China's biggest chip maker posts first net profit in 3 years

China's biggest chip maker posts first net profit in 3 years

SMIC said the third quarter will be even better than the second quarter

Thirteen turned out to be a lucky number for Semiconductor Manufacturing International Corporation (SMIC), which reported a net profit for the second quarter, its first in thirteen straight quarters.

China's chip makers have struggled not only due to the global recession but also because many have entered the contract chip manufacturing business against incumbents such as Taiwan Semiconductor Manufacturing Company (TSMC), which have vigorously defended their turf. A rebound in global chip sales this year has helped lift chip makers around the world.

SMIC's net profit in the second quarter was US$96.03 million, compared to a loss of $98.2 million during the same quarter last year. Revenue rose 42.5 percent to $381.1 million.

The company would not have been able to report a net profit without a one-time gain of $101.8 million due to a change in the value of warrants and shares it has to pay TSMC. The companies settled an intellectual property and industrial espionage case out of court last year.

The last time SMIC reported a net profit was in the first quarter of 2007, when it earned $8.76 million.

SMIC still reported an operating loss of $12.1 million in the second quarter, though that figure is less than half of the company's $28.0 million operating loss in the first quarter and is substantially lower than the $94.5 million operating loss from the second quarter of last year.

"We have witnessed an overall improvement this quarter and believe we are on course to overall profitability," said David Wang, president and CEO of SMIC, during a conference call. He said his management team remains dedicated to turning SMIC around and finding a way to sustainable profitability.

Going forward, the company expects the good times to continue.

Revenue in the third quarter will rise as much as 6 percent compared to the second quarter, and the company's gross profit margin will expand to as high as 22 percent from 15.6 percent in the second quarter, the company said in a statement.

"We continue to see revenue growth for the second half of this year," said Wang, during the call. "So far, our third quarter is completely booked and our fourth quarter is booked through November," he added.

SMIC also said capital expenditures will more than double this year to between $700 million to $750 million as it expands production capacity.

The company is banking on China's growing economy and chip sector to boost its growth in the future. Chip orders from Chinese design houses made up 28.7 percent of SMIC's sales during the second quarter, up from 19 percent in the same quarter last year. North America still accounted for most of SMIC's sales, 52.2 percent, compared to 61.4 percent last year.

"As Chinese fabless [chip design] companies continue to grow stronger and stronger, SMIC has positioned itself to become the preferred foundry," the company said.

Global chip sales have strengthened throughout this year due to strong consumer demand for electronics products, according to market research firm iSuppli, which last week raised its forecast for global semiconductor revenue growth. The firm predicts 35.1 percent growth to $310.3 billion this year, up from $229.6 billion last year. The new forecast is up from iSuppli's May prediction, which called for 30.9 percent growth.

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