By Che Pan and Brenda Goh BEIJING, Feb 11 (Reuters) – China's largest contract chipmaker, Semiconductor Manufacturing International Corp , warned of margin pressure this year as it expects a surge in depreciation costs due to a massive capacity expansion to meet strong demand for chips. The company's Hong Kong-listed shares dropped nearly 4% on Wednesday after the company said it expected flat revenue growth in the current quarter from the previous quarter and warned of a 30% jump in depreciation costs this year. "We maintained high capital spending, which drove rapid revenue growth but also placed considerable depreciation pressure on gross profit margins," SMIC's CO-CEO Zhao Haijun said during an earnings call on Wednesday, citing efforts to capitalise on demand from Chinese chip designers. The semiconductor supply chain – previously based on overseas design and manufacturing for the Chinese market – shifted to Chinese production throughout the year, Zhao said. Analog circuits saw the fastest transition, followed by display drivers, image sensors and memory, microcontrollers (MCUs), and logic chips. SMIC would add about 40,000 12-inch equivalent wafers in new monthly capacity by the end of this year, Zhao said. It added 50,000 12-inch wafers in monthly capacity in 2025. Zhao said strong AI memory demand was squeezing supply to other sectors, especially mid-to-low-end phones, causing memory shortages and cost increases for manufacturers. China remained SMIC's biggest market, accounting for 87.6% of its revenue in the fourth quarter, while the U.S. contributed 10.3%. The company pre-purchased critical equipment, while ancillary equipment remained pending, creating timing mismatches, Zhao said. As a result, already-acquired equipment might not translate into full production capacity this year. SMIC reported a 60.7% jump in fourth-quarter profit on Tuesday, beating analyst estimates. Revenue rose 12.8% to $2.49 billion, also topping forecasts. Its monthly production capacity increased 3.5% quarter-to-quarter to 1.06 million eight-inch equivalent wafers, with utilisation rates – measuring a foundry's production intensity – reaching 95.7%, flat from the third quarter. SMIC shipped 2.51 million 8-inch equivalent wafers in the fourth quarter, up 0.6% from the previous quarter. SMIC's capital spending for 2025 reached $8.1 billion, up 10.5% from 2024 and higher than the company's original projection earlier last year. Zhao said he expected SMIC's 2026 capital spending to be the same as 2025's levels. (Reporting by Che Pan and Miyoung Kim; Editing by Stephen Coates and Thomas Derpinghaus)
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