Semiconductor Manufacturing International Corp. has witnessed a remarkable stock performance over the past two months. Its shares have more than doubled, driven by China's self-reliance push. This surge has drawn significant attention and sparked various discussions in the market.

Unraveling the Dynamics of SMIC's Stock in a Tense Landscape

Expected Boost from China's Self-Reliance Push

Shanghai-listed shares of China's largest outsourced chipmaker, Semiconductor Manufacturing International Corp., have seen an astonishing 120% increase from a September low. This outperformance compared to global sector names like Nvidia Corp. and Taiwan Semiconductor Manufacturing Co. highlights the stronger demand from onshore Chinese investors. The company's competitive prices have lured local chip designers, leading to higher-than-expected sales growth this quarter, as reported by Bloomberg Intelligence. This surge is seen as a direct result of China's efforts to narrow the technology gap and localize manufacturing.China has been investing heavily in chips to catch up with Western nations. The latest pledges of stimulus have served as an additional catalyst, with onshore shares of Hua Hong Semiconductor Ltd. up 78% from their September low. However, despite these gains, China still lags behind in AI and other advanced areas due to US-led restrictions on advanced manufacturing equipment. For instance, Huawei Technologies Co.'s chip ambitions have faced major setbacks due to US sanctions.

Risks and Caution Amidst the Surge

While the stock surge is impressive, there are also risks and cautionary notes. Some analysts and fund managers caution that the stocks now appear expensive. The main trading thesis is domestic substitution, but there is a lot of speculative buying based on news events instead of fundamentals. Volatility should be expected as the market reacts to these factors.Moreover, rivals like TSMC may lower prices for making legacy chips, putting pressure on SMIC's pricing power. Morgan Stanley analysts note that competition from foundries may intensify in 2025, and SMIC's trading valuation does not look attractive. The Hong Kong-listed stock is trading at a forward price-to-book ratio of 1.2 times, above its three-year average level of 0.9 times. Valuation based on book value is considered more useful for evaluating asset-heavy, cyclical businesses like chip foundries.Morningstar Inc. analyst Phelix Lee also points out that both SMIC and Hua Hong may not be moving quickly enough to capture demand for high-end power chips used in data centers. If Chinese AI startups lose access to advanced processors, it will also hurt the demand for peripheral chips supplied by SMIC and Hua Hong.In conclusion, Semiconductor Manufacturing International Corp.'s stock surge is a complex phenomenon with both opportunities and challenges. The company's performance is closely tied to China's self-reliance efforts and global market dynamics, and it will be interesting to see how these factors unfold in the future.