By Sherry Qin

Shares of China's top two chip foundries fell sharply after weak first-quarter results and guidance underlined concerns about demand and price pressures.

Semiconductor Manufacturing International Corp.--China's biggest chip maker--was down 6.9% in Hong Kong on Friday morning, while smaller peer Hua Hong Semiconductor slumped 12%. The benchmark Hang Seng Index was 0.3% lower.

China's chip industry is facing oversupply risk as manufacturers ramp up capacity under Beijing's push to localize production. The bid to develop the sector into one of the economy's new growth drivers has been amplified by U.S. export restrictions blocking Chinese companies' access to equipment needed for advanced semiconductors.

The ensuing competition has led to a price war that is pressuring companies' bottom lines.

SMIC's first-quarter results on Thursday did little to alleviate concerns, with management saying production disruptions weighed on pricing. Net profit more than doubled from a low base but missed a FactSet-provided consensus estimate, while revenue growth undershot both analysts' views and the company's guidance.

Guidance for the second quarter also disappointed, with SMIC expecting revenue to drop by 4% to 6% on the quarter. Its gross profit margin projection of 18%-20% was also lower than market expectations.

Bernstein analysts think pricing pressure could continue as SMIC will likely need to match competitors if it wants to maintain market share.

Weak average selling prices renewed fears about competition as SMIC hasn't slowed expansion plans, and demand for PCs and smartphones may not be as strong as hoped, Morningstar analyst Phelix Lee said.

SMIC reiterated its plan to spend over $7 billion expanding capacity this year, roughly the same amount it invested last year.

Smaller peer Hua Hong also reported a weaker-than-expected revenue gain of 18% for the first quarter amid rising depreciation from capacity expansion. It too gave downbeat second-quarter guidance, projecting that its gross margin will keep declining to 7% to 9%.

The outlook for the two chip makers beyond the current quarter remains unclear, muddied by China-U.S. tensions.

In a research note, Citi analysts said the uncertain macro outlook has clouded visibility into the second half of the year. Analysts at DBS expect sale price pressure for Chinese legacy chip makers to persist as economic uncertainty stemming from geopolitical tensions could delay any sustained recovery.

That said, both foundries seem somewhat resilient amid tariff risks as most of their sales come from customers in China.

SMIC's shares are still up 32% so far this year, while Hua Hong's gains are at 43%.

Analysts say that as the tariffs dust settles, SMIC, which has the most advanced chip-making tech in China, is well-placed to capture demand from companies who can no longer source products from foreign firms. Government subsidies for home appliances and electronics can also buoy demand for lower-end chips.

SMIC will closely monitor how tariffs impact demand, Chief Executive Zhao Haijun said during an earnings call on Friday.

While acknowledging that changes in trade policy are causing market anxiety, SMIC management said "the second half of the year presents both opportunities and challenges."

Write to Sherry Qin at sherry.qin@wsj.com

(END) Dow Jones Newswires

May 09, 2025 00:43 ET (04:43 GMT)

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