US China Tensions Will Undermine Access To Advanced Nodes

Key Takeaways

• Reliance on the Chinese market, limited access to advanced technology, and global isolation heighten risk of revenue volatility and declining long-term growth prospects.
  
• Intensifying competition, climbing research costs, and restricted international opportunities threaten profit margins, technological progress, and future earnings quality.
  
• Outperforming industry trends, SMIC benefits from strong demand, deep local partnerships, expanding end markets, and prudent financial management, supporting long-term growth and resilience.

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.

• Despite recent revenue growth, SMIC remains highly exposed to ongoing US-China geopolitical frictions and technological decoupling, which are set to further restrict its access to critical advanced manufacturing equipment and global technology partners, ultimately capping its ability to produce cutting-edge nodes and putting severe limits on future revenue expansion as international markets remain off-limits.
  
• Increasing international emphasis on supply chain resilience, intellectual property protection, and export controls is likely to further isolate SMIC from non-Chinese customers and critical technology suppliers, accelerating the fragmentation of the global semiconductor market and causing long-term erosion in market share and diminished opportunities for earnings growth.
  
• The company's persistent reliance on the Chinese domestic market-now over 80 percent of revenues-and ongoing dependence on policy-driven demand and subsidies leave SMIC acutely vulnerable to domestic economic slowdowns, government policy shifts, or subsidy cuts, driving elevated risk of revenue volatility and profit margin compression over the coming years.
  
• SMIC's inability to gain meaningful access to leading-edge extreme ultraviolet (EUV) lithography keeps its technology roadmap lagging well behind global foundry leaders; as capital intensity and customer requirements climb, SMIC will likely face rising research and development expenses that will not deliver proportional pricing power or margin uplift, instead dragging down operating income and overall earnings quality.
  
• While strong recent utilization rates have supported near-term financials, the rapid growth of global foundry capacity-particularly among large, well-capitalized US, EU, and Taiwanese players-raises the risk that SMIC's fabs will experience periods of underutilization and price competition, which could lead to material gross margin erosion and further challenge long-term profitability.

Semiconductor Manufacturing International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Semiconductor Manufacturing International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Semiconductor Manufacturing International's revenue will grow by 8.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.5% today to 3.0% in 3 years time.
• The bearish analysts expect earnings to reach $342.2 million (and earnings per share of $0.05) by about August 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 89.5x on those 2028 earnings, up from 85.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 27.3x.
• 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 11.59%, as per the Simply Wall St company report.

Semiconductor Manufacturing International Future Earnings Per Share Growth

Risks

• Sustained strong revenue growth-up 22 percent year-over-year in the first half of 2025-together with improved gross margin by 7.6 percentage points suggests SMIC continues to outpace broader industry trends, which could support share price appreciation through increased top-line and operational profitability.
  
• Capacity utilization increased sequentially to 92.5 percent with both 8-inch and 12-inch lines outperforming industry peers, indicating that underlying demand outstrips capacity and could enable revenue stability and resilience in periods of market weakness.
  
• As domestic Chinese players rapidly gain market share in analog chips, SMIC's deep collaboration and customization for these customers has led to incremental orders and improved utilization, which may further drive revenue growth and order consistency given China's semiconductor self-sufficiency push.
  
• SMIC's automotive electronics segment achieved 20 percent quarter-over-quarter growth with ongoing demand for automotive-grade chips across analog, CIS, power management and embedded memory, which anchors long-term demand from expanding end markets and supports revenue and margin stability.
  
• A robust balance sheet with $13.1 billion in cash, a low net debt-to-equity ratio and strong operating cash flow positions SMIC to weather downturns and invest in long-term capacity or technology advancement, thus sustaining future earnings growth and reducing financial risk.

Valuation

• The assumed bearish price target for Semiconductor Manufacturing International is HK$21.41, which represents two standard deviations below the consensus price target of HK$49.46. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$68.0, and the most bearish reporting a price target of just HK$20.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.2 billion, earnings will come to $342.2 million, and it would be trading on a PE ratio of 89.5x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of HK$48.66, the bearish analyst price target of HK$21.41 is 127.3% lower.
  
• 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.