occurrences

On May 9, SMIC released its 2024 quarterly report. In Q1 of 2024, it achieved operating income of 12.594 billion yuan, +23.36% year over month; realized net profit to mother of 509 million yuan, -68.02%, and -55.67% month on month; gross sales margin was 14.19%, -8.58pcts year-on-year, and -4.64pcts month-on-month.

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 after deduction 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, -58.16% month on month; sales The gross margin was 16.4%.

Key points of investment

The operating rate in 24Q1 reached 80.8%, and the gross profit margin both exceeded previous guidelines. 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. Among them, the main business was Foundry revenue of 40.875 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 operating income of 12.153 billion yuan, +3.40% year on month, and +3.16% month on month; realized net profit to mother of 1,148 billion yuan, +69.45% year on year, and -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. Worldwide, low-end consumer markets such as Bluetooth, IOT, and MCU are slowly recovering. In Q1 2024, the willingness of global customers to prepare goods increased. The company achieved operating revenue of 12.594 billion yuan, +23.36% year over month, and +3.63% month-on-month, achieving 4 consecutive quarters of growth; gross sales margin of 13.7% (IFRS), -7.1 pcts year on year, and -2.7 pcts month-on-month. The 24Q1 gross margin was better than the guideline. The decline in Q1 gross margin was mainly due to changes in product prices and product mix, and SMIC Beijing entering a depreciation period. In terms of revenue breakdown, by region, China/North America/Eurasia accounted for 81.6%/14.9%/3.5%, respectively; by size, 8 inches/12 inches accounted for 24.4%/75.6%, respectively. Revenue from the wafer product business accounted for 93.0% of total revenue, and shipments for the quarter (8-inch equivalent wafers) exceeded 1.79 million sheets, an increase of 7.2% over the previous quarter. ASP decreased by 2.6% month-on-month, about $2,040 per piece (equivalent to 12 inches), mainly due to changes in product mix. Some production lines were fully loaded, and priority was given to guaranteeing urgent orders. Production capacity increased to 814,500 pieces/month (equivalent to 8 inches) during the quarter, and the capacity utilization rate reached 80.8%, an increase of 4 pcts month-on-month.

The share of smartphones and consumer electronics increased significantly in 24Q1, both exceeding 30%. 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 modernization of the 23Q3 mobile industry chain, some innovative product companies initiated express orders, and business began to recover steadily. By application area, smartphones/computers and tablets/consumer electronics/connected and wearables/industrial and automotive revenue accounted for 26.7%/26.7%/25%/12.1%/9.5% of the company's integrated circuit foundry business in 2023, respectively. In various fields, the share of computer and tablet revenue growth (yoy+9.2pcts) is due to the large number of express orders for new products from some customers. The share of revenue in 24Q1 was slightly adjusted. Smartphones/computers and tablets/consumer electronics/connected and wearables/industrial and automotive were 31.2%/30.9%/13.2%/7.2%, respectively. The share of smartphones and consumer electronics increased significantly. The 24Q1 company later delayed the delivery of computers and tablets. Since demand for standard products is usually stable, priority was given to guaranteeing urgent orders related to market share, that is, consumer electronics.

Continuing to build a 12-inch production capacity, the capital expenditure for the full year of 2024 is expected to be about 7.5 billion US dollars. 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. For global supply and demand, “local for local, China for China” is currently a common layout. Today and next year will still be the peak year for each region to build 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 is approximately RMB 52.84 billion, and the capital expenditure for 2024Q1 is US$2,235 billion. The capital expenditure for the full year of 2024 is estimated to be about US$7.5 billion, or about 80% for equipment expenses. 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 sales revenue growth will not be lower than the average of comparable peers, with a year-on-year increase in single digits. Looking ahead to the second quarter, the company saw: 1) the international consumer market partially recovered, and new products needed to be increased, such as low-power Bluetooth and MCU inventory, and customers began to make up orders; 2) due to demand to watch sports events this year, sales of set-top boxes and TV-related products are increasing, significantly more than last year; 3) the largest smartphone, especially Chinese smartphone manufacturers, are taking more products than last year. Smartphone-related products are currently in short supply.

As demand for early delivery of goods from some customers continues, Q2 revenue is expected to increase 5%-7% month-on-month in 2024; gross margin is expected to be between 9% and 11% due to increased production capacity and quarterly depreciation.

Profit forecasting

We expect the company to achieve operating income of 505.93/587.84/67.071 billion yuan in 2024/2025/2026, and achieve net profit of 46.93/56.71/6.208 billion yuan. The stock price on May 14, 2024 corresponds to 2024-2026 PE 73/60/55 times, respectively, and PB 2.12/2.05/1.98 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.