Incident: SMIC's 2024Q2 earnings report showed that revenue for the quarter was 1.9 billion US dollars, up 21.8% year on year, up 8.6% month on month; gross profit margin was 13.9%, down 6.4 percentage points year on year, up 0.2 percentage points month on month; net profit to mother was 0.165 billion US dollars, down 59.1% year on year, up 129.2% month on month; capacity utilization rate was 85.2%, up 6.9 percentage points year on year, up 4.4 percentage points month on month.

Revenue and gross profit all exceeded expectations, and wafer sales increased sharply: the company's 2024Q2 revenue of 1.91 billion US dollars exceeded the guideline limit (18.4 to 1.87 billion US dollars), mainly due to increased wafer sales. 2024Q2 shipped 2.112 million pieces, an increase of 17.7% month-on-month. The increase in performance due to the increase in partial shipments was offset by a decline in ASP, and the average sales unit price of 2024Q2 fell 8% month-on-month; the gross profit margin was 13.9%, exceeding the guideline limit (~ 11%). Mainly due to the recovery of the downstream consumer electronics industry, the company's operating rate has increased, and at the same time, some customers have been given the opportunity to enter the industrial chain, bringing new demand to the company.

The share of overseas revenue increased, and the consumer electronics industry grew significantly: by region, the revenue share of 2024Q2 in China, the US region, and Eurasia was 80.3%, 16.0%, and 3.7% respectively. The share of overseas customers all increased to varying degrees, mainly due to overseas customers picking up goods early to avoid political risks; in terms of downstream applications, 2024Q2 smartphones, computers and tablets, consumer electronics, connectivity and wearables, industrial and automotive revenue accounted for 32.0%, 13.3%, 35.6%, 11.0%, and 8.1%, respectively. The industry's revenue surpassed smartphones as the biggest source of revenue for the quarter.

The supply of 12-inch production capacity is in short supply, and the guidelines for the second half of the year were greatly improved: the company's management said that the company's 12-inch production capacity has been at full capacity in the past few months, and production capacity of 0.06 million 12-inch sheets will be expanded throughout 2024. We expect the company to increase 12-inch production capacity for 0.046 million sheets in the second half of the year. The company expects revenue to increase by 13% to 15% month-on-month in 2024Q3, with gross margin between 18-20%. According to the company's performance briefing, the main reason for the month-on-month increase in revenue and the increase in gross margin is that the product structure will improve, and the share of 12-inch product shipments will increase. At the same time, wafer shipping prices have bottomed out in 2024Q2, and product prices are expected to rise in the second half of the year.

Investment advice: The company is in the leading position of domestic foundry. We expect the company to achieve operating income of 58.735/68.544/78.962 billion yuan and net profit to mother of 3.402/4.046/5.056 billion yuan in 2024-2026. The corresponding PE is 114.47/96.27/77.03 times, respectively, to maintain the “gain” rating.

Risk warning: Geopolitical risks increase; downstream recovery falls short of expectations; excess wafer production capacity