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SMIC: A long cycle, waiting patiently for the east wind

1.Overall Performance: Basically in line with expectations. In the third quarter of 2023, SMIC achieved a revenue of $1.62 billion, a QoQ increase of 3.9%, which is within the company's guidance range of 3% to 5%, but slightly lower than market expectations ($1.64 billion). The company's gross margin for this quarter continued to decline to 19.8%, slightly higher than market expectations (19.2%).

2. Analysis of the three core indicators: revenue, gross margin, and capacity utilization rate. The increase in revenue this quarter was mainly driven by the increase in shipment volume, while there was no significant increase in prices. Although there was an increase in shipment volume, the company's capacity utilization rate for this quarter did not increase due to the impact of capacity expansion. It is worth noting that the overall demand is still relatively weak, and the company's inventory reached a new high this quarter.

3. Business progress: Moving towards domestic substitution comprehensively. The company's smartphone business did not show significant improvement this quarter, and the growth mainly came from other businesses such as computers and automobiles. The proportion of revenue from the Chinese market continued to increase to 84%, and the proportion of domestic customers also continued to rise.

4. Guidance for the next quarter: SMIC expects a QoQ revenue growth of 1%-3% in the fourth quarter of 2023, corresponding to $1.64-1.67 billion, slightly lower than market consensus ($1.69 billion); gross margin of 16-18%, also slightly lower than market expectations (18.74%).

Overall, the financial report of SMIC this time is not ideal. Although the revenue and gross margin for the third quarter are basically in line with expectations, the guidance given by the company for the next quarter is lower than market expectations for both indicators.

Taking a closer look at the company's data, Dolphin Research believes that the less ideal aspects of SMIC in this quarter are as follows:

1) No increase in prices: Although the company's revenue has rebounded, it is mainly due to the increase in shipment volume, and the calculated data shows that the company's product prices are still declining.

2) Inventory continues to rise: Although the shipment volume has increased, the company's inventory continues to rise this quarter. The high inventory levels will continue to suppress the company's capacity utilization and gross margin.

Overall, although the company's production capacity is relatively sufficient and continues to expand, the weak demand directly affects the company's operating conditions. Considering the company's own guidance, in the current situation where product prices have not yet rebounded, high inventory levels will also bring significant pressure on earnings growth.

Although the stock prices of the company and the technology sector have rebounded recently, it will be difficult for such "less than ideal" performance to bring sustained upward momentum to the company. The recovery of the company's performance also needs to wait a little longer.

Here is Dolphin Research's detailed analysis:

I. Key indicators for SMIC: Revenue, gross margin, and capacity utilization.

Key indicator 1: Revenue

In the third quarter of 2023, SMIC achieved revenue of $1.621 billion, a QoQ increase of 3.9%, which is in line with expectations (QoQ growth of 3-5%). The company's shipment volume continued to recover this quarter, while prices declined QoQ.

Analyzing from the perspectives of quantity and price, the main factors influencing the revenue growth of SMIC this quarter are:

  1. Quantity: SMIC's wafer shipments (equivalent to 8 inches) reached 1,537 thousand pieces, a QoQ increase of 9.5%.
  2. Price: SMIC's wafer revenue (equivalent to 8 inches) was $1,054, a QoQ decrease of 5.2%.

From the breakdown of quantity and price, the revenue rebound this quarter is mainly driven by the increase in shipment volume, while product prices continue to decline.

Although the company and the industry are still in a downturn, the company's capital expenditure has significantly increased this quarter. The company's capital expenditure this quarter was $2.135 billion, a YoY increase of 17.2%. Dolphin Research believes that this is mainly due to the accelerated procurement of equipment such as lithography machines by the company this quarter.

Looking ahead to the fourth quarter of 2023, SMIC has provided a quarterly guidance of 1-3% QoQ revenue growth, corresponding to an expected revenue of $1.64-1.67 billion for the next quarter, slightly lower than the market consensus expectation ($1.69 billion). Dolphin Research believes that after the downstream inventory pressure of some customers weakens, there will be a certain demand for inventory replenishment, which will drive the company's shipment volume to increase. However, there are no clear signs of price recovery yet.

