occurrences
On March 28, SMIC released its 2023 annual report. In 2023, it achieved operating income of 45.250 billion yuan, -8.6% year on year; realized net profit of 4.823 billion yuan, -60.3% year on year; realized net profit without return to mother of 3.269 billion yuan, -67.7% year on year; looking at Q4 alone, 2023Q4 achieved operating income of 12.153 billion yuan, +3.16% year on month; realized net profit to mother of 1,148 billion yuan, +69.45% year on month.
Key points of investment
Revenue increased quarterly, with a full year operating rate of 75%. In 2023, the semiconductor industry was at the bottom of the cycle. Global market demand was weak, industry inventories were high, inventory removal was slow, and competition in the industry was fierce. The company achieved revenue of 45.250 billion yuan in 2023, -8.6% year-on-year, of which the main business was Foundry revenue of 40.8875 billion yuan, -9.8% YoY, and sales of 5.867 million wafers (approximately equivalent to 8-inch wafers), or -17.34% YoY. The annual utilization rate is 75%, which is basically in line with the guidelines at the beginning of the year. Demand for electronic devices picked up in the second half of 2023, market vitality recovered, and the industry gradually showed signs of recovery. The company's performance increased quarterly. 2023Q4 achieved revenue of 12.153 billion yuan, +3.40% year over month, and realized net profit to mother of 1,148 billion yuan, +69.44% year over year, or -58.16% month on month. The pressure on the profit side is due to the semiconductor industry being at the bottom of the cycle and the company's high investment and high depreciation.
The Q4 mobile phone terminals CIS and DDIC performed well, and the computer and tablet sector achieved contrarian growth. In Q4 2023, image sensors and display driver chips used in mobile terminals performed brilliantly in various product platforms: CIS and ISP revenue increased by more than 60% month-on-month, and production capacity was in short supply; DDIC and TDDI revenue increased by nearly 30% month-on-month, with strong competitiveness in the 40nm and 55nm markets; AMOLED technology applications also formed a good layout. Thanks to the upgrading of the mobile industry chain in the third quarter, some innovative product companies launched express orders, and business began to recover steadily. By application area, in the company's integrated circuit foundry business in 2023, smartphones accounted for 26.7% of revenue, computers and tablets accounted for 26.7%, consumer electronics 25%, connectivity and wearables 12.1%, and industry and automobiles 9.5%. In various fields, the share of computer and tablet revenue growth (yoy+9.2pct) is due to the large number of express orders for new products from some customers.
Continuing to build a 12-inch production capacity, capital expenditure in 2024 is expected to remain flat year on year. In the medium to long term, the global semiconductor industry is both cyclical and growing, and the short-term imbalance between supply and demand will not affect the medium- to long-term improvement of the industry. As demand for intelligent terminal equipment rises, the market size continues to rise, and all links in the industrial chain pick up step by step. Wafer processing is a key industry at the front end of the industrial chain, and capacity utilization is expected to gradually recover, achieving continuous and steady medium- to long-term growth. In recent years, the trend of regionalization in the semiconductor industry has become more and more obvious, and some countries and regions are actively planning to expand local foundry production capacity. The company plans to continue with the announced 12-inch plant and capacity construction plans in 2024. The company's capital expenditure for 2023 was approximately RMB 52.84 billion, and the capital expenditure is expected to remain roughly the same in 2024 compared to the same period last year. Depreciation due to high investment will put pressure on the profit side. In 2024, the company is expected to break out of the downturn along with the semiconductor industry chain and achieve steady and moderate growth under the combined effects of a gradual improvement in customer inventory and a continued recovery in demand for mobile phones and the Internet. It is expected that the increase in sales revenue will not be lower than the average of comparable peers, with a year-on-year increase in single digits. The company expects sales revenue to remain flat to increase 2% month-on-month in 2024Q1, with a gross profit margin of 9% to 11%.
The decline in gross margin in the first quarter was mainly due to changes in product prices and product mix, and SMIC Beijing entering a depreciation period.
Profit forecasting
We expect the company to achieve operating income of 482.14/555.86/62,422 billion yuan in 2024/2025/2026, and achieve net profit of 40.32/49.18/6.068 billion yuan, respectively. The stock price on April 12 corresponding to 2024-2026 is 80/65/53 times PE and 2.03/1.97/1.90 times respectively, maintaining a “buy” rating.
Risk warning
Risk of changes in industrial policy; market demand falling short of expectations; progress in advanced processes falling short of expectations; intensifying competition in mature processes; geopolitical risk; risk of exchange rate fluctuations.