AI demand drives triple-digit profit growth for Chinese chip foundries SMIC, Hua Hong

Two of China's leading contract chipmakers, Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Grace Semiconductor, reported staggering profit growth in the second quarter of this year, soaring by triple digits due to a surge in demand for domestically produced artificial intelligence chips that circumvent US export controls.

SMIC, the nation's largest foundry, disclosed that its net profits surged 261.7 percent to $479.2 million and Hua Hong's profits increased by 385.9 percent to $38.6 million, year-on-year. SMIC's revenue for the three months ending in June rose 36 percent year-on-year to $3 billion, matching estimates from Bloomberg. Meanwhile, Hua Hong's revenue hit a record $717.5 million in the quarter, up 26.8 percent from the previous year, surpassing the consensus estimate of $702.7 million.

The figures underline how domestic chipmakers are operating their fabrication plants at full capacity to meet the growing domestic demand, as major tech companies and startups race to secure computing power to train large models and fuel AI applications. SMIC forecast in a filing to the Hong Kong stock exchange that the AI-induced industrial momentum and its ripple effects would continue into the second half of the year, bolstering broad-based demand for integrated circuit manufacturing.

"We will flexibly allocate existing capacity and accelerate new capacity to ease supply constraints," SMIC added. Hua Hong's chairman and president, Bai Peng, credited the earnings surge to increased shipments and higher average selling prices during the AI cycle, expecting the price hikes to persist into 2027. SMIC's shares were flat at HK$67.55 before the earnings release on Thursday, while Hua Hong closed 3 percent higher at HK$147.20.

The positive momentum was also reflected in the financial results of upstream chip designers. Iluvatar Corex, a Shanghai-based AI chip developer, projected first-half profits between 60 million yuan and 140 million yuan, marking a turnaround from a loss of 609 million yuan in the same period last year. Lenovo shares jumped 20 percent in Hong Kong after reporting 43 percent revenue growth in the quarter ending June, reaching a record quarterly high of $26.9 billion.

The results offer fresh insight into China's chipmaking sector, navigating a complex landscape of AI frenzy and tightened US export controls on chipmaking equipment. SMIC ranked third among global foundries based on first-quarter revenue, trailing Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung Electronics. Hua Hong Group, the parent company of Hua Hong Grace Semiconductor, was sixth in the global ranking, according to TrendForce data.

For the upcoming third quarter, SMIC anticipates revenue between $3.06 billion and $3.12 billion, a 2 to 4 percent increase from the current quarter. Hua Hong expects a top line of $770 million to $780 million. Analysts predict that both foundries will maintain high capacity utilization rates in the coming months and years, driven by China's aggressive localization of supply chains under its tech self-sufficiency drive.

AI chip fabrication demand will soon emerge as a "secular driver" for tier-1 Chinese foundries with a total addressable market potentially exceeding $10 billion, according to UBS analysts.