Earnings reports from the top two wafer companies are coming! Will they ignite a rally in chip stock

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SMIC Q4 2025 Earnings Live Broadcast

[AI Key Takeaways]

Financial Performance

- Revenue for the fourth quarter of 2025 was $2.489 billion, a quarter-over-quarter increase of 4.5%, with a gross margin of 19.2%, down 2.8 percentage points quarter-over-quarter

- Full-year revenue for 2025 was $9.327 billion, a year-over-year increase of 16.2%, setting a new historical high; gross margin was 21%, up 3 percentage points year-over-year

- Profit attributable to the company was $685 million, with capital expenditures at $8.1 billion

- Total assets were $52.3 billion, cash funds were $11.9 billion, interest-bearing debt-to-equity ratio was 36%, and net debt-to-equity ratio was 1.9%

Business Progress

- Capacity utilization remained at 95.7%, with 8-inch utilization overall exceeding full capacity, and 12-inch utilization close to full capacity

- By the end of the year, equivalent 8-inch standard logic monthly production capacity reached 1.059 million wafers, an increase of 111,000 wafers compared to the end of the previous year

Benefiting from the accelerated shift in the automotive industry chain, revenue from industrial and automotive wafers has grown by more than 60% year-over-year in absolute terms

Revenue from customers in China increased by 18% year-over-year, while revenue from overseas customers grew by 9% year-over-year

Guidance for the next quarter

Sales revenue for the first quarter of 2026 is expected to remain flat quarter-over-quarter, with gross margin projected to be between 18% and 20%

Full-year sales revenue growth for 2026 is expected to exceed the average of comparable peers, with capital expenditures roughly unchanged compared to 2025

By the end of 2026, monthly production capacity is expected to increase by approximately 40,000 equivalent 12-inch wafers compared to the end of last year

Total depreciation for the company in 2026 is expected to increase by about 30% year-over-year

Opportunity

The repatriation of overseas supply chains and the benefits of domestic customers substituting new products for older overseas products will continue, providing sustained growth opportunities for the domestic industry chain

Strong demand for storage driven by artificial intelligence has led to an increase in orders related to AI, storage, and mid-to-high-end applications

The company has technological reserves and a leading edge in niche areas such as BCD, analog, storage, MCUs, and mid-to-high-end display drivers

Risk

External environmental factors have caused a timing mismatch between critical equipment and supporting equipment purchased in advance by the company, resulting in uneven lead times

As the new plant enters the operational phase and begins depreciation, the company's total depreciation is expected to increase by about 30% year-over-year in 2026, putting pressure on gross margins.

[AI Meeting Transcript]

Operator

Welcome to SMIC's Fourth Quarter 2025 earnings call. Today’s conference will be simultaneously broadcast over the internet and via telephone. Please note that if you join by phone, your line will be in listen-only mode. After management concludes their presentation, we will move to a Q&A session, during which instructions for participation will be provided.

欢迎参加半导体制造国际公司的2025年第四季度网络广播电话会议。今天的电话会议将通过互联网和电话同时进行。请注意，如果您通过电话加入会议，您的拨入将处于仅听模式。然而，在管理层演示结束后，我们将进行问答环节，届时您将收到有关如何参与的说明。

Now, let's invite Senior Vice President and Board Secretary Ms. Guo Guangli to host the webcast.

Guo Guangli

Hello everyone, welcome to SMIC's Fourth Quarter 2025 earnings call. The executives joining us today include Co-CEO Dr. Zhao Haijun and Senior Vice President and Head of Finance, Dr. Wu Junfeng.

Welcome to SMIC Fourth Quarter 2025 Webcast Conference Call. Attending today's call are Doctor Zhao Hai Jun Co Chief Executive Officer, Doctor Wu Jun Feng, Senior Vice President and person in charge of Finance.

Let me remind everyone that today’s presentation includes forward-looking statements, which reflect expectations about future performance but do not guarantee outcomes and are subject to inherent risks and uncertainties. Please refer to our earnings release for more information on these forward-looking statements. Unless otherwise stated, all financial data presented today follows International Financial Reporting Standards (IFRS), with currency figures expressed in U.S. dollars.

让我提醒您，今天的演示包含前瞻性声明，这些声明不保证未来的表现，将代表公司的期望，并且受到固有风险和不确定性的影响。请参阅我们收益中的前瞻性声明。请注意，今天的收益声明是根据国际财务报告准则（IFRS）呈现的。除非另有说明，货币数字以美元计。

Next, let’s invite Dr. Wu Junfeng to present the company’s financial status.

Wu Junfeng

Good morning everyone. First, I will report our unaudited results for the fourth quarter and year of 2025, followed by our guidance for the first quarter of 2026.

The fourth quarter results were as follows: Revenue was 2,489 million, up 4.5% sequentially. Gross margin was 19.2%, down 2.8 percentage points sequentially. Profit from operations was 299 million. EBITDA was 1,405 million. EBITDA margin was 56.5%. Profit attributable to the company was 173 million.

For 2025 results were as follows: revenue was 9,327 million, up 16.2% year over year. Gross margin was 21%, up 3 percentage points year over year. Profit from operation was 1,110 million. EBITDA was 5,256 million. EBITDA margin was 56.4%. Profit attributable to the company was 685 million. Capital expenditures was 8.1 billion.

