As the stock price rises dramatically, should SMIC "take profits and exit" or "remain patient and hold on"?

When discussing the semiconductor industry, one cannot overlook a company named "SMIC". As the foremost integrated circuit foundry in mainland China, SMIC has long been a cornerstone of domestically-produced chips. Driven by demand from artificial intelligence, $SMIC(00981.HK)$ having rebounded nearly 100% since the low in April of this year, it reached a new high of 65.65 HKD.

What fellow investors are most concerned about at this moment is whether SMIC can sustain its strong upward trend. What strategies should be employed moving forward? This week, we will share insights on the overall development of the semiconductor industry, SMIC's business layout, investment potential, and trading strategies.

Industry Chain and Industry Cycle

From the perspective of the semiconductor industry's supply chain, a chip generally undergoes three stages from conception to production: design, manufacturing, and packaging/testing. Most companies typically engage only in part of these stages, while $SMIC(00981.HK)$ SMIC is precisely situated in the semiconductor manufacturing segment.

There are numerous participants in the foundry segment of semiconductor manufacturing. Among them, the first tier comprises Taiwan Semiconductor, which held a market share of 70.2% according to data from the second quarter of 2025, firmly in first place; SMIC's market share stands at 5.1%, placing it in the second tier alongside Samsung (7.3%) and UMC (4.4%) (data source: TrendForce).

Overall, SMIC currently ranks third in market share globally, which is not a strong position. In Q2, it benefitted from changes in international conditions and preemptive stocking orders driven by subsidies in China's consumer market, resulting in an increase in wafer shipments for the season. However, due to shipment delays and a decline in average selling prices (ASP), quarterly revenue slightly dropped to 2.21 billion USD, leading to a minor decline in market share from 6% in Q1 to 5.1%.

Given that the semiconductor industry is cyclical, the cyclical nature stems from the mismatch between chip demand and supply capacity. For example, when demand for chips rises, semiconductor design companies place orders with foundries for manufacturing. If foundries lack sufficient capacity, they will invest in building new plants. The entire construction and expansion cycle may last two to three years, during which demand may wane, leading to an industry downturn and problems such as excess capacity and inventory backlog. Therefore, the core of investing in the semiconductor industry is accurately determining the industry's cyclical position to avoid being trapped at the cycle's peak.

So, which stage is the semiconductor industry currently in? Starting from 2024, the global semiconductor industry is showing signs of recovery, with global sales expected to reach 62 billion USD by July 2025, surpassing the 60 billion USD mark for the first time, representing a year-on-year growth of 20.6%. Furthermore, capital expenditures among the world's top ten foundries are also significantly increasing, indicating a period of high demand. Coupled with the explosive growth in computing power demand driven by the current AI revolution, along with the resurgence of traditional demand in consumer electronics, this economic upturn is likely to continue in the short term.

Breakthrough from mature processes to advanced processes

Looking at it individually, $SMIC(00981.HK)$ As the leader among domestic wafer manufacturing companies, SMIC currently primarily provides 8-inch and 12-inch wafer foundry and technical services, with three 8-inch production lines and seven 12-inch production lines located in Shanghai, Beijing, Tianjin, and Shenzhen. By 2024, the total production capacity will exceed 8 million wafers.

In terms of the wafer manufacturing industry, SMIC has achieved a breakthrough from mature processes to advanced processes. Mature processes refer to the manufacturing of chips with sizes of 28nm and above, mainly used in applications such as the Internet of Things, automotive electronics, smart home devices, communications, medical applications, and power management; advanced processes (14nm and below) are focused on high-end sectors such as smartphones and AI chips.

Currently, the global production capacity ratio between mature and advanced processes is 7:3. SMIC has already achieved large-scale mass production in mature processes, with technology reaching an internationally leading level, allowing for a rapid response to domestic demand. Regarding advanced processes, due to U.S. export controls, SMIC is unable to purchase advanced lithography machines, which has hindered rapid upgrades to processes of 7nm and below. However, SMIC's N+1 process can already achieve chip manufacturing close to 7nm, and successful prototype runs and small-scale production have validated the feasibility of this technology. Subsequent efforts need to focus on scaling up production and yield, continuously aligning with industry leaders.

Stable gross margin, increased capacity utilization

$SMIC(00981.HK)$ The business is very straightforward, mainly focusing on wafer foundry, contributing up to 95% of revenues.

