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SMIC Q2 2026 Earnings Live Broadcast
[AI Key Takeaways]
Financial Performance
- Q2 sales revenue reached $3.006 billion, up 20% quarter-on-quarter; gross margin was 25.3%, an increase of 5.2 percentage points quarter-on-quarter
- Operating profit stood at $534 million, EBITDA at $2.109 billion, with an EBITDA margin of 70.2%
- Net profit attributable to shareholders of the Company amounted to $479 million
- H1 sales revenue totaled $5.511 billion, up 23.7% year-on-year; gross margin was 22.9%, rising 1.5 percentage points year-on-year
Business Progress
- Added monthly capacity equivalent to 8,000 12-inch wafers, with capacity utilization reaching 93.7%
- Revenue in China grew by 22%, primarily driven by robust demand for AI-supporting chips and the reshoring of overseas orders
- Revenue from 12-inch wafers increased by 24% quarter-over-quarter, while revenue from 8-inch wafers rose by 11% quarter-over-quarter.
- The absolute value of revenue from AI-related products, computers and tablets, as well as industrial and automotive sectors, grew by approximately 40% quarter-over-quarter.
Next Quarter Guidance
- Sales revenue for the third quarter is projected to increase by 2% to 4% quarter-over-quarter.
- Gross margin is expected to range between 26% and 28%.
- Capacity utilization is expected to remain at a high level of around 95%.
opportunity
- The AI industry's momentum and spillover effects will continue to drive broad demand for integrated circuit manufacturing.
- We hold technological competitive advantages in areas facing supply shortages, such as AI-related chips and power management solutions.
- By flexibly allocating existing capacity and rapidly validating new capacity, we help alleviate shortages across the supply chain.
Risks
- Pressure from rising supply chain costs has been passed on to the manufacturing segment.
[AI Conference Transcript]
Operator
Welcome to SMIC's Q2 2026 earnings conference call. Today's meeting will be broadcast live via both webcast and telephone. Please note that if you join by phone, your line will be in listen-only mode. Following management's remarks, we will hold a Q&A session, during which you will receive instructions on how to participate.
Welcome to Semiconductor Manufacturing International Corporation's Second Quarter 2026 webcast conference call. Today's call will be streamed simultaneously via the Internet and telephone. Please note that if you join by phone, your line will be in listen-only mode. However, following management's presentation, we will hold a question-and-answer session, at which time you will receive instructions on how to participate.
I would now like to invite Ms. Guo Guangli, Senior Vice President and Board Secretary, to host the call. Without further ado, I introduce Ms. Guo Guangli, Senior Vice President and Board Secretary, to host the webcast.
Guo Guangli
Hello everyone, and welcome to SMIC's Second Quarter 2026 earnings briefing. Joining us today are Dr. Zhao Haijun, Co-Chief Executive Officer, and Dr. Wu Junfeng, Senior Vice President and Chief Financial Officer.
Greetings, and welcome to SMIC's Second Quarter 2026 webcast conference call. Attending today's call are Dr. Zhao Haijun, Co-Chief Executive Officer, and Dr. Wu Junfeng, Senior Vice President and Chief Financial Officer.
Please be reminded that our remarks today include forward-looking statements, which represent the Company's expectations regarding future performance rather than guarantees, and are subject to inherent risks and uncertainties. Please refer to the forward-looking statements section in our earnings announcement. Unless otherwise stated, the financial data presented in this briefing is prepared in accordance with International Financial Reporting Standards (IFRS), and monetary figures are expressed in U.S. dollars.
Let me remind you that this presentation contains forward-looking statements that do not guarantee future performance but represent the Company's expectations and are subject to inherent risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings results are presented in accordance with International Financial Reporting Standards (IFRS), and currency figures are in U.S. dollars unless otherwise stated.
I will now invite Dr. Wu Junfeng to present the Company's financial results.
Wu Junfeng
Hello everyone. First, I will report our unaudited results for the second quarter and first half of 2026, followed by our guidance for the third quarter.
Second-quarter results were as follows: Revenue amounted to $3.006 billion, representing a 20% sequential increase. Gross margin stood at 25.3%, up 5.2 percentage points sequentially. Operating profit was $534 million, and EBITDA reached $2.109 billion. The EBITDA margin was 70.2%. Profit attributable to the company was $479 million.
Results were as follows: Revenue was $3.006 billion, up 20% sequentially. Gross margin was 25.3%, up 5.2 percentage points sequentially. Operating profit was $534 million. EBITDA was $2.109 billion. EBITDA margin was 70.2%. Profit attributable to the company was $479 million.
Regarding the balance sheet, as of the end of the second quarter, the company's total assets were $57.2 billion, including cash and cash equivalents of $13.9 billion. Total liabilities amounted to $19.3 billion, of which interest-bearing debt was $14.0 billion. Total equity stood at $37.9 billion. The debt-to-equity ratio was 37%, and the net debt-to-equity ratio was 0.4%.
Moving to the balance sheet, at the end of the second quarter, the company had total assets of $57.2 billion, of which cash on hand was $13.9 billion. Total liabilities were $19.3 billion, of which total debt was $14.0 billion. Total equity was $37.9 billion. The debt-to-equity ratio was 37%, and the net debt-to-equity ratio was 0.4%.