2025年的结果如下：收入为93.27亿，同比增长16.2%。毛利率为21%，同比提高3个百分点。营业利润为11.1亿。EBITDA为52.56亿。EBITDA利润率为56.4%。归属于公司的利润为6.85亿。资本支出为81亿。

Moving to the balance sheet: At the end of 2025, the company had total assets of 52.3 billion, of which total cash on hand was 11.9 billion. Total liabilities were 17.3 billion, of which total debt was 12.6 billion. Total equity was 35 billion. Debt to equity ratio was 36% and net debt to equity ratio was 1.9%.

Regarding cash flows: In 2025, net cash generated from operating activities was 3.194 billion, net cash used in investing activities was 6.495 billion, and net cash generated from financing activities was 2.676 billion.

Cash flow in 2025: net cash generated from operating activities was 3,194 million, net cash used in investing activities was 6,495 million, net cash generated from financing activities was 2,676 million.

For the first quarter of 2026, our guidance is as follows: revenue is expected to remain flat sequentially, and gross margin is expected to be in the range of 18% to 20%.

For the first quarter 2026, our guidance are as follows: Revenue is expected to be flat sequentially and gross margin is expected to be in the range of 18% to 20%.

This concludes the financial status, thank you.

Guo Guangli

Thank you, Dr. Wu. Next, I will hand the call to Dr. Zhao Hai Jun to comment on operations.

Zhao Haijun

Good morning, everyone. With the Chinese New Year approaching, I would like to wish you all an early Happy New Year. Thank you for attending today's SMIC fourth-quarter 2025 earnings webcast conference call.

Good morning, everyone. With the Chinese New Year approaching, I'd like to wish you all an early Happy New Year. Thank you for attending today's SMIC fourth quarter 2025 earnings webcast conference call.

In the fourth quarter, the company achieved total revenue of 2.489 billion dollars, with revenue increasing by 4.5% sequentially. Wafer revenue increased by 1.5% sequentially. Both the number of wafers sold and the average selling price saw slight growth. Other revenue increased by 64% sequentially, mainly due to the concentrated shipment of photomasks at the end of the year. On the basis of adding 16,000 wafer starts per month in 12-inch capacity during the quarter, the company maintained a capacity utilization rate of 95.7%. The utilization rate of 8-inch facilities remained above full capacity, while that of 12-inch facilities approached full capacity, primarily due to the ongoing effect of industry chain transition and iteration.

The fourth quarter remained strong despite being the traditional off-season. The company's revenue was USD 2,489 million, representing a sequential increase of 4.5%. Wafer revenue increased by 1.5% sequentially while both wafers shipped and blended ASP slightly increased sequentially. Other revenue surged by 64% sequentially, mainly due to bulk shipments of masks at the end of the year. With an incremental capacity of 16,000 12-inch wafers in the quarter, the company's utilization rate stayed at 95.7%. The overall 8-inch utilization rate exceeded 100%, and the overall 12-inch utilization was nearly full, driven by ongoing industry reshuffling and iteration.

In the fourth quarter, the company’s gross margin was 19.2%, down 2.8 percentage points sequentially, primarily due to the impact of rising depreciation.

In the fourth quarter, the company's gross margin decreased by 2.8 percentage points sequentially to 19.2%, mainly because of the increase in depreciation.

Looking back at the entire year of 2025, the semiconductor supply chain, which used to design and produce overseas for domestic sales, transitioned towards localization, with the reshuffling effect persisting throughout the year. Analog circuits saw the fastest shift, followed by display drivers, camera sensors, memory, then MCUs, mixed-signal products, logic chips, and others. Chinese local design companies seized the opportunity and gained market share in the supply chain. By focusing on customer demands in niche markets, the company expedited verification and ramped up production, leading to another step forward in its 2025 operating performance and achieving a new milestone in production and revenue scale.

Looking back at the full year of 2025, the semiconductor industry chain shifted toward localization, moving away from the previous model of overseas design and production for the domestic market. The reshuffling effect continued throughout the year. Analog products experienced the fastest shift, followed by display drivers, CIS, memory, and then MCUs, mixed-signal ICs, logic ICs, and more. Chinese local fabless companies seized the opportunity to gain market share in the supply chain by focusing on customers’ demand for specialized products, accelerating product verification, and scaling up production volumes. The company’s performance in 2025 reached new heights, with a significant leap in both production capacity and revenue scale.

According to financial data, the company's revenue in 2025 reached USD 9.327 billion, increasing by 16.2% year-over-year and hitting a record high. The gross margin stood at 21%, up three percentage points year-over-year. By region, the revenue breakdown in 2025 showed that China, the US, and Eurasia accounted for 85%, 12%, and 3% respectively, remaining unchanged from last year. In absolute terms, benefiting from the previously mentioned reshuffling effects in the industrial chain and the overall growth in market demand, revenue from Chinese customers grew by 18% year-over-year, while revenue from overseas customers grew by 9% year-over-year.

According to the unaudited financial results, the company’s revenue in 2025 increased by 16.2% year over year to 9,327 million, reaching a record high. The gross margin stood at 21%, up 3 percentage points from the previous year. By region, revenue from China, North America, and Eurasia accounted for 85%, 12%, and 3% of total revenue in 2025, respectively, remaining flat compared to the prior year. From an absolute revenue perspective, driven by the aforementioned industrial chain realignment and overall market demand growth, revenue from Chinese customers rose 18% year over year, while revenue from overseas customers increased 9% year over year.

By wafer size, revenue from 12-inch and 8-inch wafers accounted for 77% and 23%, respectively, unchanged from last year. In absolute terms, revenue from 12-inch and 8-inch wafers increased by 17% and 18%, respectively. By application, wafer revenue from smartphones, computers and tablets, consumer electronics, connectivity and IoT, industrial and automotive segments accounted for 23%, 15%, 43%, 8%, and 11%, respectively.

