According to Futu News on April 8, Semiconductor Manufacturing International Corporation continued to rise today, rising 3.31% to HK $28.1 as of press time, with a latest market capitalization of HK $221.9 billion.

CITIC published the latest research report, that in the current industry capacity shortage background, Semiconductor Manufacturing International Corporation mature process capacity continues to be fully loaded, more advanced process capacity utilization is expected to significantly improve, and that the company's performance this year is expected to be better than the previous guidance, give the target price of HK $38.70, maintain the "buy" rating.

Core ideas:

In the context of the current industry capacity shortage, Semiconductor Manufacturing International Corporation mature process capacity continues to be fully loaded, more advanced process capacity utilization is expected to be significantly improved. The company has recently raised the price of contract manufacturing, and the improvement of ASP is expected to lead to improved profits. At present, the company's capacity utilization, ASP and the persistence of the industry boom are more optimistic than at the February earnings meeting, and we believe that the company's performance this year is expected to be better than the previous guidance.

For a long time, we are optimistic that the company will continue to expand production on a large scale with higher capital expenses. in the process of developing a mature process, ROE is expected to be upgraded in the future, and the company will continue to carry out advanced technology research and development to replace the core target for chip manufacturing, giving the target price HK $38.70. maintain the "buy" rating.

The current tight situation of supply and demand in the industry is grim, and the company is expected to benefit as a wafer foundry with incremental production capacity.

Dr. Zhou Zixue, chairman of Semiconductor Manufacturing International Corporation, said in the opening speech of SEMICON China on March 17, 2021, "the current global semiconductor supply is still in a very tight situation". The downstream machine industry has never been affected by the shortage of semiconductor supply, and there has never been such a serious situation in history. According to the employees' recollection, a similar situation occurred only in 1999. "

The reasons for this round of chip shortage need to be seen from both supply and demand: on the one hand, the market demand growth is much higher than expected, 5G mobile phone main chip, RF front-end, power management chip have been upgraded compared with 4G, for example, the average number of single PMIC chips has increased from 4G mobile phone 4-5 to 5G mobile phone 7-8, at the same time IoT/ smart home, automotive electronics demand upward, epidemic economy under the server, PC growth has also led to a sharp increase in chip demand.

On the other hand, the speed of production expansion is difficult to catch up with the growth of demand. Under the influence of the epidemic, some overseas wafer factories have slowed down their production expansion plans, major suppliers around the world have suspended shipments, and there is no team installation even if the equipment comes into the factory, which directly leads to delays in the expansion of production capacity. Semiconductor Manufacturing International Corporation will expand its 8-inch wafer production capacity of 30,000 and 12,000 wafers per month in 2020, which is still in short supply and maintain a full-load operation. in 2021, the company plans to continue to expand 8-inch wafers of no less than 45,000 and 12inch 10,000.

The company increases the price of contract manufacturing, ASP is expected to rise.

According to industry research, Semiconductor Manufacturing International Corporation raised its wafer foundry price in the first quarter. Globally, the time point of Semiconductor Manufacturing International Corporation's price increase is relatively backward, later than United Microelectronics Corp, Li SMC and other manufacturers. We expect that the price increase will mainly make a positive contribution to the company's profit margin, and at the same time, in the case of tight production capacity, the company's product portfolio may be further improved to produce more high-margin products accordingly.

The mature process capacity is fully loaded, and the utilization rate of some of the more advanced processes has been further improved.

The mature process parts of the company's 55nm and above have been in a state of full capacity since 2020H2, and the income of 2020Q4's 40nm and below nodes has decreased month-on-month, which may be due to the outage of major customers after September 15, in which 14/28nm revenue decreased by 68% and 40/45nm node income decreased by 19%, reflecting the low utilization of capacity below 40nm at that time. We expect that 2021Q1's 14nm capacity utilization will be significantly improved. Under the background of the current tight production capacity of Taiwan factories, some domestic main control chips and mining machine chip manufacturers have increased their orders in Semiconductor Manufacturing International Corporation 14nm. At the same time, in 40nm, 28nm and other nodes, we also see some customers such as Quanzhi Technology, Ruixin Micro's 2021Q1 performance has exceeded expectations. We expect to see a significant improvement in capacity utilization in the company's 40nm and below more advanced processes in the first quarter.

In terms of production expansion, SMIC Shenzhen and SMIC Capital projects may form a follow-up production capacity echelon.

Semiconductor Manufacturing International Corporation announced on March 17 that he signed a framework agreement to introduce Shenzhen state-owned assets to expand the 12-inch wafer production capacity of 40,000 wafers per month in the vacant plant in Shenzhen, which is expected to be put into production in 2022. Semiconductor Manufacturing International Corporation is currently building four "SMIC Capital" plants in the Majuqiao area of Yizhuang, Beijing, each with a capacity of 50,000 pieces per month, with a total production capacity of 200,000 pieces per month. The first phase of the project, which invests about US $7.6 billion to build two factories with a capacity of 100,000 pieces per month, is currently in the civil construction stage. the first P1 plant is expected to be completed in 2022-2023 and the P2 plant is expected to be completed in 2025.

The company's follow-up capacity echelon layout is clear, we long-term optimistic about the company's mature process to continue to expand production on a large scale. Many domestic design companies in mature processes are growing rapidly, such as Weir shares in image sensor field (the main process is 55~65nm), Zhaoyi innovation in memory field (55~65nm), purple light in Internet of things chip field (28~40nm), Ruixin micro in logic chip field (14~40nm), Quanzhi science and technology, etc. We believe that the company is expected to grow with domestic high-quality design companies and share domestic alternative dividends.

Earnings forecasts, valuations and ratings

We expect that the company will continue to benefit from domestic substitution and maintain prosperity downstream, and the trend will improve in 2021. It is expected that the company's gross profit margin will decline year-on-year in 2021 due to the depreciation pressure of the advanced process, and then it is expected to pick up gradually.

Taking into account the above situation, the financial support for future government projects is expected to continue. We maintain the company's 2021-2023 net profit forecast of 487 million / 553 million / 728 million US dollars, corresponding to the 2021 2023 EPS forecast of 0.48 PB 0.72 Hong Kong dollars, net assets per share 15.48 pounds 15.99 pounds 16.66 Hong Kong dollars, with reference to comparable companies Hua Hong Semiconductor and United Microelectronics Corp valuation level, according to 2021 2.5 times PB Give the target price HK $38.70 and maintain the "buy" rating.