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Semiconductor Manufacturing International Corporation (SMIC) (OTCQX:SMICY) announced revenue of $1,841.9 million in 1Q22, an increase of 16.6% QoQ from $1,580.1 million in 4Q21, and 66.9% YoY from $1,103.6 million in 1Q21.
Despite COVID lockdowns in China that delayed SMIC's expensive equipment maintenance, gross profit was $750.3 million in 1Q22, an increase of 35.7% QoQ from $552.8 million in 4Q21, and 200.0% YoY from $250.1 million in 1Q21. Gross margin was 40.7% in 1Q22, compared to 35.0% in 4Q21 and 22.7% in 1Q21.
Table 1 shows financial metrics as reported. Of interest is that SMIC is under U.S. sanctions since Dec. 18, 2020.

SMIC
I discussed these sanctions in an April 4, 2022, Seeking Alpha article entitled “SMIC: U.S. Sanctions Aimed At This Chinese Foundry Aren't Working,” which was published following the company’s Q4, 2021 earnings call.
One of the charts in SMIC’s earnings presentation for Q4 2021 was its revenue breakout by technology node, which is shown in Chart 1. Here we see that SMIC’s revenues at what it calls its FinFET/28nm node increased between 4Q 2020 and 4Q 2022 by a factor of nearly 4X.

SMIC
Chart 1
SMIC Moving To 7nm Without EUV
SMIC is the target of U.S. sanctions by U.S. Commerce Department because of SMIC’s perceived relationship to the Chinese military. But the damage to SMIC was accomplished in 2020 when ASML (ASML) was prevented from selling its EUV lithography equipment to China.
But SMIC has moved beyond 14nm. My analysis shows that SMIC is in production on its N+2 node, equivalent to the 7nm node and comparable to TSMC (TSM). And it was accomplished without the use of EUV lithography, just as TSMC did with its first generation 7nm node (N7) introduced in 2018.
Instead of SMIC manufacturing 28nm logic chips at its new fabs in Shanghai and Shenzen China, SMIC has moved first to its N+1 node (8nm equivalent) and then N+2 node. Moving to a smaller node requires a different semiconductor processing equipment product mix, benefiting equipment suppliers. This is not the case:
- Applied Materials (NASDAQ:AMAT) will benefit from the transition from 28nm to N+2 for its deposition, CMP, and implant markets and generate net revenues of $14 million.
- Lam Research (LRCX) will benefit from the transition from 28nm to N+2 for its etch, clean, and plasma strip markets and generate net revenues of $962 million.
- ASML, despite the loss of EUV sales for the transition, will generate net revenues of $4,128 million
Equally important, ASML, which was the No. 2 equipment supplier to AMAT in 2021 by just $1.5 billion, should move to the top of the global semiconductor equipment market in 2022 on the basis of the SMIC transition. These analyses are detailed below.
Node Production Takes on Importance With U.S. Sanctions
Chinese companies are still eyed suspiciously by the current U.S. administration. On March 3, 2022, Gina Raimondo, the U.S. Secretary of Commerce, said that Washington could take "devastating" action against Chinese companies that defy US sanctions on Russia for its invasion of Ukraine, according to a firewalled report in The New York Times.
Prior to the sanctions, SMIC openingly reported in its Q1 2020 earnings presentation that 1.3% of its revenues for the quarter came from chips made at the 14nm node.
Why Did SMIC Eliminate Reporting "Wafer Revenue Breakdown by Technology?"
Then in the current Q1 2022, SMIC stopped including "Wafer Revenue Breakdown by Technology” in its presentation.
FinFET in prior presentations went into volume production at SMIC at the 14nm node in November 2019. But the exclusion in the presentation doesn’t mean SMIC stopped FinFETs at the 14nm node. It means that SMIC, for fear of further U.S. repercussions, stopped telling the world what it was doing.
Prior to sanctions, SMIC announced what it called its next node N+1, claiming that it offers a 20% increase in performance, power consumption reduction of 57%, a reduced logic area by 63%, and SoC (System on a Chip) area reduction by 55% over its 14nm node, according to an October 15, 2020 press release from China.org.cn.
Understandably SMIC has been tight lipped about its N+1 process in light of current sanctions and rumors of additional ones. With that in mind, one can estimate SMIC’s current node production by the cadence of node transitions of TSMC and other competitors.
In Table 2, I show that all three companies are on a 1-1.5 year cadence in introducing an improved process or a new node. Translating that data to SMIC, which was in high volume production at 14nm in November 2019, the company should have transitioned to its N+1 node in 1Q 2021 and then the N+2 node in 2Q 2022. I estimate the N+1 node is at 8nm and the N+2 node is at 7nm.