Regarding cash flows, net cash generated from operating activities in the second quarter was $2.522 billion. Net cash used in investing activities was $2.271 billion. Net cash generated from financing activities was $607 million.
In terms of cash flow for the second quarter, net cash generated from operating activities was $2.522 billion. Net cash used in investing activities was $2.271 billion. Net cash generated from financing activities was $607 million.
The company's unaudited results for the first half of 2026 were as follows: Revenue was $5.511 billion, a year-on-year increase of 23.7%. Gross margin was 22.9%, up 1.5 percentage points year over year. Operating profit was $782 million. EBITDA was $3.545 billion. The EBITDA margin was 64.3%. Profit attributable to the company was $677 million.
Results for the first half of 2026 were as follows: Revenue was $5.511 billion, up 23.7% year over year. Gross margin was 22.9%, up 1.5 percentage points year over year. Operating profit was $782 million. EBITDA was $3.545 billion. EBITDA margin was 64.3%. Profit attributable to the company was $677 million.
Our guidance for the third quarter of 2026 is as follows: Revenue is expected to rise by 2% to 4% sequentially, and gross margin is projected to range between 26% and 28%.
For the third quarter of 2026, our guidance is as follows: Revenue is expected to increase by 2% to 4% sequentially, and gross margin is expected to be in the range of 26% to 28%.
That concludes the overview of our financial performance. Thank you.
Guo Guangli
Thank you, Dr. Wu. I will now hand over to Dr. Zhao Haijun, Co-CEO, to discuss our operational performance.
Zhao Haijun
Hello, everyone. Thank you for attending SMIC’s earnings conference call for the second quarter of 2026.
In the second quarter, the company saw growth in both wafer shipment volumes and pricing. Quarterly revenue exceeded USD 3 billion, with all key operating metrics recording substantial year-over-year and quarter-over-quarter increases. Specifically, total sales revenue reached USD 3.006 billion, a 20% increase quarter-on-quarter. Among these figures, shipment volume rose by 14.4%, while the average selling price (ASP) per wafer increased by 5.7%. The rise in shipments was primarily driven by surging demand for AI-related chips and customers pulling forward orders. The company added 8,000 units of 12-inch equivalent monthly production capacity, bringing the capacity utilization rate to 93.7%, an increase of 0.6 percentage points from the previous quarter.
In the second quarter, the business achieved growth in both wafer shipment and price. Quarterly revenue surpassed 3 billion with all key operating metrics recording substantial increases year over year and quarter over quarter. Specifically, the company overall achieved total revenue of 3006 million, sequential increase of 20%. Among that the shipment increased by 14.4% while the blended ASP increased by 5.7%. The increase in shipment was mainly driven by surging demand for peripheral chips driven by AI as well as customers shipment pull in. The company newly added 8000 12 inch equivalent monthly capacity and utilization rate increased by 0.6 percentage points sequentially to 93.7%.
By region, revenue contributions from China, the United States, and Eurasia were 90%, 8%, and 2%, respectively. All regions recorded revenue growth in absolute terms, with China seeing the largest increase at 22%. This was primarily due to strong demand for AI-related chips, the return of overseas orders, and the continued strengthening of localized manufacturing.
In the second quarter, in terms of companies revenue by region, China, America and Eurasia accounted for 90 percent, 8% and 2% respectively. All regions recorded revenue increases in absolute dollar terms. China recorded the most substantial growth at 22%, mainly driven by robust demand for AI peripheral chips, the back flow of overseas orders and continue strengthening of localized manufacturing.
In terms of wafer revenue by size, 12-inch and 8-inch wafers accounted for 78% and 22%, respectively. In absolute terms, revenue from 12-inch wafers increased by 24% quarter-on-quarter, while revenue from 8-inch wafers rose by 11%.
By wafer size, revenue from 12-inch and 8-inch wafers accounted for 78% and 22%, respectively. Revenue from 12-inch wafers increased by 24% quarter-over-quarter, while revenue from 8-inch wafers rose by 11% quarter-over-quarter.
By application, wafer revenue from smartphones, computers and tablets, consumer electronics, connectivity and wearables, and industrial and automotive sectors accounted for 17%, 16%, 44%, 7%, and 17%, respectively. All absolute revenue figures increased quarter-over-quarter. The company allocated more capacity to segments with tight demand, resulting in quarter-over-quarter absolute revenue growth of approximately 40% for AI-related chips, computers and tablets, as well as industrial and automotive applications. For other applications, although end-market demand generally declined, customer pull-in orders partially offset the impact, driving absolute revenue growth of 8%, 16%, and 13% for smartphones, consumer electronics, and connectivity and wearables, respectively.
By application, wafer revenue from smartphone, computer and tablet, consumer electronics, connectivity and IoT, industrial and automotive accounted for 17 percent, 16 percent, 44 percent, 7% and 17%, respectively. All absolute values rose quarter over quarter. The company allocated more capacity to segments facing tight demand, resulting in quarter over quarter absolute value revenue growth of approximately 40% for AI peripheral chips, computer and tablets, as well as industrial and automotive. For other applications, despite an overall downturn in end device customers, pull in partially offset the impact, driving absolute value revenue growth of eight percent, 16% and 13% for smartphone, consumer electronics and connectivity and IoT, respectively.
