remained by far SMIC's biggest market, accounting for 90.8 per cent of revenue in the third quarter, up slightly from the second quarter. The United States contributed 7.8 per cent, down slightly from 8.2 per cent, with the rest of the world making up the remainder.

The heavy reliance on Chinese customers reflects both the growth of domestic chip design companies and the effect of US restrictions, which have pushed Chinese technology firms to source more of their chips at home. It also leaves SMIC exposed if domestic demand cools, since it has relatively little business outside China to fall back on.

SMIC's strong quarter comes at a sensitive moment for the global chip industry. Nvidia's chief executive resigned on Thursday amid a scandal over alleged Chinese espionage links, and US lawmakers are pushing for tougher curbs on sales of advanced AI chips to China, developments that could reshape demand for the kind of mature-node chips SMIC specialises in.

Softer outlook for the final quarter

Despite the strong third quarter, SMIC guided to a gross margin of 26 to 28 per cent for the fourth quarter, below the 29.9 per cent achieved in the third. The softer guidance suggests profitability may come under pressure as continued capacity expansion and changes in product mix weigh on margins.

Analysts will now watch whether SMIC can sustain its utilisation rates into 2027 and whether demand from Chinese customers holds up as new capacity comes online across the industry. For now, the third-quarter numbers show a chipmaker running its factories hard and earning far more from each wafer than it did a year ago.

Source: Reuters