The Information Network
It's important to note that even though SMIC is not able to acquire EUV lithography systems, TSMC made its N7 with without EUV, using DUV 193 nm ArF Immersion lithography. The limitations of DUV dictated some of the design rules for the process. Thus, it's a misconception that EUV lithography is required for the 7nm node.
SMIC 7nm Production
With SMIC in production at its N+2 node, equivalent to the 7nm node, it raises the question - where would they be made? SMIC is building two fabs:
- SMIC has estimated to spend US$2.3 billion on a new fab in the southeastern city of Shenzhen, China., with volume production beginning in 2022. The initial capacity will be 20,000 wafers per month ("wpm"), eventually reaching 40,000 wafers per month by 2023.
- SMIC is simultaneously planning another 300mm fab in Shanghai, with monthly capacity at 100,000 wafers per month. SMIC expects to spend $8.8 billion.
Chart 2 shows SMIC’s output as reported in its recent earnings call. Monthly capacity increased 4.5% (top columns) while wafer shipments increased 6.8%, with the additional increase over capacity due to 1% higher utilization rate and 1% higher yield.
The two new fabs should initially add 50,000 wafers per month of 12-inch wafers, equivalent to 112,000 8-inch equivalents (as per the Chart 2 vertical axis). That represents an increased output of 17%.

SMIC
Chart 2
Investor Takeaway
SMIC spend $4,516 million in capex in 2021. That represents a 21% decrease from $5,733 million in 2020. At the same time, SMIC increased capacity 20% in 2021, demonstrating that the company has been able to overcome U.S. sanctions. In 2022, I estimate capex will increase 9% to $4,900 as capacity increases 17% as discussed above.
While the official node for new production will be at 28nm, I further expect that SMIC will manufacture at the N+2 node, even without EUV lithography capability. An possible oversupply of 28nm chips is on the horizon because of additional capacity coming from TSMC and UMC 28nm fabs. These are further motivations for SMIC to move to N+2.
Impact on Equipment Suppliers
Much of the impact on equipment suppliers is dependent on whether SMIC moves to its N+2 node, which is what I think it will. And, of course, the fundamental risk to SMIC remains with the U.S. Commerce Department and further sanctions which could restrict further imports of other types of processing equipment.
The additional 50,000 wpm will require an additional 20 DUV immersion lithography systems from ASML or Nikon (OTCPK:NINOY) if SMIC makes N+2 node chips in these fabs.
If they're made at the 28nm node, which is the “official” reported technology, the two fabs will require just 10 DUV systems. This will have a large impact on ASML, which has been hamstrung by delays in shipments and large backlogs.
While the official node for new production will be at 28nm, I further expect that SMIC will manufacture at the N+2 node, even without EUV lithography capability. Apossible oversupply of 28nm chips is on the horizon because of additional capacity coming from TSMC and UMC 28nm fabs. These are further motivations for SMIC to move to N+2.
Impact on Equipment Suppliers
Much of the impact on equipment suppliers is dependent on whether SMIC moves to its N+2 node, which is what I think it will. And of course, the fundamental risk to SMIC remains with the U.S. Commerce Dept. and further sanctions which could restrict further imports of other types of processing equipment.
Regardless of the node, ASML will benefit with either 10 or 20 immersion DUV systems sold. These systems are priced at €60 million, a bargain compared to the €150 million for an EUV system.
At the 28nm node, no EUV systems are required anyway, and 10 DUV immersion systems are required for the 50,000 wpm added SMIC capacity. At 7nm, normally 15 DUV systems and 5 EUV systems are demanded, depending on chip type and company. However, since SMIC is not permitted to use EUV, then they will be substituted by DUV, and 20 DUV systems will be used.
In both cases, multiple patterning is done to delineate that pattern, whether it is 28nm or 7nm. This multiple patterning process is more or less a trick to reach even the 28nm dimensions. The multiple patterning is typically a combination of deposition, etch, and lithography steps.
If we look at Chart 3 below, using immersion DUV (ArF-1) at the 20nm node there are 13 mask layers, each of which uses multiple dep-etch steps. If we move across the top of the chart, at 10nm there are 18 mask layers, an increase of 50% in the use of deposition-etch steps.
Multiple patterning at the 7nm node, as shown in the bottom left of the chart, requires 27 mask layers. However, by switching to EUV (bottom right) at 7nm, only 14 mask layers are required, similar to the 20nm node with DUV.
The terminology is as follows in switching from DUV to EUV:
- Double litho, double etch (LELE) process will be eliminated
- While ArF-I would continue to be used for the self-aligned double patterning (SADP) and
- Self-aligned quadruple patterning (SAQP) processes.

