Global Digitalization And AI Will Drive Semiconductor Demand

Key Takeaways

• Strong capacity utilization, increased automation, and supply chain localization are fueling revenue growth and operational efficiency, supporting a favorable long-term outlook.
  
• Strategic investments and deepening industry relationships position the company for expanding market share and improved profitability, despite short-term margin pressures.
  
• Structural technological and geopolitical disadvantages, reliance on legacy products, and ongoing financial strain threaten SMIC's competitiveness, profitability, and long-term growth prospects.

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 ongoing capacity expansion as a driver of revenue but highlights margin risk; however, SMIC's ability to push utilization rates above 89% despite new capacity suggests that these investments are absorbing demand far faster than expected, which supports sustained revenue growth and sets a foundation for future margin expansion as scale improves.
  
• While consensus focus is on capital investment pressure, the company's steady capex at approximately $7.5 billion annually-with 82% to 85% flowing directly into production equipment-ensures SMIC maintains technological leadership and secures future top-line growth, while margin headwinds are likely to fade as operating leverage from automation and higher-value product platforms comes online.
  
• The robust and accelerating localization of China's semiconductor supply chain, as seen in policy support, ongoing customer migration, and government dialogue, is elevating SMIC's strategic importance-positioning it to further increase domestic market share and underpin long-term revenue and earnings growth.
  
• Advanced automation and process optimization have driven a sharp increase in revenue per employee, with wafer shipments rising by 18% in Q1 while headcount remained flat, which is structurally improving operational efficiency and setting the stage for higher EBITDA margins over the medium term.
  
• SMIC's deepening collaborative relationships with leading automotive, industrial, and IoT customers-combined with strong multi-year demand forecasts for these segments-are expanding addressable markets, supporting stable ASPs, and reducing cyclicality, which will contribute to both more resilient revenue streams and improved profitability.

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 28.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.1% today to 13.3% in 3 years time.
• The bullish analysts expect earnings to reach $2.4 billion (and earnings per share of $0.3) by about July 2028, up from $609.0 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 38.7x on those 2028 earnings, down from 88.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.34%, as per the Simply Wall St company report.

Semiconductor Manufacturing International Future Earnings Per Share Growth

Risks

• SMIC's long-term ability to catch up with global leaders is severely hampered by continued restrictions on acquiring advanced lithography equipment, such as EUV machines, with management openly acknowledging ongoing learning cycles on current equipment and yield issues-this structural disadvantage is likely to constrain both revenue growth and long-term net margin expansion as competitors pull further ahead technologically.
  
• The company's business remains dominated by legacy node production, with a primary focus on 28-nanometer and above, making SMIC vulnerable to intense price competition and commoditization; declining blended average selling prices, as noted in management commentary and sequential guidance, directly threaten future gross margins and profitability.
  
• Persistent and significant capital expenditures, with annual investments of approximately $7.5 billion and ongoing nationwide fab expansion projects not yet completed, are resulting in consistently negative free cash flow, increasing balance sheet risk and limiting the company's ability to generate sustained earnings and shareholder returns in coming years.
  
• Secular industry shifts toward vertical integration by major technology customers and aggressive onshoring efforts in the US, EU, South Korea, and Japan-backed by policy support-may reduce SMIC's international customer base and overall addressable market, increasing the risk of revenue stagnation or contraction.
  
• Geopolitical headwinds, including intensifying global technology restrictions and escalating trade/tariff uncertainties, raise the risk of supply chain disruptions and overcapacity in the Chinese semiconductor sector, which the company itself acknowledges may depress future pricing, constrict end-market demand, and further weigh on revenues and net profit.

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 $17.9 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 38.7x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of HK$53.1, the bullish analyst price target of HK$65.0 is 18.3% 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.