Maintaining SMIC's “buy” rating, the target price of Hong Kong stocks was raised to HK$19.3, a potential increase of 22%, and the target price of A shares was raised to RMB 56.7, a potential increase of 26%.
Maintaining SMIC's “buy” rating: SMIC is in an upward trend in semiconductor fundamentals. The company indicated that the median revenue for the third quarter increased 14% month-on-month, and the gross margin center reached 19%, a sharp increase of 5.1 percentage points over the previous quarter. This is mainly due to localized demand driving the company's 12-inch production capacity to be in short supply, optimized product structure, and improved prices. The company expects 12-inch production capacity to increase by about 0.06 million films by the end of this year, higher than previously planned. Currently, the net ratio of SMIC's Hong Kong stock market is 0.8 x, and the net ratio of the A share market is 2.7 x. Compared with historical averages, there is room for improvement, reaffirming the “buy” rating.
Results for the second quarter exceeded market expectations, and gross margin guidance for the third quarter rose sharply: SMIC's revenue for the second quarter increased 9% month-on-month, 22% year-on-year, and the year-on-year growth rate increased slightly from the first quarter. The company expects median revenue growth of 14% month-on-month and 34% year-on-year in the third quarter, with a rapid rise in the year-on-year growth rate. The company's gross margin reached 13.9% in the second quarter, up 0.2 percentage points from month to month, above the upper limit of the guideline range. Moreover, the company's gross margin guidance for the third quarter reached 19%, a sharp increase. As SMIC's 12-inch production capacity is fully loaded and the proportion of 12-inch wafer shipments is expected to increase in the third quarter, the average unit price of the company's wafers is also expected to continue to rise, thus driving the company's revenue and gross margin improvement beyond expectations in the third quarter. SMIC's net profit for the second quarter reached 0.165 billion US dollars, down 59% year on year and up 129% month on month, higher than the market and our expectations. Based on the second quarter results and third quarter guidance, we adjusted SMIC's profit forecast, but generally maintained the EBITDA forecast for 2024 and 2025.
Highlights and prospects of the performance conference: 1) Major consumer demand, including games, remote control, smart homes, etc., was the company's main growth driver in the first half of the year. 2) Maintain a cautious and optimistic judgment on the fourth quarter: With the overall pattern of this year stable, sales in the second half of the year are expected to exceed the first half of the year, and the annual revenue growth rate is higher than the industry's growth rate. 3) The company's 12-inch production capacity is in short supply, and the additional production capacity drives the optimization of the product structure. The company expects to increase 12-inch production capacity by 0.06 million pieces/month by the end of this year.
Valuation: Based on SMIC's second quarter results and third quarter guidance, we have adjusted SMIC's profit forecast. We raised the target price of SMIC Hong Kong shares to HK$19.3, a potential increase of 22%, and raised the target price of SMIC A shares to RMB 56.7, a potential increase of 26%.
Investment risk: Downstream semiconductor demand (smartphones, new energy vehicles, industry, consumption, etc.) is recovering slowly, and the company's fundamentals are rising slowly, affecting the rebound in valuation. Semiconductor foundry is adding more production capacity faster, and the company's capacity utilization rate is increasing slowly. Competition in the industry intensified, price pressure increased, and profit performance was hampered.