Key Indicator 2: Gross Margin

In the third quarter of 2023, SMIC's gross margin was 19.8%, a QoQ decrease of 0.5pct, slightly exceeding market expectations (19.2%).

To analyze the reasons for the change in SMIC's gross margin this quarter, let's break down the cost structure of the company:

Gross profit per wafer = Wafer revenue per wafer - Fixed cost per wafer - Variable cost per wafer

Wafer revenue per wafer: SMIC's wafer revenue per wafer (equivalent to 8 inches) this quarter was $1054, a QoQ decrease of $58 per wafer.

Fixed cost per wafer (depreciation and amortization): The fixed cost per wafer (equivalent to 8 inches) this quarter was $337, a QoQ decrease of $38 per wafer.

Variable cost per wafer (other manufacturing expenses): The variable cost per wafer (equivalent to 8 inches) this quarter was $508, a MoM decrease of $3 per wafer.

Gross profit per wafer: SMIC's gross profit per wafer (equivalent to 8 inches) this quarter was $209, a MoM decrease of $16 per wafer.

By analyzing the cost breakdown, we can see that SMIC's gross margin declined this quarter mainly because the decrease in unit revenue exceeded the decrease in unit cost. The company's gross margin, similar to the semiconductor cycle, is currently at a relatively low level.

Looking ahead to the fourth quarter of 2023, SMIC has provided a quarterly gross margin guidance of 16-18%, slightly lower than market expectations (18.74%). This indicates that although the company's revenue is starting to recover, the gross margin remains low. While the company's shipment volume has increased recently, there has not been a significant rebound in prices, which puts pressure on the company's gross margin.

Key Indicator 3: Capacity Utilization Rate

The capacity utilization rate not only reflects SMIC's quarterly operating performance, but also reflects the overall prosperity trend of the wafer manufacturing industry. Currently, with the relative downturn in the semiconductor industry, adjustments in downstream manufacturers' orders will directly affect the capacity utilization rate of chip manufacturers.

In the third quarter of 2023, SMIC's capacity utilization rate was 77.1%, indicating that the company's capacity utilization rate is still low this quarter. Dolphin Research believes that although the company's shipment volume has increased this quarter, the low capacity utilization rate is mainly due to the recent expansion of the company's capacity.

Looking ahead to the fourth quarter of 2023, Dolphin Research believes that the company's shipment volume will continue to increase, but with the pace of expansion being maintained, the company's capacity utilization rate will remain relatively low.

II. Business Perspective on SMIC After reviewing the three key indicators, Dolphin Research and everyone will take a comprehensive look at the quarterly business situation of SMIC:

2.1 Downstream Markets

In this quarter, the proportion of SMIC's revenue from the smartphone business was 25.9%, and there was no significant growth. The quarter-on-quarter growth mainly came from other businesses, including computer, automotive, and industrial control.

Although the consumer electronics market has shown signs of recovery, the company is positioned upstream in the industry chain, and the impact on the company's performance is not yet significant.

2.2 Wafer Sizes

Since the first quarter of 2022, SMIC no longer discloses the revenue proportion of each process node, only the revenue proportion of 8-inch and 12-inch wafers. This makes it impossible to see the revenue changes of each node in detail.

In this quarter, the proportion of SMIC's revenue from 12-inch wafers remained at a high level of 74%, and the overall proportion did not differ much from the previous quarter. Specifically, in terms of the proportion of the two sizes and the company's revenue, the revenue of 12-inch chips increased by 3.3% quarter-on-quarter, while the revenue of 8-inch chips increased by 6.7% quarter-on-quarter.

2.3 Regional Distribution

SMIC has adjusted the caliber of regional revenue distribution from "North America/China Mainland and Hong Kong/Europe and Asia" to "China Region/US Region/Euro-Asia Region". Due to the adjustment, there are slight differences in the data.

From the regional revenue of this quarter, the revenue from the China region continued to increase to 84%, with domestic substitution constantly improving. Currently, the domestic market is the company's main source of revenue, and the company's growth this quarter mainly came from domestic customers in the computer and automotive industries.

III. SMIC from the perspective of operating data

3.1 Operating Expenses: Overall Stability in Expenses

From the perspective of operating expenses, SMIC's operating expenses in this quarter were $234 million, which is relatively stable.

