Incident: The company released its 2023 annual report, achieving operating income of 45.25 billion yuan, a year-on-year decrease of 8.61%; net profit to mother of 4.823 billion yuan, a year-on-year decrease of 60.25%; deducted non-net profit of 3.27 billion yuan, a year-on-year decrease of 66.52%; gross profit ratio of 21.89%, and overall performance was in line with the performance report.
Key points of investment:
High-end products drive the improvement of ASP, and the 2024 guidelines are steady. According to financial reports, the company achieved operating income of 12.152 billion yuan in 23Q4, up 3.4% year on year; net profit to mother was 1,148 billion, down 58.2% year on year. The revenue side picked up this quarter, mainly driven by increased shipments, while the price side of the product declined slightly. The company's Q4 gross margin was 18.83%, down 5.22pct from month to month. According to Hong Kong stock financial reports, the company's capacity utilization rate declined slightly by 0.3 pcts from 77.1% in 23Q3 to 76.8% in 23Q4. We believe that, on the one hand, the current industry cycle is still sluggish, putting pressure on the average price of the company's products. On the other hand, the company's expansion of production will increase depreciation and amortization expenses, further lowering the level of gross margin. The company's 23Q4 equivalent 8-inch wafer shipments were 1.675 million wafers, an increase of 9% over the previous year; annual sales volume of wafers (equivalent to 8 inch) decreased by 17.4% to 5.867 million wafers in 2023, but ASP was mainly driven by high-end products to increase from 6,381 yuan/piece in 2023 to 6,967 yuan/piece. The company's Hong Kong stock earnings report predicts that 24Q1 revenue will remain flat to 2% month-on-month, gross margin will be 9% to 11%, and the main depreciation will continue to increase; the company's guidance for 2024 sales revenue is no lower than the average of comparable peers.
The level of capital expenditure is steady, and the four major new plants are steadily expanding production. According to Hong Kong stock financial reports, by the end of 23Q4, the company's monthly production capacity of 8-inch wafers had increased to 805,500 wafers, an increase of 91,500 wafers compared to the beginning of the year; the company's total capital expenditure in 2023 was US$7.47 billion, which indicates that the expenditure in 2024 will remain roughly the same. According to the company's announcement, the progress of the four new expansion and mature process projects in Shanghai, Beijing, Tianjin, and Shenzhen is 80%, 91%, 97%, and 85%, respectively.
Focus on the new impetus for fab growth. In the short term, the semiconductor cycle has bottomed out, inventory removal is nearing its end, and the subsequent focus will be on demand research and product mix. The pace of domestic inventory removal is faster, so it is expected to take the lead in recovery, but attention must be paid to the flexibility and sustainability of specific products. Overall, there is not much room for decline in the profitability and operating rate of mature processes. The 28nm process node is the main force for future fab production expansion. Market demand for automotive and industrial chips will become a hot race track. Only by optimizing the product structure and following a differentiated route can we effectively improve our competitiveness. In the long run, wafers benefit from the demand for localization at mature nodes. Local design companies are growing rapidly. Although they are mainly based on mature processes, they still bring a large demand for local wafer foundry. With global supply chain safety concerns, the supply chain has shifted from cost priority to safety priority. Due to huge market demand, although the development of advanced processes has been blocked, mature processes in mainland China are expected to develop on a large scale and rapidly.
Adjust profit forecasts to maintain a “buy” rating. According to the company announcement guidelines, we adjusted the company's net profit forecast for 2024-2025 to 40.42/5,518 billion (originally 86.17/10.436 billion yuan), and added the 2026 forecast to 6.956 billion, corresponding to the 24-26 A-share share price PE of 81/60/47X. Due to the heavy assets in the foundry process, we think PB pricing is reasonable. The company's PB Band is still in the lower range since listing. The integrated circuit manufacturing process is comparable to that of the company C Canchip, Xinlian Integration, Saiwei Electronics and China Resources Micro have an average PB of 3X, maintaining a “buy” rating.
Risk warning: downstream demand falls short of expectations, advanced process R&D falls short of expectations, and production capacity release falls short of expectations.