In the second quarter, the company's gross margin increased by 5.2 percentage points quarter-over-quarter, primarily due to higher average selling prices (ASP) and better-than-expected capacity utilization, which offset the drag on gross margin from increased depreciation. In terms of EBITDA margin, it rose by nearly 13 percentage points quarter-over-quarter to reach 70%.
In the second quarter, the company's gross margin increased by 5.2 percentage points to 25.3%, mainly due to an increase in blended ASP and better than expected utilization rate, which offset the drag on gross margin from increased depreciation. Besides, EBITDA margin increased by nearly 13 percentage points sequentially to 70%.
According to unaudited financial data for the second quarter, the company's sales revenue for the first half exceeded $5.5 billion, a year-on-year increase of 23.7%. The gross margin was 22.9%, up 1.5 percentage points year-on-year. Total capital expenditures for the first half amounted to $3.4 billion.
According to the unaudited results for the first and second quarters, the company's revenue in the first half of 2026 surpassed 5.5 billion, up 23.7% comparing to the same period last year. The gross margin was 22.9%, up 1.5 percentage points comparing to the same period last year. The company's total capital expenditures for the first half of the year were 3.4 billion.
For the third quarter, the company expects shipments to continue growing and prices to remain resilient. Revenue guidance points to a sequential increase of 2% to 4%. Gross margin is guided to rise sequentially to the range of 26% to 28%, continuing its upward trend after offsetting incremental depreciation and peak summer electricity costs. Capacity utilization, including newly added capacity, is expected to remain at a high level of around 95%, effectively diluting unit fixed costs.
In the third quarter, the company's shipment is expected to continue to grow and the price is expected to remain resilient. The quarterly revenue is guided to increase 2% to 4% sequentially and the gross margin is guided to rise sequentially to be in the range of 26% to 28%. After offsetting incremental depreciation in the third quarter and peak summer season power costs, utilization rate inclusive of newly added capacity is expected to remain at a high level of around 95% which effectively dilutes unit fixed costs.
Looking ahead to the second half of the year, the industrial drive and spillover effects generated by artificial intelligence will continue to bring broad demand to integrated circuit manufacturing. The company is flexibly allocating existing capacity and rapidly validating new capacity to help alleviate shortages in the supply chain. Meanwhile, we also observe that pressure from rising supply chain costs has been transmitted to the manufacturing segment. The company will actively respond to overcome difficulties and strive to minimize the impact. Overall, we remain optimistic about the industry trend and the company's development.
Looking ahead to the second half of this year, the industrial momentum and spillover effects generated by AI will persist, driving broad-based demand for integrated circuit manufacturing. The company will flexibly allocate existing capacity and accelerate the qualification of newly added capacity to help ease supply constraints across the industrial chain. At the same time, we have observed that pressure from rising upstream supply chain costs has been passed through to the manufacturing segment. The company will proactively address these challenges and mitigate headwinds to minimize the overall impact. Overall, the company maintains an optimistic outlook on industry trends and its own development.
Finally, we would like to express our sincere gratitude to our customers, suppliers, investors, and the broader community for your understanding and strong support. Thank you all.
Finally, thank all customers, suppliers, investors and community for your understanding and strong support. Thank you all.
Guo Guangli
Thank you, Dr. Zhao. Next, we will move to the Q&A session, with responses provided by Dr. Zhao and Dr. Wu. Questions asked in Chinese will be answered in Chinese, and questions asked in English will be answered in English. Each participant is limited to a maximum of two questions.
Thank you doctor Zhao. Next is our Q&A session. Questions will be answered by Doctor Zhao and Dr. Wu. Chinese questions will be answered in Chinese. English questions will be answered in English. Please limit your questions to two per person.
I would now like to open up the call for Q&A. Operator, please assist.
Operator
We will now begin the question and answer session. To ask a question, please press *11 on your telephone. To withdraw your question request, please press *11 again.
Your first question comes from Huang Leping of Huatai Securities. Please go ahead with your question.
Huang Leping
Congratulations, Mr. Zhao, on the very strong performance. I would first like to ask about the robust volume in Q2; I noted a 14.4% increase in shipment volume. Where did this growth originate? I observed that capacity expansion in Q2 was only 1.7%, and capacity utilization saw only a slight increase. Thus, shipment growth significantly outpaced output growth. Was this primarily driven by contributions from the ramp-up of new facilities, or by the release of work-in-process and finished goods inventory? Additionally, you repeatedly mentioned the demand for AI-related chips in your prepared remarks. From an application perspective, I noticed that the Industrial and Automotive sectors grew by 42%, while Computers and Tablets grew by 39%. Is a significant portion of this growth attributable to the AI-related chips you mentioned? If so, what specific products are involved? Thank you.