按尺寸来看，12英寸和8英寸的晶圆收入占比分别为77%和23%，与去年持平。从绝对收入的角度来看，12英寸和8英寸分别增长了17%和18%。按应用划分的晶圆收入占比：智能手机、计算机和平板电脑、消费电子、连接和物联网、工业和汽车分别占23%、15%、43%、8%和11%。

Benefiting from the accelerated transition within the automotive supply chain and the platform investments made by the company over the past two years, the company’s industrial and automotive wafer revenue grew by more than 60% year-over-year in absolute terms. Driven by national policies stimulating consumption and the growth in international demand boosting China's exports, the company’s consumer electronics wafer revenue grew by more than 30% year-over-year.

Benefiting from the accelerated reshuffling of the automotive supply chain as well as the company's platform deployment over the past two years, absolute wafer revenue from industrial and automotive sectors increased by more than 60% year over year. Additionally, benefiting from the boost in national consumer stimulus policies and growth in international demand driving an increase in China exports, absolute wafer revenue from consumer electronics rose by more than 30% year over year.

The company’s capital expenditure in 2025 was 8.1 billion, higher than initially projected at the beginning of the year. This was mainly due to addressing strong customer demand, changes in the external environment, and extended equipment delivery times, leading to the early procurement of already planned capacity. By the end of the year, monthly capacity, equivalent to 8-inch standard logic wafers, reached 1,059,000 pieces, an increase of 111,000 wafers compared to the previous year-end. Total shipments amounted to 9.7 million wafers, with an annual average capacity utilization rate of 93.5%, up 8 percentage points year over year.

The company’s capital expenditure in 2025 totaled 8.1 billion, exceeding the initial projections made at the beginning of the year. This was primarily driven by the need to meet strong customer demand, evolving external market conditions, and extended equipment delivery times, which led to an acceleration in planned capacity expansion. By the end of the year, monthly capacity had reached 1,059,000 standard logic 8‑inch equivalent wafers, an increase of approximately 111,000 wafers compared to the end of the previous year. Total shipments reached around 9.7 million wafers, and the annualized capacity utilization rate rose 8 percentage points year over year to 93.5%.

Looking ahead to 2026, the trend of overseas industrial chain reshoring and domestic customers' new products replacing older overseas products will continue, bringing sustained growth opportunities for the domestic industrial chain. During the November earnings conference call, the impact of the memory macro cycle on the industry and foundry sector was discussed. Over the past two months, we have communicated extensively with partners across the industrial chain. We have observed that the strong demand for memory driven by AI has squeezed the supply available to other application sectors such as mobile phones, particularly in the mid to low-end markets, where terminal manufacturers are facing pressure from insufficient supply and rising prices of memory chips.

Looking ahead to 2026, the effects of industrial chain reshoring from overseas and the replacement of legacy overseas products with new offerings from domestic customers will continue, creating sustained incremental growth opportunities for the domestic industrial chain. The impact of the memory macro cycle on the industry and the foundry sector was discussed during the November earnings conference call. Over the past two months, we have engaged in extensive discussions with partners across the industrial chain. Our findings indicate that the robust demand for memory chips driven by AI has tightened supply for other application sectors, such as mobile phones—particularly in the mid‑to‑low‑end market. As a result, end‑user companies in these segments are facing pressure from both constrained supply and rising prices for memory chips.

Even if end-user companies can pass on cost increases to consumers through price hikes, this will lead to a decline in demand for end products. The combined effect of these factors has resulted in a reduction of mid to low-end orders received by foundries. However, orders related to AI, memory, and mid to high-end applications are increasing. In this market environment, leveraging its technological reserves and leading advantages in niche areas like BCD, analog, memory, MCU, and mid to high-end display drivers, along with customer product layouts, the company remains well-positioned in the current industry development cycle. The company will actively respond to urgent market demands to drive continued revenue growth in 2026.

Even if end‑user companies can pass on this cost increase to consumers through higher end‑product prices, such measures will inevitably lead to a decline in demand for end products. The combined impact of these factors has resulted in a drop in mid‑to‑low‑end orders received by foundries. However, orders related to AI, memory, and mid‑to‑high‑end applications are on the rise. In this market environment, by leveraging its technological reserves and leading advantages in niche markets such as BCD, analog, memory, MCU, and mid‑to‑high‑end display drivers—coupled with customers’ product roadmaps—the company remains well positioned within the current industry development cycle. The company will proactively address urgent market demands to drive continued revenue growth in 2026.

Considering all the above factors, the company's guidance for the first quarter is flat revenue sequentially, with a gross margin between 18% and 20%. Assuming no major changes in the external environment, the company's guidance for 2026 is for revenue growth to exceed the industry average in comparable markets, while capital expenditures are expected to remain roughly flat compared to 2025.

结合上述因素，公司第一季度的指导意见如下：预计收入将环比持平，毛利率预计在18%到20%之间。基于外部环境没有重大变化的前提，公司对2026年的指导意见是：预计收入增长将高于同一市场的行业平均水平，资本支出预计与2025年大致持平。

Regarding the company’s outlook for 2026, we would like to make the following two clarifications. First, over the past few years, the company has significantly increased investment and accelerated capacity expansion. In 2025, we added approximately 50,000 wafers of 12-inch capacity, and in 2026, we plan to further expand production. However, due to external environmental factors, although the company has pre-purchased key equipment, the corresponding auxiliary equipment may not yet have been purchased, causing a time lag and creating a mismatch. As a result, the equipment purchased may not form complete production capacity this year. Based on the current situation, we expect that by the end of the year, our monthly capacity will increase by about 40,000 12-inch equivalent wafers compared to the end of last year.

