(InfoWorld) - Semiconductor Manufacturing International Corp. (SMIC) on Friday reported a loss for the second quarter, but said that after six months of weak semiconductor demand, things are finally looking up.

Despite a generally weak market for chip makers, SMIC reported its second-quarter revenue rose 26.5 percent compared to the same period last year, to $280 million. However, that wasn't enough for the company to turn a profit. SMIC reported a larger-than-expected loss of $40 million for the second quarter, compared to a profit of $34 million last year.

Based in Shanghai, SMIC is China's largest semiconductor manufacturer and the world's third-largest contract chip maker. The company's two larger rivals, Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp., both posted net profits for the second quarter.

"The loss is really worse than our expectations," said Helen Lau, an analyst at Sun Hung Kai Investment Services, in Hong Kong. Lau had expected SMIC to post a second-quarter loss of $21 million

The loss came despite rising wafer shipments, SMIC said. Second-quarter wafer shipments totalled 330,499 units of 200 millimeter-equivalent wafers, an increase of 64 percent over the same period last year.

However, this increase in wafer shipments didn't keep pace with increases in SMIC's total manufacturing capacity. The company said its capacity utilization rate during the second quarter was 87 percent, compared to 99 percent one year earlier.

Falling prices hurt SMIC's bottom line during the second quarter. The average selling price of finished wafers fell from $1,034 per wafer during the second quarter of 2004 to $829 per wafer during the second quarter of 2005, SMIC said. The company blamed the drop in average selling prices to lower prices for DRAM (dynamic RAM) chips and "general industry softness."

Despite a poor showing during the second quarter, SMIC said the outlook for the months ahead is brighter.

"The second quarter of 2005 marked what we believe to be the trough of the current semiconductor cycle," SMIC said in a statement. "We believe that the second half of 2005 will be a period of financial growth and improvement."

SMIC expects to see wafer shipments rise between 7.5 percent to 9.5 percent during the third quarter. Average selling prices are expected to rise by up to 10 percent, it said.

Based on this outlook, the company said it has increased its capital expenditure (capex) budget for the year to $1.1 billion, from a previous forecast of $1 billion.

However, Sun Hung Kai's Lau did not find the company's outlook encouraging. "They seem very cautious about their capex and [wafer] shipments," she said.

Lau noted that the expected single-digit increase in third-quarter wafer shipments would represent a slower increase than during the second quarter, when wafer shipments rose 16 percent over the first quarter.

SMIC's outlook indicates that an expected rebound in semiconductor demand during the second half of the year may not be very strong, Lau said.

On Thursday, SMIC announced the appointment of Yang Yuan Wang, chief scientist of the Microelectronics Research Institute at Beijing University, as chairman of the company's board of directors. Wang will replace company founder Richard Chang, who will remain as chief executive officer of the company, it said.

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