Event: On February 7, 2024, the company released the fourth quarter results report of 2023. The company expects revenue for 23Q4 to be US$1,678 million, up 3.6% month-on-month; gross margin to be 16.4%, down 3.4 pcts month-on-month; and net profit to mother of US$175 million, up 86.2% month-on-month.
Weak demand recovered slowly, and increased depreciation dragged down performance. The company expects to achieve operating income of 6.322 billion US dollars for the full year of 2023, a year-on-year decrease of 13.1%; achieve net profit to mother of 903 million US dollars, a year-on-year decrease of 50.3%; and achieve a gross profit margin of 19.3%, a year-on-year decrease of 18.7 pcts. The main reason for the sharp decline in net profit due to 2023 compared to the 2022 forecast is that the semiconductor industry was at the bottom of the cycle in the past year, global market demand was weak, industry inventories were high, and competition in the industry was fierce. Affected by this, the Group's average capacity utilization rate decreased, wafer sales volume decreased, and product portfolio changed. Furthermore, the Group is in a period of high investment, and depreciation has increased compared to 2022.
The mobile phone business grew significantly, and mature manufacturing processes continued to expand production. In terms of revenue, by region, China, the US, and Eurasia are expected to account for 80.8%/15.7%/3.5% of revenue in 23Q4; by application, 23Q4 smartphones, computers and tablets, consumer electronics, connectivity and wearables, industry and automobiles are expected to account for 30.2%/30.6%/22.8%/8.8%/7.6%, respectively. Among them, the share of smartphones grew rapidly, from 23.5% in 23Q1 to 30.2% in 23Q4. Image sensors and display driver chips applied to mobile terminals performed well. In terms of production capacity, SMIC continues to expand production. It has three 8-inch fabs and four 12-inch fabs in Shanghai, Beijing, Tianjin, and Shenzhen, and a 12-inch fab each under construction in Shanghai, Beijing, and Tianjin. In the next five to seven years, SMIC will increase its 12-inch wafer production capacity by 340,000 wafers per month after the completion of four new production expansion projects. The company's capital expenditure for the full year of 2023 was US$7.47 billion. In the fourth quarter of 2023, the equivalent monthly production capacity of 8 inches reached 8055 million tablets, and the capacity utilization rate reached 76.8%.
24Q1 continued to grow month-on-month, and the operating rate gradually recovered and waited for recovery. According to Gartner's forecast, the semiconductor market is still sluggish in the short term, and the market is expected to decline 10.9% to reach $534 billion in 2023.
However, in the long run, the semiconductor industry will gradually recover, and global semiconductor revenue is expected to grow 16.8% to reach US$624 billion in 2024. The company expects sales revenue to remain flat to increase 2% month-on-month in the first quarter of 2024, and gross margin is expected to be between 9% and 11%. On the premise that there are no major changes in the external environment, the 2024 guideline given by the company is that sales revenue growth should not be lower than the average of comparable peers, with a single-digit year-on-year increase.
Investment advice: Considering that SMIC is a leading company in the domestic foundry industry, the company's capacity utilization rate is about to bottom up as demand in the downstream industry gradually recovers. The company's revenue for 23-25 is estimated to be 452.50/522.59/62.354 billion yuan, respectively, and net profit to mother of 48.23/60.33/7.445 billion yuan, respectively. The corresponding PE valuations are 72/58/47 times, and PB valuations are 2.5/2.4/2.3 times, respectively. We are optimistic about the company's long-term development and maintain a “recommended” rating.
Risk warning: Iterative risks of R&D and technology upgrades; fluctuations in overseas situations may affect the industrial chain; downstream demand falls short of expectations.