For the 2026 company outlook, we make the following two points. Firstly, in recent years, the company has increased investment and accelerated capacity expansion. In 2025, the company added approximately 50,000 units of 12-inch wafer capacity and continues to expand capacity into 2026. However, due to external factors, the company has procured some key equipment in advance while supporting equipment may not yet be purchased. This timing mismatch has led to an uneven situation where the procured equipment might not form complete production lines this year. Based on the current situation, it is estimated that by the end of this year, the increase in monthly capacity will be around 40,000 12-inch equivalent wafers compared to the end of last year.

Secondly, in order to actively seize local manufacturing opportunities, the company has maintained high levels of investment, which has driven rapid revenue growth but also placed significant depreciation pressure on gross margins. As new fabs exit the start-up phase and begin depreciation, the company's total depreciation in 2026 is expected to grow by about 30% year-over-year. To counter this pressure, the company will focus on internal optimization by striving to maintain high utilization and improve cost efficiency through operational enhancements. From the perspective of current operations management, the core factor influencing changes in gross margin is the increase in depreciation per unit of revenue. For other influencing factors, the company aims to mitigate the impact through proactive management.

Second, in order to proactively seize local manufacturing opportunities, the company has maintained a high level of investment, which has fueled rapid revenue growth but also placed significant depreciation pressure on gross margins. As new fabs move out of the startup phase and begin depreciating, the company’s total depreciation for 2026 is expected to increase by approximately 30% year over year. To offset this pressure, the company will focus on internal optimization by striving to maintain high utilization rates and improve cost efficiency through operational enhancements. From the perspective of current operations management, the primary factor influencing changes in gross margin is the rise in depreciation per unit of revenue. For other influencing factors, the company aims to mitigate their impact through proactive management.

Success built on long-term efforts endures. After 25 years of forging ahead through trials, hardships, and hard work, we are more confident than ever to participate in, support, and drive the comprehensive development of the upstream and downstream sectors of the domestic IC industry. The company will always focus on customer service and market demand, steadily advancing the construction of high-quality capacity, promoting synergetic development within the industrial chain, reducing costs and increasing efficiency by boosting new productive forces, seizing current market opportunities, driving the company's long-term sustainable development, and creating long-term value for shareholders.

That endures. Success is built on a long-term foundation through persistent effort. After 25 years of forging ahead through trials, hardships, and hard work, we are more confident than ever to participate in, support, and drive the all‑round development of the upstream and downstream sectors of the local IC industry. The company will always focus on customer service and market demand, steadily advance the construction of high‑quality capacity, foster the synergistic development of the industrial chain, reduce costs and increase efficiency by leveraging new productive forces, seize current market opportunities, promote the company’s long‑term sustainable development, and create long‑term value for shareholders.

Finally, we extend our sincere thanks to friends who care and support the development of SMIC.

Guo Guangli

Thank you, Dr. Zhao. Next, we will enter the Q&A session, where questions will be answered by Dr. Zhao and Dr. Wu. Chinese questions will be answered in Chinese, and English questions will be answered in English. Each questioner may ask up to two questions.

I would now like to open up the call for Q&A. Operator, please assist.

Operator

Now is the question and answer session. If you would like to ask a question, please press *11. If you would like to cancel your question, please press *11 again.

Your first question comes from Le Ping Huang of Hua Tai Securities, please go ahead.

Huang Le Ping

Thank you, thank you, Mr. Zhao, and congratulations on the company's excellent performance. I’d like to first ask about the impact of the storage cycle. As Mr. Zhao mentioned earlier, over the past couple of months, while there has been an impact on demand for mid-to-low-end smartphones, it has also driven some new demand. Could Mr. Zhao elaborate further on how AI will drive new demand, and which of the company’s platforms will benefit? On the other hand, how do you see the timing for the bottoming out of demand for mid-to-low-end smartphones? Thank you.

Zhao Haijun

To answer your first question, Leping, thank you for asking the first question. I'd like to make two points and share some personal thoughts and speculations with you. At this point, the impact of memory has already been factored into our current report’s revenue forecast and related data. Therefore, going forward, it is up to everyone to speculate whether the impact will worsen, improve, or change in other ways.

You asked when the mid-to-low-end market might rebound. First, SMIC's response to market changes can already be seen in the Q4 earnings report, where we noted a four-point decline in PC and peripherals. Essentially, we anticipate that upcoming memory shortages may affect these areas, so we are reallocating capacity to segments with undersupply, such as data centers, power supplies, and industrial automotive sectors. For products like certain smartphones where inventory levels are high, we expect declines, at least in the first half of the year, and have adjusted production accordingly. Therefore, the company’s current capacity utilization and revenue projections already factor in the anticipated downward trend for mid-to-low-end smartphones and PCs in the first half of this year. That’s the first point.

The second point is that everything in the world has two sides to a coin—one side being bad brings the other side being very good. Right now, SMIC also produces memory and memory-related products, and demand for these has surged dramatically. It’s well-known across the industry that prices have been rising throughout the first quarter due to supply shortages. To address this, we’re doing our best to shift MCU capacity or logic circuits related to memory toward dedicated memory production.

Another observation relates to all forms of data—aside from computing power, there’s also the aspect of data transmission, which involves throughput. Whether it’s optical data transmission or digital electrical data transmission, all these circuits are growing. Moreover, edge computing, or what we call Edge AI, and low-power devices for endpoint applications, including base station power supplies, DC power supplies, etc., are seeing significant demand. We’re witnessing an exponential increase in demand for what we call driver mode low-power applications.

