China’s SMIC fails to impress … again

Semiconductor Manufacturing International Corp. (SMIC), China’s largest chip maker, Friday reported a profit for the first quarter thanks to a pair of one-time financial gains, but analysts remained unimpressed as the company fell short in several key areas.

At first glance, the first quarter was good to SMIC despite an industry-wide inventory glut that hurt major players. The company reported net income attributable to shareholders of US$9 million on sales of $388.3 million during the first quarter. By comparison, it reported a loss of US$9.6 million on sales of US$351.1 million during the same period last year.

However, analysts were not impressed, noting SMIC’s profitability during the period was mostly the result of a $6 million tax credit and a one-time gain of $27.2 million from the sale of used chip-making equipment.

Excluding these and other non-recurring items, Warren Lau of Macquarie Research Equities estimated in a research note that SMIC earned a net loss of $40 million during the first quarter of 2007. Using a similar measure, SMIC had a net loss of $10 million during the first quarter of 2006, he said.

“SMIC’s latest results reaffirm our belief that the company continues to struggle with profitability and we do not expect any material improvement any time soon,” Lau said.

SMIC’s margins weighed on analysts. Gross margin was lower than expected at 9.5 percent during the first quarter and operating margins, excluding gains from the sale of equipment, came in at -3 percent — the tenth consecutive quarter of losses for the company, Lau said

During a conference call with SMIC’s management, analysts expressed surprise that during the second quarter SMIC expects to spend between $450 million and $510 million of the $720 million budgeted for 2007 capital expenditures (capex).

Total capex spending during the first quarter was $90.9 million, leaving a budget of $120 million to $170 million available for the second half of the year. In response to questions, Richard Chang, SMIC’s CEO, said the company planned to spend heavily on equipment for its 300-millimeter wafer fabrication plants during the second-quarter with an eye towards boosting production capacity during the second half of the year.

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