China SMIC Swings To Profit In 4Q As Output Rises -Source
Wednesday February 11, 6:03 am ET
HONG KONG -(Dow Jones)- Semiconductor Manufacturing International Corp. recorded its first quarterly profit in the final three months of 2003, helped by higher production and expanded capacity, a person familiar with the company's initial public offering plans said Wednesday.
SMIC, China's largest producer of made to order chips, had a net profit of about US$10 million for the October-December period, reversing a third-quarter net loss of US$8 million, he said.
The company, founded in April 2000, has reached the milestone of recording a quarterly profit faster than its Taiwanese counterparts, which pioneered the industry.
"It took six years for TSMC to achieve its first turnaround," the person added, referring to Taiwan Semiconductor Manufacturing Co. , the world's largest producer of made-to-order chips.
SMIC has won approval from stock exchange regulators to kick off its IPO, which could raise US$1 billion-US$1.5 billion. It plans in mid-March to list between 20% and 25% of its enlarged capital on the Hong Kong and the U.S. main boards.
"This company is just quite lucky," Nomura's Taipei-based semiconductor analyst Rick Hsu said.
Hsu said SMIC benefited from low equipment costs when it was established during an industry downturn, and it is now enjoying gains from the recovery in chip demand. In addition, the Chinese company is experiencing a relatively short learning curve compared with its predecessors as it was founded by overseas professionals.
It has been winning new orders as a low-priced competitor and building its capability in advanced production technologies, although it lags industry leaders like TSMC by a few generations of innovation. It sells its chips for as much as 40% cheaper than TSMC's equivalent products, analysts estimated.
The Chinese company is also ramping up production. Its revenue in 2003 reached US$360 million, more than seven times the US$50 million recorded in 2002, the source said.
The 8-inch wafer fab, or chip-fabrication plant that SMIC recently acquired from Motorola Inc. (NYSE:MOT - News) is set to begin operation later in the first quarter, adding more production lines to the company's three existing 8-inch fabs.
The company will also begin production at a more advanced 12-inch fab in Beijing using finer manufacturing technology in the fourth quarter or in early 2005.
The bigger the wafer size and the finer the production technology, the more chips can be cut from each wafer, resulting in lower average costs and higher margins.
Twelve-inch fabs are the most advanced - but also the most expensive - production plants in the world, so it usually takes firms some time to make them profitable.
"It'll still take many years for SMIC to catch up with TSMC," the person said. "But it has gradually been taking orders away from TSMC. Customers (chip designers) hope to diversify their risks."
SMIC has a growing list of clients, including Texas Instruments Inc. (NYSE:TXN - News) , Infineon Technologies AG (NYSE:IFX - News) , Nvidia Corp. (NasdaqNM:NVDA - News) , Marvell Technology Group ( MRVL), Motorola Inc. and Broadcom Corp. (NasdaqNM:BRCM - News) .
This year, the company's revenue is likely to triple, the source said, thanks to the commencement of the new operations and the semiconductor industry rebound.
However, profit this year is likely to be modest because of depreciation charges and research and development costs, he said.
SMIC believes it will continue to gain market share, the person said, with profit set to increase beginning in 2005, despite some analysts' anticipation of a downturn in the semiconductor sector next year.
One concern surrounding SMIC is the industry's enormous thirst for capital. This is especially true for SMIC as it seeks to jack up production in the years ahead.
SMIC has budgeted nearly US$2 billion in capital expenditure for this year and another US$1 billion for 2005, the person said. This implies that fund-raising pressure will continue to weigh on the company even after its billion-dollar IPO.
The person added that following two rounds of private share placement, with the latest in September last year, and two rounds of debt-financing, with the latest in mid-January, SMIC's total debt-to-capital ratio is only about 30% ahead of its IPO, indicating that room remains for loan financing.
-By Loretta Ng, Dow Jones Newswires; 852-2802-7002; loretta.ng@dowjones.com
(Dan Nystedt in Taipei also contributed to the report)
-Edited by Sharon Buan and John Viljoen |