SMIC’s BCD capacity has consistently been insufficient due to demand from the automotive sector, data centers, and other industries tied to these needs. In summary, memory, BCD, memory-related logic circuits, power supply-related circuits, and circuits used in industrial and automotive applications are all in short supply. These areas are experiencing growth. Over the coming months, SMIC will work hard to release additional capacity and bring new equipment online to support growth in BCD, memory, memory-related products, base stations, data centers, and AI-related circuits. That’s the first part.

Secondly, regarding your question on mid-to-low-end smartphones and when demand might rebound, this is just my personal opinion, and many of you are industry observers who may see more than I do. My view is as follows: overall market demand, meaning end-user demand—the everyday consumer—is still present in the B2C space. People will still buy phones and computers regardless of whether there’s a shortage or surplus in supply. This demand will pick up in the second half of this year or next year, depending on consumer needs. That’s the first belief.

Second, having personally experienced five memory cycles, each cycle eventually divides into two parts. One part is end-user demand, which tends to be amplified during shortages. For instance, if someone urgently needs an airline ticket but can’t find one on Air China, they’ll check with Eastern Airlines, and if not there, Southern Airlines. So, at airline ticket counters, it might seem like there’s demand for multiple tickets, but in reality, it could just be one person’s urgent need. When supply is tight, this effect gets exaggerated. Once production catches up to meet demand, the actual demand becomes more stable and reliable.

So currently, this demand has been amplified due to a sense of crisis, as everyone is somewhat panicked and anxious. This amplification has directly driven up prices and also boosted the inventory held by intermediaries, which we call channel distributors. A lot of goods should now be with these channel distributors. The real bottleneck brought by artificial intelligence lies in HBM packaging and FT testing. You can see that after Paradigm announced its news, the stock rose 20% in one day, indicating that there aren't enough test platforms. Moreover, when it comes to backside processing, thinning, chamfering, and stacking for HBM, the capacity isn't sufficient either. It's not like all the wafers at the front-end can immediately shift to AI-related tasks to produce AI-focused HBM.

Therefore, memory capacity will increase in the coming months. Those who buy equipment on priority can get it within four months, while those who are slower can receive it within nine months. Around nine months later, we will likely see an increase in production capacity at the wafer front-end. However, this capacity cannot be directly used for applications related to AI data centers and HBM because the verification process takes longer. Instead, these capacities will quickly be redirected towards consumer markets, such as toys, mobile phones, and other consumer products, where verification is much faster. These tests don't require the extensive back-end capacity increases I mentioned earlier for HBM, so they can proceed without delay.

At this point, the channel distributors' stockpiling will ease as prices have peaked, and capacity has increased along with supply. They will start releasing their inventories simultaneously. Currently, they are holding back entirely due to ongoing price negotiations. Once the pricing is finalized, and the supply increases over the next nine months, they will release their stock. That should be when we see a rebound in consumer electronics and mid-to-low-end smartphones.

In the end, regardless of how many fewer smartphones are produced this year, the total output across computers, edge devices, smartphones, and consumer electronics by the end of next year should remain unchanged, more or less. Therefore, we continue to communicate this message to our clients: do not be overly pessimistic, and avoid cutting too many orders right now. If you cut too many orders now and demand picks up in the third quarter, you might not have enough inventory, potentially losing your market share to competitors who do have stock.

Our clients, including SMIC’s clients, are gradually accepting our advice. Orders that were initially planned for significant cuts have recently started to be slowly reinstated. Of course, we need to address the shortages in the most strained parts of the capacity. We must supplement the tightest areas of demand. Meanwhile, after some reflection during the fourth quarter and first quarter, confidence has been restored, and existing orders will be placed again. Le Ping, this is my personal take on the situation.

Huang Le Ping

Thank you, Mr. Zhao. My second question relates to the company's ASP and the supply-demand dynamics of the mature process platform. As Mr. Zhao mentioned earlier, both volume and price have increased this quarter. I’ve seen news reports stating that the company adjusted prices for some product lines last December. Could you explain the background behind this price adjustment? Also, given the weak consumer demand, does the ability to implement price adjustments indicate that the supply-demand situation for the mature process platform remains very tight? Particularly, we've noticed that the world’s largest foundries are exiting certain mature process platforms. Does this imply that, looking ahead to 2026, capacities for 12-inch and 8-inch mature processes will still be highly constrained?

Zhao Haijun

Alright, Le Ping, you’ve asked an excellent question. First, pricing reflects the relationship between supply and demand, following trends set by other major suppliers in the market. For instance, as memory prices rise, SMIC's memory prices also increase. BCD components, which are in short supply, are used in AI, data centers, and automobiles. Given the improved quality of our products in these categories, corresponding price increases are already occurring.

Currently, there are places where capacity is being reduced because our peers and competitors are no longer focusing on mature processes, shifting instead to advanced packaging or selling to others, leading to a drop in supply. Indeed, I’ve observed that sectors like CMOS image sensors (CIS) and LCD drivers, which were once at the lowest price tier in the entire supply chain, have now stabilized. New and iterative products, especially competitive ones, are seeing price increases.

In the entire industry, these bulk products originally referred to LCD drivers, CMOS image sensors, and memory. These are all considered bulk products. The prices for products like CIS and LCD drivers have now stabilized and are gradually rebounding. Memory prices are rising rapidly, and BCD prices are still growing, with supply unable to meet demand. This situation has created a relatively positive environment overall.