Zhao Haijun
Thank you, Leping, for your first question. SMIC's revenue growth in Q2 was mainly driven by increased shipments and price increases. Regarding the 14.4% increase in shipment volume, this rise occurred because customers demanded wafers as quickly and in as large quantities as possible. Therefore, in Q2, we accelerated processes closer to the shipment stage while slowing down new wafer starts. This allowed us to allocate more back-end manufacturing capacity under the same total capacity constraints, enabling higher shipments to meet customer demand and pull-forward effects.
On another note, the capacity built by SMIC over the past few years has been undergoing validation. As mentioned in previous communications, it takes an average of about 16 months from installing new equipment and setting up production lines, to introducing products, and finally obtaining customer approval for Production Change Notifications (PCN). Consequently, the capacity invested in various fabs in previous years is now ramping up in response to customer demand. Therefore, part of the growth is due to the net increase in our capacity.
Leping, what was your second question? You asked about the breakdown of revenue or shipment proportions. We generally stated that AI-related chips, combined with other Computer and Tablet segments, accounted for 40% growth. You wanted to know how much of this growth came specifically from AI and AI-related components versus the Industrial and Automotive sectors. We may provide a separate breakdown for AI-related chips in the next quarter or later. While we believe this growth is substantial, our reporting is rigorous. Currently, when collecting orders or shipping, we do not always have detailed data from customers specifying exactly how many units are allocated to AI-related chips, servers, or other specific applications.
Previously, since SMIC did not list 'AI-related chips' as a separate category, these were sometimes classified under Industrial or under Computers and Edge Computing. This makes it difficult to provide precise figures immediately. However, we recognize that demand for SMIC's AI-related chips is huge, and we have pulled forward significant shipments to meet this demand. In our report, we estimate that this segment contributed approximately 40% to the growth.
Huang Leping
My second question concerns the guidance for Q3. The current guidance indicates a 2-4% range. I also notice that gross margin continues to rise, moving from 25.3% to 26-28%. Does this imply that our gross margin will continue to trend upward in Q3? Furthermore, given the impact of pull-forward shipments you mentioned earlier, will shipment volumes remain relatively stable? How should we interpret the reasons for the noticeable change in growth rate in Q3 compared to Q2? Thank you.
Zhao Haijun
Leping, our revenue comes from two factors: the number of wafers shipped, and the pricing determined when the wafers came off the line—whether at previous or current prices. Many wafers shipped in Q2 actually came off the line in Q1 or even Q4 of last year, so they were priced at older rates. SMIC's pricing is generally based on the time of completion. New orders and newly completed wafers use new prices. Therefore, wafers coming off the line or continuing production in Q3 will reflect the new pricing. As a result, the benefit from these price adjustments will be more pronounced in Q3, leading to gross margin growth.
Regarding the other aspect of Q3, the situation is similar for us. Each quarter sees a significant increase in depreciation, which typically impacts our gross margin by 4% to 5%. The volume growth in Q3, excluding the impact of increased depreciation, should be greater than this figure. If you add another 5% on top of the current baseline, it becomes clear that price realization is the primary driver.
There hasn't been a substantial increase in volume. First, SMIC's capacity expansion has been following a steady, linear trajectory. The ramp-up is uniform, and we cannot suddenly release a large amount of additional capacity; this volume is calculable. Last quarter, we added an average of 8,000 12-inch wafers per month, and the increase in Q2 was similar. The excess portion, or the lack of further improvement, is because in Q2 we fulfilled additional customer pull-in requests close to shipment dates. Therefore, there was less pull-in activity in Q3. Further pull-ins would disrupt the steady operational rhythm of our production lines, preventing them from moving too quickly. Thus, Q3 serves as a period for our company to stabilize and smooth out our revenue. This represents a balance point where we meet customer pull-in demands while ensuring the healthy operation of our production lines.
Le Ping, that answers the question very clearly. Thank you, Mr. Zhao, thank you, Le Ping, thank you.
Operator
The next question comes from Yuan Yuan of CITIC Securities. Please go ahead with your question.
Yuan Yuan
Congratulations to the management team on the impressive performance in Q2. I have two questions. First, regarding pricing: how many times has the foundry raised prices year-to-date? What was the approximate magnitude of each increase? Is the current price hike targeted at specific products or is it comprehensive across most categories? Is there room for further price increases from the second half of this year into next year? We noted that the company's average selling price (ASP) in Q2 was USD 990–991, equivalent to 8-inch wafers, representing a sequential increase of approximately 5.7%. Within this Q2 increase, what is the respective impact of pure price hikes versus changes in product mix? That is my first question. Thank you.
Zhao Haijun
Thank you for your question, Yuan Yuan. SMIC's pricing strategy differs somewhat from other industry peers. We do not issue blanket announcements stating that prices will increase by a certain percentage starting from a specific date. Instead, we negotiate with each customer. SMIC has its unique characteristics, serving different customers across various niche markets. In segments where capacity is tight and demand exceeds supply—areas where SMIC has invested significant effort to achieve breakthroughs and holds competitive advantages—we began negotiating price increases earlier.
This year, we have clearly seen that sectors such as mobile phones, automotive, and industrial electronics have not grown; in fact, they are declining. Under these circumstances, everyone is facing challenges, and raising prices is not a viable strategy to secure more orders. Therefore, we have either refrained from raising prices in these areas or postponed such actions. Consequently, while SMIC announced price adjustments to the industry and customers around February this year and engaged in discussions, we only implemented price increases after negotiations with customers in the segments where our capacity was most constrained.