The Information Network
Chart 3
For SMIC’s 50,000 wpm at 28nm, in addition to the 10 DUV immersion systems, multiple patterning will demand 125 etchers and 200 CVD systems. At 7nm, in addition to the 20 DUV immersion systems, multiple patterning will demand 350 etchers and 175 CVD systems. Clearly equipment suppliers will benefit from SMIC’s move to its N+2 node.
The impact of different types of equipment demanded in SMIC’s move to 7nm (N+2) production is shown in Table 3, according to our report entitled “Global Semiconductor Equipment: Markets, Market Forecast, Market Share.”
Here we see Applied Materials showing a net gain of just $14 million by SMIC’s transition to 7nm for its three equipment types based on its share of the SAM (served available market). Lam Research will show a net gain of $962 million, and ASML will show a net gain of $4,128 million despite SMIC using DUV lithography systems instead of EUV systems that are under U.S. sanctions.

The Information Network
The move by SMIC to 7nm will move the company into the elite category occupied by TSMC, Samsung Electronics (OTC:SSNLF) and Intel (INTC). That transition will generate money for equipment suppliers, but that growth will depend on the SAM of the supplier. AMAT will exhibit a net gain of just $14 million compared to nearly $1 billion by LRCX and $4,128 for ASML.
In 2021, AMAT eked out ASML as the overall leader of the global equipment market by just $1.5 billion. The net gain in revenues from SMIC will move ASML to the top of the global equipment market in 2022.
Financial Metrics
Chart 4 shows share price for AMAT, ASML, and LRCX over a three-year period. The nearly identical growth indicates that shares are traded irrespective of the company with neglect to any headwinds or tailwinds a company may have faced over this period.
YCharts
Chart 4
Chart 5 shows the PE ratio of the three companies indicating ASML is overbought. Readers can learn more about my rating of ASML in my April 26, 2022, Seeking Alpha article entitled “ASML: Dissecting An Incredibly Poor Q1 2022 And Earnings Call.”
YCharts
Chart 5
Chart 6 shows that all three companies share performance has been impacted by the 10-year treasury, which has been increasing as a result of 8+% inflation in the U.S.
YCharts
Chart 6
Chart 7 shows Seeking Alpha Quant Ratings of the three companies showing ASML and LRCX a hold and AMAT a buy. AMAT announces its earning on Thursday, May 19, 2022, AFM. I have a sell on AMAT and a hold on ASML and LRCX. Readers can learn more about my thesis on AMAT in my May 4, 2022 Seeking Alpha article entitled “Applied Materials Q2 Preview: Facing Headwinds On Several Fronts.”

Seeking Alpha
Chart 7
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