However, standard products face this issue: if you don’t iterate last year’s products, their prices will drop this year. So now we see that some customers who iterate quickly can maintain price growth even in the same applications such as WiFi, LCD driver, or AMOLED driver. If it's the same product without much change, like CIS, its price drops. Therefore, SMIC is now prioritizing R&D, engineering support, and capacity for products that undergo iteration and whose prices can be further stabilized. This allows us to maintain control over SMIC’s ASP going forward. Thank you.

Operator

The next question comes from Yuan Wang of CITIC Securities, please go ahead.

Wang Yuan

Alright, thank you. As the New Year is approaching, on behalf of CITIC Securities Research Department, I’d like to extend early New Year greetings to all the leaders and colleagues at SMIC, as well as all the investors online. My first question is about the landscape for mature process nodes. Earlier, Mr. Zhao mentioned that we are seeing some overseas fabs, such as those in Taiwan and Korea, exiting part of their mature process capacities. On the demand side, we are seeing expansions in memory production adopting CBA solutions. Will this drive additional demand for logic dies? How do you view the marginal changes in the supply side for mature processes moving forward, and how much incremental trend will memory expansion bring to logic? Including how such changes might affect pricing trends? That’s my first question.

Zhao Haijun

Thank you, Yuan Wang. The market dynamics were just discussed. Due to artificial intelligence, data centers, and edge-side applications, these represent new growth areas that didn't exist before. Additionally, the domestic automotive industry chain has seen substantial growth, which has significantly increased the demand for BCD capacity and products as well as memory products. This new demand consumes a large portion of the already established capacity and existing technical platforms.

As a result, the remaining supply for products like CIS, LCD drivers, and standard logic has decreased. Another factor you mentioned is that other players have older factories and aging equipment. These factories urgently need space, so they are exiting this capacity to focus on advanced packaging or sell it off for other purposes.

Thus, across the industry, the applications I just mentioned have consumed significant capacity, and the remaining capacity is less than before. Coupled with the fact that others are exiting some of this capacity, these two factors together reduce the supply of bulk products such as CMOS image sensors, LCD drivers, and standard logic. Previously, prices for these products would decrease annually, but recently, due to reduced supply, many clients are shifting orders from one supplier to another, resulting in new prices that either increase or at least stay stable.

This has helped stabilize or slightly increase prices for standard and bulk products this year. At the same time, companies are investing more in purchasing equipment to convert current capacities used for bulk products into producing memory and BCD products, which command higher prices. Thus, this year, we see a shift in mature node capacities, a reduction in the supply of bulk products, and stable to slightly increasing prices. Yuan Wang, that is my response.

Wang Yuan

Alright, thank you, Mr. Zhao. My second question is about the impact of the localization of this industrial chain on our company. What proportion of the impact will it have? What changes will occur in the company's product structure? You mentioned earlier that we have significant capacity expansion plans to meet these demands, with an additional 40,000 wafers of capacity expected by 2026. How will the company balance the relationship between the new depreciation and gross margin? From a quarterly perspective, how do you foresee the pace of this capacity expansion? Thank you.

Zhao Haijun

Alright, Wang Yuan. The overall framework was already covered in my previous report. We will continue to invest a similar amount of capital expenditure as last year. Last year, it was 8.1 billion US dollars, and this year it will be around 8 billion US dollars. This 8 billion US dollars, due to varying delivery cycles, cannot simply be calculated in terms of when the capacity may arrive; there could be some delays.

For example, as we previously mentioned, for our mature process lines, about 80 to 83 dollars out of every 100 dollars of capex is used to purchase capacity equipment. Then, for capacity equipment, whether it’s 40nm, 55nm, 28nm, etc., you can calculate how much is needed per 10,000 wafers. In this way, everyone can figure out the capacity, which can be calculated, but now there are some timing adjustments, so it won’t happen as quickly as originally calculated. However, there is also a relative advantage because the capacity has not yet been converted, allowing for better arrangements during assembly. The time for actual depreciation, the start of depreciation, and mass production can also be better planned.

In the report just now, we mentioned that since we had already announced figures from the previous two years—7.3 billion US dollars in the year before last and 8.1 billion US dollars last year—this equipment has already arrived and will enter mass production, starting to increase depreciation. Our depreciation increase in 2026 will be about 30%, or one-third, which is a very large increase in depreciation.

We believe that in 2026, as I just reported, we still have confidence in making this year a success. To achieve this, we need to maintain the development of SMIC's market share, support our strategic customers in succeeding in the market, and at the same time, properly manage the pressure of depreciation entering our capacity. When will we enter a virtuous state? For SMIC, if the incoming and outgoing depreciation can balance, but the denominator of outgoing depreciation keeps increasing, that would mark a turning point for SMIC. We think this year we can make it through, next year might be the most challenging, but after next year, things will only get better. That’s the situation, Wang Yuan. Alright, thank you, Mr. Zhao, your response was very clear. I also wish the company and all investors a prosperous new year. Thank you.

When will we enter a virtuous state? If SMIC can balance incoming and outgoing depreciation, with the denominator of outgoing depreciation growing larger, that would be SMIC’s turning point. We believe we can get through this year, next year may present the biggest challenge, but after that, things will improve steadily. That’s the situation, Wang Yuan. Alright, thank you, Mr. Zhao, your response was very clear. I also wish the company and all investors a prosperous new year. Thank you.

Zhao Haijun

Alright, thank you, Wang Yuan, thank you.

Operator

The next question comes from Jian Kuai of Oriental Securities. Your next question comes from Jian Kuai of Oriental Securities, please go ahead.