The revenue growth reflected in Q1 already showed a 5.7% increase. As I mentioned in my response to Le Ping's question, our gross margin improved further in Q2, although depreciation costs also rose by over 4%. Taking this factor into account, the gross margin in Q2 was approximately 9% to 10% higher than in Q1. This demonstrates that the impact of our price increases, agreed upon in Q1, began to materialize in Q2.
Moving forward, the approach remains consistent. For segments where SMIC's capacity is fully utilized and demand exceeds supply, we will negotiate with customers. Our priority is to support the areas with the most severe capacity constraints. We also aim to align with industry practices; since peers have already raised prices in these areas, we need to adopt a reasonable pricing strategy. SMIC is never the first to raise prices, nor do we implement the highest hikes. However, we have built a reputation in the industry for engaging in negotiations with clients to ensure prices remain reasonable. Thank you, Mr. Zhao.
Yuan Yuan
The second question concerns demand. I would like to ask which specific application segments are experiencing marginally tighter demand conditions? Additionally, which applications can generate higher value-added for the company?
Zhao Haijun
Understood. Overall, the pricing trend follows traditional microeconomic principles, closely tied to supply and demand dynamics. In areas where demand outstrips supply, particularly where SMIC has long maintained competitive technology and quality standards, price increases are inevitable.
Regarding your question on market segments, we are currently seeing tightness in segments related to computing power, specifically components supporting computing power circuit boards, which we refer to as supporting chips. Demand in these areas is robust and expected to grow further. As seen in financial reports, since last year, forecasts for investments in computing boards, data centers, and AI-related infrastructure have shown quarter-over-quarter growth. This morning, I heard analysis from the US suggesting that AI-related investments are now projected at $880 billion, up from the previous quarter's estimate of $600 billion. We have also observed Chinese internet companies significantly increasing their hardware investments, exceeding our original forecasts.
Consequently, our current forecasts indicate that customer discussions regarding future cooperation and production volumes far exceed our initial expectations. At SMIC, we see direct correlation with data center circuit boards and computing power boards. These supporting chips, such as logic circuits, BCD (Bipolar-CMOS-DMOS), and optical module transceivers, are facing supply shortages, a trend expected to persist in the long term.
Secondly, overseas markets are witnessing a squeeze on traditional sectors due to the increased demand for AI supporting chips. Companies that previously manufactured these products are exiting certain areas; for instance, memory companies are no longer producing specialty memory, specialized logic, or non-flash memory. We observe that capacity in these segments is insufficient to meet demand, leading to continuous price increases.
We are also observing a reshoring trend. Previously, segments such as mobile phone chips and display driver ICs (DDIC) for large-screen TVs and mid-sized monitors were less favored. However, there is now a clear trend where manufacturers cannot secure capacity, prompting negotiations for future capacity allocation and pricing. In a market with overall capacity shortages, the initial impact was on AI and its supporting components, followed by spillover effects from AI demand. Consequently, chips in other related industries will also face constraints. As mentioned earlier, sectors like mobile phone chips and panel driver chips will likely see gradual price increases due to limited capacity availability.
That concludes my response, Yuan Yuan. Thank you, Mr. Zhao, for the clear explanation. Those are all my questions. Thank you, Yuan Yuan.
Operator
The next question comes from Yikang Zhang of CICC. Please go ahead.
Yikang Zhang
Dr. Zhao, Dr. Wu, and members of the management team, good day. Thank you for this opportunity to ask questions. My first question concerns capacity utilization and demand. Specifically, is the current high level of capacity utilization sustainable? Also, could Dr. Zhao help categorize mature process nodes—such as power management MCUs, drivers, and analog chips—into segments like supply shortage, balanced supply and demand, or ongoing destocking? On the demand side, we have observed an increase in the proportion of industrial and automotive applications. Has restocking in the automotive and industrial sectors begun to transition into end-market recovery? That covers my questions regarding capacity utilization and demand. Thank you.
Zhao Haijun
Thank you, Yikang. Indeed, we are seeing varying levels of heat across the industry. Currently, situations of excess demand over available capacity are primarily seen in areas related to artificial intelligence, computing power, data centers, and edge computing. These are mainly logic circuit-related. Within these systems, there is substantial demand for power management and power supply components on all boards.
Whether it is GPUs or CPUs, they require supporting HBM, memory, and DRAM. SSDs (solid-state drives) and their drivers are also needed, as are motor drivers for cooling systems and power supplies within optical modules. The volume is significant. For instance, in a single rack containing 72 GPUs along with other supporting components, the number of power management and supply units alone can exceed 16,000. Thus, demand in this area far outstrips supply.
Currently, destocking is mainly occurring in the mobile phone sector, where inventory levels built up from previous pull-forward shipments are gradually decreasing. In consumer electronics such as panel drivers, prices have been low, order volumes have been small, and while inventory levels are not high, demand remains weak. However, due to capacity constraints, there is concern that if demand for consumer electronics—such as TVs, monitors, and computers—rebounds next year, current reserve inventories will be insufficient. Consequently, companies are worried about securing capacity for next year and have begun to build up stock.
