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Chinese chipmaker's shares in free-fall

The shares of Semiconductor Manufacturing International Corp (SMIC, 中芯國際集成電路), China's biggest made-to-order chipmaker, fell to a record after they posted a fourth straight quarterly loss.

The stock fell 6.9 percent and was down 3.9 percent at HK$0.98 (US$0.12), its lowest since the company listed in March last year, on the Hong Kong stock exchange.

The third-quarter net loss was US$26.6 million, or US$0.0718 per diluted American depositary share, from net income of US$39.3 million, or US$0.1079, a year earlier, the Shanghai-based company said today in a statement on its Web site. Sales rose 13 percent to US$310 million from US$274.9 million.

Chief Executive Richard Chang (張汝京), 57, cut his forecast for gross margins because average selling prices for dynamic random access memory (DRAM), chips will rise less than forecasts. DRAM chip sales made up 31 percent of total sales in the third quarter, compared with 17.5 percent a year earlier, the company said today. In the current quarter, Chang said he targets to cut DRAM chip sales to below 30 percent of total sales.

"We're concerned that SMIC relies too much on its revenue from memory devices," said Warren Lau, an analyst at Macquarie Securities who has an "underperform," rating on the stock and a 12-month target price of HK$0.60. "This will hurt profitability as SMIC lacks scale to compete with pure commodity memory players like Samsung Electronics Co and Hynix Semiconductor Inc." The stock has fallen 43 percent this year, compared with a 0.1 percent decline in the benchmark Hang Seng index.

Semiconductor Manufacturing, whose largest rival is Taiwan Semiconductor Manufacturing Co (台積電), was expected to post losses of US$31 million, according to the estimates of six analysts.

Samsung, the world's biggest maker of computer memory chips, said profitability for the main type of DRAM used in PCs "doesn't look good" until the first half of next year because of oversupply of the product. DRAM sales made up 36.4 percent of the company's total sales in the second quarter.

Hynix, the world's second-largest maker of memory chips, said it expects fourth-quarter DRAM prices to be "stable to slightly down" from the third quarter.

The Semiconductor Industry Association, a San Jose, California-based trade group, predicts worldwide chip sales will gain 8.8 percent next year, from a 6 percent pace projected for this year. In 2004, global chip sales rose 28 percent to US$213 billion.

Cost of sales rose to US$284.7 million, making up 92 percent of revenue, and up from 73 percent a year earlier, the company said. Total depreciation charges in the third quarter accounted for US$192 million, Chang said in a conference call. The company expects depreciation to reach US$900 million for next year on capital spending of US$1.1 billion, Chang said.

Semiconductor Manufacturing's depreciation charges are higher, at between 60 percent and 65 percent of cost of sales, than the 25 percent to 27 percent for their competitors, Chang said. The main reason for this is that the company is only five years old, compared with rivals that have been around for 20 years, he said.
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