Kuai Jian

Hello Mr. Zhao and other leaders, my first question is regarding the product mix. As you mentioned earlier, there have been some changes in customer orders for downstream products. For SMIC, we have also observed noticeable shifts in the proportion of different products, especially in Q4. The market now has certain expectations, such as forecasts for PC shipments. Based on the share of various downstream sectors, what changes or trends do you anticipate moving forward? That’s my first question.

Zhao Haijun

Alright, Kuai Jian, thank you for this question. Earlier, I reported to everyone that based on feedback from the market and our customers, we already know that many are unable to secure sufficient memory supplies. Intermediaries have stockpiled large amounts of inventory but are unwilling to release it due to pricing discussions. In response to this situation, we adjusted our production capacity. Hence, you’ve already seen a reduction in capacity allocation for computing and peripheral products, mainly because clients predict this segment may be affected going forward.

Thus, we redirected the surplus capacity toward BCD, memory-related products, and newly designed products as I mentioned earlier. With the reduced availability of memory, high-end products will not see a decline. Customers are likely to use their limited supply of memory or memory-related circuits to manufacture higher-value products, such as premium smartphones, high-end PCs, and luxury watches, right? Consequently, we expect an increase in demand for products related to these mid-to-high-end categories, and we have increased their order allocations accordingly. This is our response strategy.

So, let me explain to you about the part concerning product iteration. For instance, AMOLED drivers, high-end CMOS image sensors, advanced logic chips, BCDs, MCUs, and memory components — all these are experiencing volume increases. For older products that haven’t been updated, which were mass-produced last year as the same product, client demand will slightly decrease, and we will allocate less capacity to them.

However, we have already started the next phase of work. As I answered in the previous question, we are now persuading clients to increase their inventory levels because overall end-market demand remains unchanged. Everyone needs to ensure that the total inventory level stays intact because once the memory issue is resolved, you must align with corresponding complementary components, whether it’s CIS, image sensors, LCD drivers, fast chargers, PMICs, or Wi-Fi modules. Otherwise, you might risk losing market share.

Recently, we have noticed that our clients are gradually agreeing with this perspective. Those who initially felt very pessimistic and planned to cut many orders are now slowly reinstating those orders. This is the current market situation.

Kuai Jian

Alright, thank you, Mr. Zhao. My second question is also about seasonality. In the first quarter, there might be factors affecting not just our company but possibly the entire industry chain, such as the Spring Festival and other elements. On the other hand, we are continuously increasing our production capacity. Overall, as you mentioned earlier, some customers have reinstated orders they previously planned to cancel. Considering these combined factors, how do we view the capacity utilization rate for the first quarter? That's my second question, thank you.

Zhao Haijun

Alright, for the first quarter, our thinking is that SMIC has many projects, new factories undergoing engineering training, product verification, and R&D support. Actually, part of our capacity is used for these purposes. Therefore, under full load, it would be around 95% to 96%. Of course, we hope that in the first quarter, we can achieve a similar capacity utilization rate as the fourth quarter.

The main task is what was mentioned earlier—there was a significant gap because everyone thought that without memory supply, it would lead to very high inventory levels. And if there were new product iterations along with existing inventory of older products, there could be significant losses from price reductions or even write-offs. Now, we are working with customers to analyze this situation, hoping to produce more updated products, build up inventory, and continue using older products for mid-to-low-end needs. By negotiating a price and sharing the risk together, these orders have been reinstated.

So we are jointly promoting our capacity utilization in this way. However, as I mentioned earlier, the capacity base for the first quarter is larger than that of the fourth quarter. To achieve the same capacity utilization rate, we actually need more orders than the fourth quarter. This is the direction we are currently striving for, as we still have some time. Today is the 11th, and we have more than half of the first quarter remaining until March 31st. We hope to maintain a level similar to that of the fourth quarter.

Kuai Jian

Very clear, thank you, Mr. Zhao. I have no further questions.

Zhao Haijun

Thank you, Mr. Kuai, thank you.

Operator

The next question comes from Jian Hu of Guosen Securities. Please go ahead.

Hu Jian

Yes, thank you, management team. Let me first wish all the leaders a happy new year. I have two questions. The first one is regarding our capital expenditure. Throughout 2025, we can see that the company's overall capital expenditure is slightly higher than the initial expectations at the beginning of the year. General Manager Haijun just mentioned an important point, which is considering factors like equipment lead times, we made advanced purchases. I would like to ask General Manager Haijun to elaborate a bit on the core considerations for this early procurement. Can we interpret it as the proportion of capital expenditure for supporting equipment will significantly increase in 2026 or even over the mid-term? That’s my first question.

Zhao Haijun

Alright, Hu Jian. SMIC’s capacity expansion is essentially part of a long-term plan. The previous approach was more conservative – we had long-term agreements (LTAs) with clients, and we planned out annual capacity increases, along with increases in depreciation and staffing. This was a very meticulous planning process, and we also had some successful experience with it.

Now, however, we are facing some uncertainties. One uncertainty is that market clients may suddenly succeed and quickly switch their production demands, which requires rapid responses. At the same time, other industry peers are accelerating their expansions. If SMIC does not have some reserve capacity to quickly fill the gap, SMIC might lose its long-trusted customers who wouldn’t be able to achieve success through SMIC. This is why we need to prepare some capacity in advance.

The second reason relates to international political factors. Sometimes, delivery times can be longer due to certain approval processes and considerations involved, which are beyond our control. Therefore, ordering in advance ensures that the equipment will eventually arrive.