Another factor behind this trend is the concern over potential price increases next year across the supply chain, including packaging and testing services, as well as packaging materials. Therefore, companies are seeking a balance point by stocking up now to avoid facing capacity shortages or higher prices later. We are clearly observing a trend of inventory replenishment, with many parties currently negotiating capacity allocations for the end of this year and next year.
Regarding your observation that SMIC's share of automotive and industrial shipments has increased: this is because our customers' products can serve both automotive/industrial and mobile/panel markets. Recently, these customers have continued to place orders, but the delivered goods have been primarily allocated to automotive and industrial applications, resulting in lower usage for mobile and consumer electronics. Therefore, while SMIC's overall shipments in certain areas may have declined, the ratio of automotive and industrial shipments has indeed increased, which explains this phenomenon. Understood. Thank you, Dr. Zhao.
Yikang Zhang
My question follows up on the previous discussion regarding capacity allocation, delivery lead times, and pricing power. You mentioned that demand varies across different downstream sectors. What principles does the company primarily follow when allocating capacity among customers in the consumer, industrial, automotive-grade, and AI-related segments? Additionally, excluding our product mix, what are the approximate month-over-month price changes for different process categories? Furthermore, regarding Q3, have all price increases been finalized and agreed upon, or are there still pending adjustments? This is my second question concerning capacity allocation, lead times, and pricing. Thank you.
Zhao Haijun
Understood. I will answer your second question first, then the first one. Regarding pricing, it largely depends on overall industry trends. Since the industry recovery started earlier this year, SMIC engaged in discussions with customers in February and March aligned with these trends. However, those were partial price increases, not applicable to all products. As I mentioned earlier, prices for SMIC's mobile phone-related products have not increased, as our customers in this sector are currently facing significant challenges, and the industry has not seen substantial growth this year. Similarly, there have been no price hikes for DDIC (Display Driver IC) and other panel driver products.
We did not initiate the previous round of price increases proactively. Instead, we adjust pricing according to broader industry trends as capacity becomes tight. SMIC is not the first to announce or lead a wave of price hikes. Looking ahead, as supply-demand tightness persists and expectations for a recovery in mobile and consumer electronics next year drive restocking demand, we will negotiate prices and allocate capacity accordingly.
Returning to your first question: from a long-term development perspective, where do we prioritize capacity allocation, how do we execute this, and where does SMIC's pricing power lie? Here is our approach: When allocating capacity, SMIC's primary consideration is long-term strategic cooperation. We have established strategic bindings and consensus with certain customers over the past years. Since we previously committed to building capacity for them, their supply is prioritized. We do not simply divert capacity to new entrants offering higher prices. SMIC adheres strictly to its first principle: honoring past commitments to our customers takes precedence.
Secondly, in areas where SMIC faces tight supply and demand and possesses strong competitive advantages—where we have reached the top tier of the industry—we engage in negotiations with customers. When there is a significant gap between prevailing market wafer prices and SMIC's current pricing, we seek appropriate recognition from customers. Our quality has reached this leading level, and we believe we deserve corresponding respect and acknowledgment. Therefore, in these specific areas, we have certain pricing power and strong justification for price adjustments.
In other areas, we strive to maintain the highest industry standards, including for consumer and mobile phone segments. However, pricing in these sectors moves in tandem with overall market conditions. We do not proactively reduce capacity or raise prices during industry downturns. As mentioned in previous meetings, SMIC categorizes its products into at least eight to ten tracks, with applications divided into five major scenarios, which may be further subdivided into six or seven in the future. One of these is AI-supporting chips, which, as noted, will be segmented more granularly.
The prosperity levels of these application scenarios vary over time. In some areas, customers are less price-sensitive but require SMIC to support capacity and R&D; in others, they expect us to offer favorable pricing to help them navigate difficulties. We address these segments differently. As stated in the meeting, SMIC has stood by our customers in the consumer and mobile sectors this year without raising prices or implementing significant production cuts. Consequently, revenue from our mobile and consumer segments has continued to grow rather than decline. We prioritize fulfilling customer orders. Thank you, Mr. Zhao, for the clear explanation. Congratulations again on the company's strong performance. I have no further questions.
Thank you, Yi Kang. Appreciate it.
Operator
The next question comes from Jiang Kuai of Orient Securities. Please proceed with your question.
Jiang Kuai
Hello Mr. Zhao and distinguished leaders. I noticed that the company's EBITDA margin in Q2 exceeded 70%. This level is exceptionally strong both historically and compared to global peers in the foundry industry. The company also expects gross margins to continue rising in Q3, while depreciation as a percentage of revenue may remain at a relatively high level. What is your outlook for the EBITDA margin going forward?
Zhao Haijun
Thank you, Jiang Kuai, for your question. Let’s break down the outlook into the near term and the long term. It is too early to discuss next year in detail. For this year, we have already provided guidance for Q3, and our order book is solid through Q4 and the end of the year. Within this year, we do not foresee any price reductions; prices will at least be maintained. The current pricing, gross margins, and capacity utilization rates achieved by SMIC are predictable, consistent, and sustainable.