Looking back over the past few years' revenue situation, affected by the industry cycle, SMIC's revenue rebounded from a bottom in Q1 2023, achieving growth for nine consecutive quarters. In Q2 2025, revenue reached $2.21 billion, representing a year-on-year increase of 16%; however, it experienced a slight decline compared to the previous quarter, primarily due to annual maintenance of production lines and equipment upgrades, as well as a drop in average selling price (ASP).

It is noteworthy that SMIC's revenue growth rate has shown signs of a decline in the last three quarters. If we analyze the wafer revenue this quarter by application category, the revenue share from largest to smallest is as follows: consumer electronics 41% > smartphones 25.2% > computers and tablets 15% > industrial and automotive 10.6% > internet wearable 8.2%. This quarter, revenue growth year-on-year for computers, tablets, and internet wearables shows a downward trend; moreover, except for smartphones and industrial and automotive sectors, the revenues of other sectors (computers, consumer electronics, internet wearables) have declined compared to Q1. Although government subsidies still support the first half of the year, demand for electronic terminals has weakened, impacting overall quarterly revenue.

However, based on key indicators such as capacity and capacity utilization, SMIC's capacity utilization rate (capacity utilization rate: calculated as total output of wafers divided by estimated quarterly capacity) has significantly improved in recent quarters, reaching a high of 92.5% in Q2. The increase in capacity utilization signifies that the company can better dilute fixed costs, positively affecting gross margins. Additionally, Q2's capacity was 0.99 million wafers, with shipments of 2.39 million wafers, both maintaining steady growth, confirming SMIC's ability to convert capacity into products.

From a profitability perspective, SMIC's gross margin for this quarter is 20.4%, maintaining a level above 20%. Although this represents a slight decline from the previous quarter, the overall performance remains commendable. The decline in gross margin is primarily attributed to the decrease in average product prices and an increase in operating expenses (mainly in R&D and administrative costs) in Q2 compared to Q1. According to guidance for the next fiscal quarter, the gross margin is likely to be within the range of 18% to 20%. We should closely monitor changes in gross margin to identify potential business inflections.

Investment Logic: What are the long-term benefits?

Due to the unique nature of its business, SMIC has been entrusted with the strategic mission of enabling China to overcome the bottlenecks in high-end chip manufacturing, representing the long-term national fortunes of China's semiconductor industry.

Firstly, the chip industry is currently in a cycle of prosperity, with the company's revenue, gross margin, and capacity utilization sending positive signals, including the recent acquisition of SMIC North, which represents the company's resource integration to enhance its production capabilities.

Secondly, AI is presenting historical opportunities; it not only requires the most advanced chips but also demands a vast quantity of mature process chips to support it. SMIC's mature processes can promptly meet the substantial demand.

Additionally, due to the intensification of North American chip restrictions, the certainty of domestic substitution will be a long-term benefit. After all, the logic of enhancing local chip coverage remains unchanged, and market demand will not waver, all of which is advantageous for stimulating SMIC's business development.

Moreover, the uniqueness and rarity of SMIC in China cannot be overlooked; there is no other enterprise capable of continuously investing and achieving breakthroughs in advanced processes like SMIC. Of course, there is still significant room for the company's advancements in this area, as it still trails Taiwan Semiconductor and Samsung in 3nm and 5nm processes. Investors need to extend their outlook over a longer horizon.

Trading Strategy: Take profit or hold long?

From a trading timing perspective, we can focus on the changes in stock prices from a technical standpoint.

From a weekly K-line viewpoint, $SMIC(00981.HK)$ The stock price has followed the industry cycle of 2023 to establish a bottom and is entering a rapid upward trend in the second half of 2024. As of September 1, 2025, the stock price has increased more than fourfold and is currently maintaining an upward trend.

From the perspective of daily candlestick analysis, referring to the trend throughout 2024, the stock price has re-entered a fluctuating upward trend starting from July. Combining this with the Fibonacci extension levels, the stock price has formed a short-term effective support at the 61.8% level (HKD 57.8) and is currently rallying towards the 78.6% level, likely aiming to break through the early September high of HKD 65.65.

For long-term investors, if betting on domestic substitution and the long-term demand for chips, SMIC merits our prolonged attention; for short-term investors, it is crucial to monitor whether the recent highs can be convincingly surpassed; otherwise, there are key support levels at HKD 57.8 and HKD 53.8.

For high-risk tolerance investors, we can also employ an options strategy as a supplement. For instance, we believe SMIC will not undergo significant adjustments in the near future, and thus, one might consider a short put strategy. If the stock price is above the strike price at expiration, we will profit from the option premium; if the stock price falls below the strike price, we will acquire shares directly, while the option premium helps reduce trading costs.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.