Shares of Semiconductor Manufacturing International Corp. (SMIC), China’s largest outsourced chipmaker, have surged by 120% over the past two months, fueled by expectations of a boost from China’s drive for semiconductor self-sufficiency. Despite the sharp gains, analysts warn that the stock may be overpriced amid ongoing risks from global competition and geopolitical tensions.
SMIC’s Shanghai-listed shares have significantly outperformed major global semiconductor players, including Nvidia Corp. and Taiwan Semiconductor Manufacturing Co. (TSMC), as local investors in China show growing confidence. The company’s stock has also surpassed its Hong Kong-listed shares by nearly 50%, reflecting strong domestic demand.
Much of the optimism surrounding SMIC stems from China’s strategic push to localize semiconductor production, a goal amplified during the presidency of Donald Trump. Analysts suggest that while the push for domestic manufacturing could benefit SMIC and its local peers, the current stock price may not be sustainable. Concerns about economic slowdowns and limited access to crucial technologies, compounded by heightened geopolitical risks, add to the uncertainty.
“There is a lot of speculative buying, with trading driven more by news events than by solid fundamentals,” said Xiang Xiaotian, director at Shanghai Chengzhou Investment Management Co. “Volatility is to be expected, as the primary belief driving the trade is that Chinese companies will increasingly turn to local chipmakers for their needs.”
China has significantly increased its spending on semiconductors in an effort to close the technological gap with Western nations. SMIC and other local foundries, such as Hua Hong Semiconductor, have benefited from this surge, with Hua Hong’s stock also rising 78% since September. Additionally, Beijing’s stimulus measures are providing further tailwinds for the domestic chip industry.
SMIC has projected stronger-than-expected sales growth for this quarter, driven by competitive pricing that is attracting local chip designers. Research from Bloomberg Intelligence points to China’s chip foundries recovering more quickly than their global counterparts, particularly in the less-advanced chip sectors.
However, while demand for legacy semiconductors used in sectors like automotive and industrial applications appears to be on the upswing, China remains far behind in the production of more advanced chips. The country is still hindered by US-led sanctions that restrict access to the most cutting-edge manufacturing equipment. Huawei Technologies, for instance, has faced significant setbacks in its quest to develop high-performance chips due to these restrictions.
“Artificial intelligence is a small blessing for SMIC and Hua Hong,” said Phelix Lee, an analyst at Morningstar. While the two companies may benefit from AI’s rise, they are likely not advancing quickly enough to meet the demand for high-end chips used in data centers. Should Chinese AI startups lose access to more advanced processors, demand for peripheral chips supplied by SMIC and Hua Hong could also suffer.
As SMIC’s stock continues to climb, scrutiny over its earnings and future growth prospects is intensifying. Analysts also point to potential pressure on SMIC’s pricing power, especially if competitors like TSMC decide to lower their prices for legacy chips.
“We acknowledge the stronger localization demand and the sustainability of SMIC’s gross margins,” wrote analysts at Morgan Stanley, led by Charlie Chan. “However, competition from foundries could intensify in 2025, and we believe SMIC’s current valuation does not appear attractive.”
SMIC’s Hong Kong-listed shares are currently trading at a forward price-to-book ratio of 1.2, above its three-year average of 0.9. Analysts emphasize that for asset-heavy, cyclical businesses like chip foundries, valuation based on book value is more relevant than earnings multiples.
Morningstar’s Lee also cautioned that both SMIC and Hua Hong may be overvalued. “The market may have overestimated the extent of average selling price recovery,” he said, “and could be overly optimistic about the impact of fiscal stimulus.”
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