Regarding gross margins, you can calculate the annual increase. This year, depreciation is expected to rise by approximately 30%. As mentioned earlier, Q2 depreciation amounted to $1.22 billion, bringing the full-year total to around $4.9–5.0 billion. This implies a quarterly increase of roughly $120–140 million compared to the previous quarter. Given this growth, if there is no price increase, the incremental depreciation will need to be deducted from our margins.
In terms of gross margins, we have reached a certain level. Our capacity utilization rate is basically maintained at 95%, as we reserve 5% of capacity for R&D. We will not further increase utilization at the expense of R&D. Thus, capacity utilization has already reached a very high level. Moving forward, the only way to further improve EBITDA would be through potential price increases driven by tight capacity.
However, as I mentioned earlier, any further price increases would likely be concentrated in consumer products, mobile phones, and display driver ICs, which previously had lower pricing. But we do not expect significant price hikes in these segments this year. In summary, without the increase in depreciation, our current levels could be maintained. However, since depreciation increases each quarter, there will be some downward pressure. On the other hand, we anticipate some price recovery in consumer segments, which will provide partial offset, though the magnitude is difficult to predict at this stage. Overall, we remain optimistic. SMIC is in a very good period, with our technology and products well-received and in demand by customers. We will continue to execute well, striving to sustain our current strong performance in terms of orders, capacity utilization, EBITDA, and gross margins.
Wu Junfeng
Junfeng, would you like to add anything? Regarding Jiang Kuai’s question on Q2 EBITDA, it indeed reached a historical high. As you observed, our Q2 gross margin also hit a recent peak. Beyond gross profit, another factor impacting EBITDA was one-time other income recognized in Q2. For Q3, there is uncertainty regarding changes in the fair value of investments in associates or financial assets, which will affect Q3 EBITDA. However, as Mr. Zhao mentioned, depreciation continues to rise, and our guidance indicates an increase in Q3 gross margin. Assuming gross margins remain at a high level, overall EBITDA should stay robust and trend positively, excluding one-off items. That’s all from me, thank you.
Zhao Haijun
Junfeng, okay, thank you. I forgot there was one more one-time item. Okay, thank you, Jiang Kuaihao. Thank you to both leaders. Appreciate it.
Operator
The next question comes from Tong Luo of Guotai Junan Securities. Please go ahead with your question.
Luo Tong
Mr. Zhao, Mr. Wu, and members of the management team, hello. I have a follow-up question regarding gross margin. We expect depreciation to increase by over 30% year-on-year in 2026, which theoretically should put significant pressure on gross margins. However, we have observed that the company's operations are performing very well, with gross margins showing a strong upward trend in both the current and the upcoming quarter. Could you please break down the specific drivers behind this gross margin improvement? Specifically, what is the relative contribution of price increases versus product mix optimization? Thank you.
Zhao Haijun
Okay, to put it directly, the impact of price increases is greater than that of product mix optimization. Regarding product mix optimization, we do have some flexibility, but as mentioned earlier, it is not simply a matter of shifting capacity to whichever customer (say, Zhang San or Li Si) offers a higher price. That would be capacity optimization based on pricing, but our approach is different. Our capacity optimization primarily involves reallocating capacity away from areas where customers have lower demand toward areas with higher demand and better pricing.
For example, we can reduce production of logic circuits and reallocate that capacity to MCU or specialty memory. Similarly, if there is currently less need for high inventory levels of LCD drivers, we can shift that capacity to produce NOR Flash. This represents a form of product optimization. Additionally, our new capacity additions are largely pre-booked by customers who specify their needs for the coming year. This is why SMIC invested in such significant capacity expansion. This new volume is immediately utilized at full capacity for higher-quality products with better pricing, which provides us with a competitive advantage. Luo Tong: Understood, thank you, leadership.
Okay, thank you.
Operator
The next question comes from Tong Zhang of CLSA. Please go ahead with your question.
Zhang Tong
Thank you, leaders. This is Tong Zhang from CLSA. I have a question regarding depreciation. Previously, the company guided that depreciation expenses would increase by 30% year-on-year this year. What is the current status of depreciation? What is the specific expected amount for depreciation in the second half of the year? Furthermore, when do you expect depreciation to reach its peak or inflection point? Thank you.
Wu Junfeng
Should Mr. Wu answer this first? Alright. Yes, as we mentioned during the previous earnings call, our depreciation expense is expected to increase by approximately 30% year-over-year this year. Depreciation for the first half was around RMB 2.3 billion. Currently, the full-year depreciation growth appears consistent with our prior guidance, projected to rise by about 30%, bringing the total close to, but just under, RMB 5 billion.
Regarding when depreciation will peak: based on previously announced capacity expansion plans and our continuous CAPEX investments in recent years, these capitalized expenditures are gradually entering their depreciation periods. According to those earlier project plans, depreciation was expected to peak in 2027. However, our expansion plans are being adjusted dynamically in response to market conditions and order books, so we are making corresponding arrangements for capacity expansion.
