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

China's two leading contract chipmakers, Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Grace Semiconductor, experienced remarkable profit growth of over 200% in the second quarter of 2023, spurred by an increase in demand for locally manufactured artificial intelligence (AI) chips that bypass US export restrictions.

SMIC, the nation's largest foundry, reported a 261.7% surge in net profits to $479.2 million, while Hua Hong reported an even more substantial 385.9% jump in profits to $38.6 million. Both companies' revenues also skyrocketed, with SMIC earning $3 billion in the three months leading up to June - matching expectations - and Hua Hong achieving a record $717.5 million, a 26.8% increase from the preceding year.

SMIC's CEO expressed optimism for the upcoming half-year, stating that the AI-driven demand would continue to fuel the industry's growth. Hua Hong's chairman and president attributed their earnings surge to higher shipments and improved prices during the AI cycle, hinting at further price hikes throughout the second half of 2023.

Shares of SMIC remained relatively stable ahead of the earnings release, while Hua Hong's stock surged 3% following the report. Meanwhile, upstream AI chip designers, such as Iluvatar Corex, reported reversing losses and anticipating strong first-half profits, reinforcing the bullish outlook for China's chipmaking sector. SMIC and Hua Hong are among the top three and six globally, respectively, in terms of foundry rankings, as outlined by TrendForce data.

Looking ahead to the third quarter, SMIC anticipates revenue between $3.06 billion and $3.12 billion, a modest growth of 2-4%, while Hua Hong forecasts a top line between $770 million and $780 million. Analysts predict that the demand for AI chip fabrication will become a long-term growth driver for China's tier-1 foundries, with a potential market worth far exceeding $10 billion.