The third point relates to the current situation in the memory sector. Everyone is increasing capacity, and equipment companies prioritize orders based on 3-, 6-, or 9-month schedules. Previously, you might place an order and receive the equipment within four to six months. However, now that everyone is placing orders simultaneously, things won't move as fast. Last year, we anticipated that delivery times would only get longer because everyone is aggressively expanding capacity.

So, SMIC placed orders ahead of schedule. Some suppliers completed certain products faster than expected and asked if SMIC could bring in the equipment earlier. We agreed to do so. This is roughly the situation. Compared to our original forecast last year, there has been a slight upward adjustment, though the reasons are relatively straightforward.

Hu Jian

Thank you, General Manager Haijun. Since we brought in the main equipment last year, will we be bringing in more supporting equipment this year?

Zhao Haijun

As I just mentioned, this year our capital expenditure will be roughly the same as last year. There is a factor at play here: we cannot bring in capacity that ultimately can't be delivered, so any gaps in capacity must be quickly filled. That's the situation.

Hu Jian

Alright, understood. Thank you. My second question actually relates somewhat to the memory segment that everyone was initially concerned about. I remember that last time, Dr. Zhao provided us with some very insightful data, which turned out to be very accurate. As you mentioned then, a 5% supply gap could lead to a doubling of price elasticity. In fact, from Q4 of last year until now, this has largely played out, and prices have even risen significantly. So, I would like to ask Dr. Zhao again, based on your experience and review of historical cycles, how does this round of the memory cycle differ from previous ones? Or from your perspective, which past cycle does it resemble most? What we're observing now is whether this real shortage can genuinely be adjusted through pricing. Additionally, will the squeeze on global foundry capacity gradually become apparent moving forward? Thanks, Mr. Zhao.

Zhao Haijun

Alright, these are purely my personal observations, and they may not necessarily be correct, nor do they need to reflect everyone's consensus. In data centers, or in mobile phones and computers, memory serves as a form of redundancy, meaning there’s an excess configuration. For instance, when you buy a phone, whether it has 32G or 64G of NAND flash or DRAM, people generally think more is better. Essentially, what we're discussing is whether the minimum configuration is sufficient.

Now, there are two things happening. One is that currently, computational power is insufficient because everyone has grand visions for artificial intelligence. People want to build all the data centers needed for the next ten years within one or two years. They haven’t fully figured out what these data centers will be used for, but they feel they will definitely be needed in the future. It’s similar to building high-speed rail stations or highways—there may not be much traffic now, but they’re still being constructed for future demand, compressing ten years of construction into two years.

So, in terms of AI-related demand, within a certain period, it will never be possible to meet it entirely. We can't immediately fulfill the demand by heavily investing in front-end and back-end production of memory chips such as HBM. This shortage will likely persist for several years.

However, as I mentioned earlier, on another front, wafer equipment manufacturers and wafer fab construction are progressing relatively quickly. They can produce memory wafers rapidly, but the verification process for new equipment and factories to be used in AI data centers takes a long time. While this cannot immediately address the needs of AI data centers, it can help alleviate demand in consumer electronics, PCs, and smartphones.

Currently, existing factory capacity for smartphones and PCs is being redirected toward AI applications. Once new factories are built, they won’t be able to contribute to AI immediately—AI will still face a shortage of HBM—but the supply of memory for smartphones and PCs will gradually catch up. Distributors no longer need to hoard inventory, and the overall supply chain will run more smoothly. This situation can be resolved relatively quickly, depending on how fast equipment suppliers deliver their products.

Based on the previous delivery speed of equipment companies, under normal circumstances, those with particularly high priority, accounting for about one-third, can be delivered in four to five months. For general priority, delivery usually takes about seven to eight months. The slowest priority may take around twelve to sixteen months. Therefore, this capacity will be released, first filling the consumer category.

So we just made a forecast that when this capacity is gradually released, those who have stockpiled in the channel will also release their stockpiles, which is a two-way effect. At this time, there might be a shift where mid-to-low-end phones and computers are no longer so short in supply. We generally estimate this point in time based on equipment delivery timelines, quickly ramping up production while distributors release these inventories. We think it could take about nine months to a year.

I believe – not 'we' but personally I feel – since this is fairly quick, there might be some turnaround as early as the third quarter this year. As we discussed earlier, we've been advising SMIC's customers not to halt production lines or reduce output themselves, but instead prepare sufficient inventory for a potential rebound in Q3.

However, artificial intelligence requires high-quality HBM, and its delivery times are much slower compared to front-end processes. For example, capacities for edge trimming, backside thinning, and stacking are extremely slow. Thus, looking ahead a year, if we're still discussing issues, by then the main bottleneck for HBM AI memory might no longer be the wafer fab. Even using the wafer fab for AI purposes won't help, as the bottleneck lies in the backend, not the frontend.

FT testing is very slow when multiple dies are stacked together, and yield improvement is also very sluggish. Quality validation takes even longer. So that side remains a bottleneck that cannot be resolved in the short term. Hence, only those few major players who started HBM early remain leading. Newly built plants won't benefit from HBM so quickly, but they can immediately address shortages in mid-to-low-end phones, computers, edge devices, watches, and consumer memory products at a faster pace.

Hu Jian

Understood, thank you, Mr. Zhao. Very clear, thank you, no more questions.

Zhao Haijun

Alright, thank you, Hu Jian.

Guo Guangli

Thank you all very much for your questions. I'll now turn the conference back to Miss Guo Guang Li for closing remarks.

Thank you for participating in today's conference call. Thank you for your trust and support.

This concludes SMIC's fourth quarter webcast conference call. We thank you for joining us today.

For more details:SMIC IR

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