occurrences
On November 10, SMIC announced its three-quarter report. The first three quarters achieved operating income of 33.098 billion yuan, -12.35%; net profit of 3.675 billion yuan, -60.86%; realized net profit of 3.675 billion yuan, -60.86%; achieved a net profit of 2,272 billion yuan, -71.50% year-on-year; and achieved a gross profit margin of 23.01%, -12.99pcts year-on-year. According to international reporting standards, the company achieved revenue of US$1.62 billion in Q3, a month-on-month increase of 3.9%; a gross profit margin of 19.8%, a decrease of 0.5pcts; and an increase of 9.5% in overall shipment volume. However, due to the increase in total production capacity to 796,000 pieces, the average capacity utilization rate fell 1.2pcts to 77.1%.
Key points of investment
High inventories in the Chinese market abated, and CIS/ISP, RF Bluetooth, display drivers, and NOR Flash grew rapidly. Looking at the subregions, China, the US, and Eurasia accounted for 84%/12.9%/3.1% of revenue, respectively, and +4.4pcts/-4.7pcts/+0.3 pcts month-on-month. Revenue in China increased 10% month-on-month, mainly due to the mitigation of the high inventory level of products in the Chinese market. Inventories fell to a relatively healthy level, while the inventories of US and European customers were still at historically high levels. By application, smart phones, the Internet of Things, consumer electronics, and other types of revenue accounted for 26%, 12%, 24%, and 38%, respectively, -0.9pcts/-0.4pcts/-2.4pcts/+3.7pcts month-on-month. Demand for CIS/ISP and RF Bluetooth used in domestic terminals was good, up 24% and 28% month-on-month; display-driven inventory returned to a healthy level, and sales revenue increased 16% month-on-month; demand for special storage was plentiful, and NorFlash increased 27% month-on-month. It mainly benefits from the relatively good demand for new products from Chinese customers, and the supply of some commodities is in short supply.
Demand for 40/55nm is strong, production capacity is expanding at an accelerated pace, and the capital expenditure plan for 2023 was raised to $7.5 billion. The 2023Q3 company's monthly production capacity (equivalent to 8 inches) was 795,800 pieces, an increase of 41,500 units/month over month. Under the high production capacity base, the capacity utilization rate fell to 77.1%; the wafer ASP was 2161 US dollars, a decrease of 5% over the previous month. The production capacity released in the third quarter was mainly the production capacity of the 8-inch Tianjin plant and the 12-inch Beijing and Shenzhen plants. The production line of the Tianjin plant was mainly 0.15-0.18 μm BCDanalog Power, and the Beijing and Shenzhen production lines were mainly 12-inch 40/55 nm production lines, mainly used in CIS/ISP and NOR flash. Looking at the full year, the production capacity of the 8-inch Tianjin plant is expected to increase by 40,000 pieces, and the 12-inch production capacity is expected to increase by 20,000 pieces. Judging from the manufacturing process, 40/55 nm is still tight. First, the 40nm CIS back thinning requires 15-20 layers of light masks. The requirements are high, the cycle is long, production capacity is scarce, and supply and delivery are slow. Second, there are high requirements for 40nm applications. For MCU, DDIC, etc., very specific ion implantation equipment is required. The poor reusability of the equipment has led to a shortage of some production capacity. For the 55nm CIS senor section, due to its relatively strong competitiveness, most low-cost mobile phones and DDIC monitors use 55nm. At the same time, in terms of NOR Flash, the low price situation in the industry triggered a demand for inventory replenishment and storage, increasing demand for 55nm production capacity. 2023Q3 capital expenditure was US$2.135 billion, +4% YoY and +23% YoY. The company raised its capital expenditure plan for the full year of 2023 by 18% to US$7.5 billion (US$6.35 billion), mainly because the company allowed equipment suppliers to make breakthroughs ahead of schedule to cope with the impact of current global geopolitics on the equipment delivery cycle in order to ensure that the projects already initiated reach production. Looking ahead to the future market, the company believes that the pace of global production expansion is faster than demand growth, industry competition is intensifying, and there is a risk of overcapacity. However, the company's expansion of production is based on the overall pace of development and user order demand, and is optimistic about the future removal of production capacity.
Market demand shows a double U trend, and the pace is different at home and abroad. The company believes that the market is still at the bottom, and the trend is showing a double U pattern. The recovery period is expected to be extended by one year. On the demand side, the speed of inventory and the pace of chip conversion are different in different regions of the world. Chinese customer inventories have reached a balanced level of entry and exit, yet the US and Europe are still at historically high levels. At the same time, inventories related to automotive chips began to be high, shifting from aggressive expansion to focusing on core business, strictly controlling inventory and costs, and becoming more cautious in distribution.
Other than data center-related high-performance computing chips, crystal back processing, dual- and three-wafer copper-copper bonding, and chiplets, the market lacks new momentum and bright spots, and it is necessary to wait until the market recovers.
The company's judgment is mainly based on: 1) Inventory data of the top 20 OEM customers, based on customer inventory turnover days, inventory replenishment cycles, etc.; 2) NTO (new tape out), or new product conditions, are generally one year ahead of the mass production cycle. The current accumulated NTO situation basically represents the overall product demand for the next year; 3) Looking at the three aspects of mobile phones, consumer electronics, and industry, the small-scale recovery brought about by the wave of new smartphone products and switches in the third quarter is mainly seasonal. Demand in 2024 is expected to remain the same as in previous years, and will not affect the general trend.
Profit forecasting
We expect the company to achieve revenue of 436.07/508.05/61,494 billion yuan in 2023/2024 and 2025, respectively, and realized net profit of 58.85/73.70/9.746 billion yuan respectively. The stock price on December 15 corresponding to 2023-2025 PE was 72/58/44 times, respectively, maintaining the “buy” rating.
Risk warning:
Market demand falls short of expectations; advanced process progress falls short of expectations; competition among mature processes intensifies; geopolitical risk; exchange rate fluctuation risk.