Therefore, the timing of the depreciation peak remains uncertain and depends on our capacity expansion plans and CAPEX deployment. Based on current trends, the new CAPEX invested in recent years will drive further depreciation growth in 2027. Moreover, assets invested after 2027 will also begin depreciating, leading to continued growth in depreciation expenses. Thus, there is still uncertainty regarding when the peak will be reached.
Zhao Haijun
Zhang Tong, let me clarify this. For the fixed asset investments (CAPEX) we have already disclosed, we can calculate precisely which quarter they will hit their peak. As Mr. Wu just indicated, based on announcements made up to today, we can state that the peak will occur in 2027; we can even specify the exact quarter.
However, there has been a significant change—specifically, growth—since our meeting with everyone back in February, when we discussed our forecasts for AI and customer demand, to today, where we are receiving requests from customers to reserve capacity. Consequently, our company is currently adjusting existing space across various factories to install additional equipment. We will continue to communicate these developments through conference calls or official announcements.
This means it is difficult to assert now that the previously mentioned peak will be the final one, followed by a yearly decline in depreciation and rising gross margins. We cannot make such a claim at this stage. We can only say that during this expansion process, SMIC remains committed to safeguarding its gross margin and competitive advantage, ensuring that these factors do not suffer significant negative impacts. This is a key consideration in our capacity expansion and investment decisions. We will maintain ongoing communication with our investors.
Alright, thank you, Mr. Zhao and Mr. Wu. Thank you.
Operator
The last question for today comes from Jian Hu from Guohai Securities. Please go ahead with your question.
Hu Jian
Great, thank you. Thank you, Dr. Zhao, and thank you, Dr. Wu. It is an honor to ask the final question. We observed that alongside the company's impressive earnings release yesterday, major domestic analog semiconductor leaders also reported strong performance. Therefore, I would like to ask Dr. Zhao: Given the current market sentiment, how do the supply-demand dynamics and price trends for the BCD process platform compare with the significant divergence in prosperity seen in other segments? Specifically, to what extent has demand from sectors like AI driven this trend?
Additionally, I have another question for Dr. Zhao. Many analog companies emphasize their deep accumulation in process technology and concepts such as virtual IDM. Could you explain the differences among various analog companies in terms of product transitions and their proprietary process capabilities? These are my two main questions. Thank you.
Zhao Haijun
Thank you, Hu Jian, for focusing on BCD and power management issues. We are currently observing a new industrial trend driven by artificial intelligence. This trend primarily boosts two ends of the spectrum: one related to advanced computing and standard logic, and the other related to mature analog circuits, particularly driving demand for 8-inch wafers far beyond expectations. The middle segment, such as 40nm and 28nm nodes, is being driven indirectly by spillover effects. Currently, our 40nm and 28nm processes cannot directly serve components related to computing power and AI data centers.
There is a consensus that BCD capacity is in short supply, leading most BCD and analog circuit manufacturers to report significant growth. We see two key points here. First, the required product types are highly diverse. Analog circuits represent a product category built on long-term operations and gradual accumulation. No single company can capture the entire market; players can only secure the high-end segments with the highest requirements and best pricing, given the massive volume involved.
Major international players often offer 200,000 to 300,000 SKU models. For certain models with high single-product demand, rapid scaling using 12-inch wafers is feasible. However, for products with low demand that require uninterrupted supply over the next decade, it is impractical to migrate thousands of SKUs quickly. For instance, if monthly demand is only 100 wafers, converting to 12-inch production would result in less than one wafer per month, making production line management inefficient.
Consequently, 8-inch capacity remains essential. Furthermore, 8-inch equipment is more mature. Building a new 12-inch line for 65nm or 50nm processes may involve equipment equivalent to 22nm or more advanced nodes. Integrating older models requires a run-in period and cannot immediately replace existing 8-inch capacity. Thus, we see a market segmentation. High-demand applications requiring 48V high-voltage and high-current capabilities are predominantly on 8-inch lines. Some high-volume bulk products are gradually shifting to 12-inch due to limited 8-inch capacity. Regardless, demand is expected to remain robust through the end of next year. As companies announce data center projects and GPU purchases, industry leaders are already constructing advanced fabs, ensuring these investments will not go to waste.
Every GPU or AI ASIC produced requires corresponding supporting components, including the analog circuits, power supplies, optical modules, data management solutions, HBM, and SSDs I mentioned earlier. This complementary trend confirms future demand. Therefore, demand and pricing for the BCD platform remain strong, with supply continuing to fall short of demand.
Regarding the differences among companies, we focus on two aspects. First is voltage. There is a growing demand for higher voltage capabilities to reduce wiring and deliver higher current, stepping down from 48V to 1V. Demand for 48V solutions is significant, but suppliers are few due to reliability concerns. Operating at 48V requires voltage tolerance of 80-100V, which necessitates long-term validation, limiting the number of qualified suppliers. Second is customer relationships. Companies with decade-long ties to major clients can rapidly scale up when demand surges. In contrast, customers switching suppliers face slower transition times. These are the two primary differentiators.
Alright, thank you, Dr. Zhao, for your very detailed response. Thank you. Alright, see you later. Thank you.
Guo Guangli
Now, please welcome Ms. Guo Guangli. I'd now like to hand the call 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 second quarter webcast conference call. We thank you for joining us today.
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