Incident: The 2Q24 company performed well. 2Q24 achieved revenue of 1.901 billion US dollars, up 21.8% year on year and 8.6% month on month, exceeding the range limit of 5%-7% month-on-month increase in previous company revenue guidelines. It was mainly due to an 18% month-on-month increase in wafer shipments, offsetting the impact of ASP's 8% month-on-month decline due to changes in product portfolio. In terms of profit, 2Q24 achieved a gross profit margin of 13.9%, exceeding the upper limit of the company's gross margin guideline range of 9%-11%, up 0.2 pct from month to month, down 6.4 pct from year to year; net profit to mother was 0.165 billion US dollars, down 59% year on year and up 129% month on month, corresponding to a 5 pct to 9% month-on-month increase in net profit margin. 3Q24's guidance was strong and far exceeded expectations. 3Q24 showed revenue growth of 13%-15% month-on-month, corresponding to 2.15-2.19 billion US dollars. The median value was more than 16% higher than the market forecast of 1.87 billion US dollars, the gross margin guide was 18%-20%, and the median value was about 7 pcts higher than the 12.08% expected by the market. Strong performance is due to accelerated demand for localization, increased capacity utilization, and increased ASP prices. The company indicates that the revenue growth rate for the full year of '24 will exceed the industry average, and the revenue scale in the second half of the year is expected to exceed that of the first half of the year.

Downstream demand for consumer electronics, smartphones, etc. is recovering, and demand for foundry manufacturing is rising. 1) Applications: 2Q24 benefits from a recovery in consumer electronics and smartphone demand. Smartphones, computers and tablets, consumer electronics, and others accounted for 32%, 13%, 36%, and 19% of revenue, respectively. Among them, consumer electronics and smartphones were the main growth drivers, driving strong demand for chip products such as BCD platforms and RF/CMOS. 2) Size: 2Q24 8 inches and 12 inches accounted for 26.4% and 73.6% of revenue, respectively. The 8-inch share increased 1.1 pct year over year, an increase of 2 pct month-on-month, representing a recovery in 8-inch capacity utilization; 3) Region: Benefiting from the wave of domestic substitution, China accounts for 80% of revenue, the US accounts for 16% of revenue, and Eurasia accounts for 4%.

Capacity utilization has increased, and the increase in wafer prices is compounded by an increase in the shipment ratio of 12-inch wafers. I am optimistic that the increase in ASP will drive continued growth in profitability. The 3Q24 guidance exceeded expectations. 1) Shipment volume and capacity utilization rate: The 2Q24 capacity utilization rate was 85%, an increase of 4 pct over the previous month. This is an increase in the utilization rate of 8-inch wafers, and the 12-inch production capacity is close to full load. The company's production expansion plan continues to advance. In 2Q24, the monthly production capacity of 8-inch tablets increased by 3% month-on-month compared to 1Q24 0.815 million tablets, and the monthly production capacity of 12-inch tablets by the end of 24 was increased by 0.06 million compared to the end of 23. In terms of shipment volume, the company's guidance for 3Q was the same as 2Q. Customers finished restocking in 4Q and will place orders as needed, which may result in a slight decrease in 4Q shipments. 2) ASP: The ASP price increase will be the main reason why the 3Q24 guidelines have greatly exceeded expectations, and the price increase trend will continue until at least 4Q24. ① The supply of wafers was in short supply, and ASP for various products showed an upward trend in price since 2Q24; ② 3Q24 12-inch shipments increased, and product portfolio improvements helped overall ASP growth. Looking ahead, the recovery in downstream demand supports capacity utilization and wafer shipments, and ASP price increases are expected to continue from 3Q24 to at least 4Q24, driving a steady increase in profitability.

Profit forecast, valuation, and rating: Downstream demand recovery, optimistic about subsequent capacity utilization improvements and wafer ASP price increases, but considering that capacity release will increase depreciation and amortization, we adjusted SMIC (0981.HK)'s net profit for 24-25 to be 0.679/0.911 billion dollars (-25%/-13% compared to the previous forecast), adding a net profit forecast of 1.181 billion dollars to the mother for 26 years, corresponding to a year-on-year growth rate of -25%/+34%/+30%; similarly, adjust SMIC ( (688981.SH) Net profit to mother for 24-25 was 4.81/6.458 billion yuan (adjusted -26%/-14% compared to the previous forecast), adding a net profit forecast of 8.367 billion yuan for 26 years. The stock price corresponds to the 24-25 Hong Kong stock PB 0.8x/0.8x, and the A-share PB2.5x/2.4x, and benefits from domestic substitution opportunities to maintain SMIC's “buy” rating for Hong Kong stocks and A shares.

Risk warning: US regulations are getting stricter; downstream demand is weak; industry competition is increasing; technology falls short of expectations.