Shares in Semiconductor Manufacturing International Corp. (SMIC), the world’s third-largest chipmaker by revenue, are up over 75% for the year so far, making it one of the best performing stocks on the benchmark Hang Seng Index.
SMIC is mainland China’s equivalent to Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip manufacturer and a supplier to giants like Apple and Nvidia. Founded in 2000, SMIC has become the center of Beijing’s drive to build its own domestic chip industry.
The AI boom has lifted SMIC’s shares, particularly in the wake of DeepSeek, whose powerful, yet efficient, model has reversed pessimistic narratives about China’s tech sector.
But SMIC also benefits when the U.S. tightens the screws on China’s chip industry. Chinese firms starved of chip options have to turn to domestic manufacturers like SMIC and fellow manufacturer Hua Hong for alternatives.
Chip controls
Phelix Lee, a semiconductor analyst for Morningstar, credits several factors for SMIC’s massive stock rise: U.S. export controls, China’s drive for chip self-sufficiency, and recent hype around DeepSeek.
Since 2022, the U.S. has placed broad controls on sales of advanced chips and chipmaking equipment to Chinese companies. Washington has steadily expanded these controls over time, and encouraged other countries like Japan and the Netherlands to pass their own export controls. (The U.S. has also directly targeted SMIC, restricting its access to U.S.-made equipment since 2020.)
SMIC also benefits from Beijing’s drive to create a domestic chipmaking industry, which has seen Chinese officials lavish subsidies on local companies. “China has, in the past, talked about being self-sufficient in more parts of the supply chain, and that usually benefits SMIC and other local chip names,” Lee says.
Success has been mixed, with previous investment funds mired in corruption and high-profile failures.
But Washington’s chip controls have intensified China’s need for a domestic semiconductor sector. Beijing is already pushing domestic manufacturers, like EV maker BYD, to start using more locally made chips.
In late August 2023, Huawei—barred from buying U.S. chips since 2019—released a premium smartphone that featured an advanced processor just a few generations behind the cutting-edge. The Kirin processor was produced by SMIC, a feat that Chinese state media celebrated as proof that U.S. export controls couldn’t stop China’s tech sector.
Analysts suggest SMIC was able to use older technology in innovative ways to make more advanced chips, though at the time some suggested that the chipmaker might struggle to produce at scale.
SMIC is also working with Huawei on the latter’s new Ascend AI chips; the Chinese tech company is pitching its chips as a way for companies to do “inference”—running AI models—more cheaply.
The Financial Times reports that Huawei has been able to improve chip yields to 40%, making it profitable for the first time, citing unnamed sources. The company reportedly plans to get a 60% yield, which is similar to TSMC’s yields for Nvidia’s H100 processor.
Finally, add DeepSeek and its lightweight yet powerful AI model, which lowers the barrier to entry for companies looking to leverage the new technology. “DeepSeek has opened up even more optimism in having mature or so-called legacy semiconductors perform high-end AI functions,” Lee says.
SMIC’s difficult choice
Still, Lee thinks that investors may be getting a bit too optimistic about SMIC. (Morningstar currently judges the stock to be significantly overvalued.)
“The company is basically trapped between investing immensely into advanced technology, or being trapped in very intense competition in the more mature technology that other players in China can offer,” he says. SMIC isn’t yet at the cutting-edge, remaining a few generations behind market leaders TSMC and Samsung. Getting to that advanced level requires a lot of very expensive investment and R&D.
SMIC spent about $7.5 billion in 2024 on capital expenditure, roughly the same level as the year before, and about as much as the chipmaker expects to spend this year. (While high, that’s significantly less than TSMC, which spent $11 billion in the fourth quarter of 2024 alone.)
For now, Lee thinks that SMIC can survive spending so much on capital investment in part owing to government subsidies, and the “inflated price that customers pay despite their chips being a bit inferior”compared with non-Chinese foundries.
Alternatively, SMIC could start to make less-advanced chips—but China’s legacy chip market is getting increasingly crowded, pushing down prices and margins throughout the sector.
That dilemma is showing up in SMIC’s finances. While the chipmaker’s revenue rose by 27% to hit $8 billion for the year, profit dropped by over 45%, to $900 million, as it faces competition in the mature chip space and heavy spending to support advanced manufacturing.
SMIC forecasts that its 2025 revenue might grow by as much as 8%, which it claims is higher than the industry average in other markets. But co-CEO Zhao Haijun, in comments to analysts in February, worried that the market might soften in the latter half of the year, as “rush orders” spurred by Trump tariffs peter out.
“There might be intensified price competition to fight for orders later in the year,” he told analysts. “The trend for the price is unclear for the second half, but it will not go up.”
