Digital Transformation And AI Adoption Will Expand Semiconductor Markets

Key Takeaways

• Strong utilization rates and rapid capacity expansion position SMIC for outperformance in revenue, gross margins, and future net margin gains despite high capital expenditure.
  
• Deepening domestic collaborations, policy support, and broadening market demand drive earnings resilience, long-term contracts, and sustained growth opportunities across multiple industries.
  
• Geopolitical tensions, export restrictions, and overreliance on the Chinese market threaten SMIC's technological advancement, international growth, margins, and long-term financial stability.

Catalysts

An investment holding company, engages in the manufacture, testing, and sale of integrated circuits wafer and various compound semiconductors in the United States, China, and Eurasia.

• Analyst consensus recognizes SMIC's capacity expansion as a driver of growth, but the company's recent utilization rates outperforming industry peers and its ability to maintain over 92% utilization in both 8-inch and 12-inch wafers, even in periods of softening demand, signals a stronger than expected absorption of new capacity that should support gross margins and revenue outperformance.
  
• While high capital expenditure is seen by analysts as a margin headwind due to increased depreciation, SMIC's rapid scaling into advanced nodes and fast customer ramp-with analog, CIS, and automotive electronics shipments all showing double-digit growth-suggests these investments could deliver superior economies of scale and drive net margin expansion sooner than the market anticipates.
  
• The shift in global digitalization, AI, and IoT adoption continues to broaden SMIC's addressable market, evidenced by demand growth across connectivity, consumer electronics, and automotive, positioning the company for sustained revenue growth as more industries require foundry services for increasingly connected devices.
  
• SMIC's deepening collaborations with domestic customers during rapid import substitution are resulting in incremental orders and bespoke process platforms, which are likely to secure long-term, high-volume contracts that provide greater earnings predictability and potentially support premium pricing in key segments.
  
• With aggressive capacity additions rooted in strong policy support and SMIC's ability to localize its supply chain, the company is positioned to benefit from both regulatory protection and preferential procurement for domestic players, supporting steady cash flows and stronger long-term earnings resilience.

Semiconductor Manufacturing International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Semiconductor Manufacturing International compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Semiconductor Manufacturing International's revenue will grow by 26.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.5% today to 13.5% in 3 years time.
• The bullish analysts expect earnings to reach $2.4 billion (and earnings per share of $0.3) by about August 2028, up from $576.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 38.3x on those 2028 earnings, down from 85.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.53%, as per the Simply Wall St company report.

Semiconductor Manufacturing International Future Earnings Per Share Growth

Risks

• Increasing geopolitical instability and the potential for further trade wars could result in ongoing or escalated export restrictions on advanced semiconductor manufacturing equipment, constraining SMIC's ability to adopt leading-edge technology and potentially capping its future revenue growth and technological competitiveness.
  
• The company's high revenue concentration from the Chinese market, with eighty-four percent of revenue coming from China and limited exposure to America and Eurasia, exposes SMIC to risk if domestic demand falters or Chinese government policies shift, impacting both revenue and net margins.
  
• As global customers accelerate efforts to diversify their supply chains away from China, SMIC could lose key international contracts and find limited growth opportunities outside its domestic market, negatively affecting long-term revenue streams.
  
• Persistent inaccessibility to advanced chipmaking equipment due to U.S. export controls may cause SMIC to remain permanently behind global peers in technology, reducing pricing power, confining the company to legacy nodes with thinner margins, and suppressing earnings potential over time.
  
• Ongoing heavy capital expenditure requirements, as evidenced by over three billion dollars spent in the first half of the year, combined with only modest sequential revenue growth and pressure on gross margin, could strain SMIC's balance sheet and free cash flow if advanced-node revenue remains constrained, ultimately affecting profitability and long-term earnings.

Valuation

• The assumed bullish price target for Semiconductor Manufacturing International is HK$65.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Semiconductor Manufacturing International's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$65.0, and the most bearish reporting a price target of just HK$14.13.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $18.0 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 38.3x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of HK$48.66, the bullish analyst price target of HK$65.0 is 25.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.