SMIC close to moving out of the red

C. William Lu, an analyst with investment banking firm Piper Jaffray (Minneapolis), also raised his forecast for SMIC (Shanghai) for 2005, due to a better-than-expected outlook for the second half.

For Q2, SMIC is projected to lose $0.09 a share on sales of $283.6 million, according to the firm. The company’s results are projected to be “in line with guidance, with blended ASP down 2 percent quarter-over-quarter, wafer shipments up 17 percent, and a utilization rate at 87 percent,” Lu said in a report. “[SMIC’s] logic customers were still cautious in early Q2, but demand picked up toward the end of Q2.”

SMIC reported sales of $248.8 million in the first quarter of 2005, down 14.7 percent from $291.8 million in the prior quarter. SMIC said its net loss increased to $30.0 million in the first quarter of 2005, compared to a loss of $11.2 million in the fourth quarter of 2004.

The losses are partly due to a legal settlement with Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). Last year, TSMC said that it has reached an out-of-court settlement with Chinese silicon foundry rival SMIC over patent infringement and related issues. Under the terms, SMIC will pay TSMC some $175 million to settle the bitter patent and trade secret suit.

Meanwhile, after a string of losses, SMIC could achieve breakeven results in the third quarter of 2005, versus Lu’s previous estimates for EPS of minus $0.05 and consensus of minus $0.02.

“We expect SMIC to guide for strong sequential revenue growth in 3Q,” he said. “We believe revenue could be up 15-20 percent, with ASP up 10 percent quarter-over-quarter and a fab utilization rate above 90 percent.”

For Q4, SMIC’s growth is projected to be moderate, “with wafer shipment up 6 percent, ASP up modestly, and a utilization rate around 95 percent,” he said.

Demand is strong for leading-edge processes. “We see SMIC gaining traction with its 130-nm copper production line beyond the Texas Instrument backend business,” Lu said. “Several communication and consumer customers are engaging with SMIC for full 130-nm copper chip production, albeit at small volumes near term.”

As a result, Lu is raising his estimates for SMIC in 2005. Sales are projected to hit $1.24 billion, up from $1.17 billion. EPS is now minus $0.11, up from minus $0.22 for the year.