Breaking down the operating expenses of this quarter, research and development expenses were $173 million, general and administrative expenses were $128 million, and sales and marketing expenses were $9 million. Among them, administrative expenses increased slightly, while research and development and sales expenses remained stable.

3.2 Business Indicators: Inventory Reaches a New High

From a business indicator perspective, we mainly observe the company's inventory and accounts receivable:

① In this quarter, SMIC's inventory reached $2.577 billion, an increase of 9.9% MoM.

② In this quarter, SMIC's accounts receivable reached $1.219 billion, an increase of 16.7% MoM.

③ Combining the relationship between inventory/accounts receivable and revenue in the balance sheet, the inventory/revenue and accounts receivable/revenue ratios for this quarter were 159% and 75.2% respectively. From an operational perspective, SMIC's inventory is still on the rise, reaching a new historical high.

Combining the company's inventory and capacity utilization data, we can see the company's trend. In the first quarter of 2022, the company's capacity utilization rate was still close to full capacity. As the company's inventory continued to rise since the first quarter of 2022, the capacity utilization rate began to loosen from the second quarter. Therefore, considering the current inventory situation, Dolphin Research expects the capacity utilization rate in the fourth quarter of 2023 to remain relatively low in order to prioritize the digestion of the company's current high inventory.

3.3 EBITDA Indicator: Non-operating Profit Decreases

From the perspective of EBITDA, SMIC's pre-tax profit before interest, taxes, depreciation, and amortization reached $901 million in the third quarter, showing a slight decline.

Looking at the indicators separately, SMIC's pre-tax profit before interest, taxes, depreciation, and amortization mainly comes from the release of operating profit and depreciation/amortization. The decline in this quarter is mainly due to the decrease in profit (Dolphin Research believes that it is mainly due to the decrease in investment income from external sources in this quarter). The profit margin (pre-tax profit before interest, taxes, depreciation, and amortization) for this quarter has declined to 55.6%. Due to the heavy asset nature of the manufacturing industry, most of the company's profits are eroded by depreciation and amortization.

Dolphin Research's Historical Articles on SMIC:

Earnings Season

August 11, 2023 Conference Call: "The Increment of Mobile Phones Actually Comes from 'Trade-In'? (SMIC 2Q23 Conference Call)"

August 11, 2023 Earnings Review: "The Lackluster SMIC: How Long Until Recovery?"

May 12, 2023 Conference Call: "12-Inch Rush Orders, Semiconductor Industry Begins Structured Recovery (SMIC 23Q1 Conference Call)" May 11, 2023 Earnings Report Review: "SMIC: The Alpha Light Shines Through the Chip Cycle" link

February 10, 2023 Conference Call: "High Depreciation Pressures Gross Margin, Improvement Depends on the Second Half of the Year" (SMIC 22Q4 Conference Call Summary) link

February 10, 2023 Earnings Report Review: "SMIC: Visible Decline, But Is It Good Now?" link

November 11, 2022 Conference Call: "Despite Semiconductor Downturn, Capital Expenditure Remains Unchanged" (SMIC 22Q3 Conference Call) link

November 11, 2022 Earnings Report Review: "SMIC: Long-Term Faith Can't Escape the 'Cycle Curse'" link

August 12, 2022: "How Will SMIC Respond to the Semiconductor Downturn?" (22Q2 Conference Call Summary) link

August 11, 2022: "Prices Can't Rise Anymore, SMIC Holds Firm Against the 'Cycle Plunder'" link

May 13, 2022 Conference Call: "Limited Impact of the Pandemic, Semiconductor Shortage Becomes Structural" (SMIC Conference Call Summary) link

May 12, 2022 Earnings Report Review: "Pandemic and Market May Stumble, But SMIC's Performance Doesn't 'Stumble'" link

February 11, 2022 Conference Call: "Alpha Beyond Industry Price Increases, SMIC Expands Production Again" link

February 10, 2022 Earnings Report Review: "SMIC: Continuous Growth in Performance Amidst 'Rising' Voices" link

November 12, 2021 Conference Call: "After Exceeding Expectations, SMIC Faces a Major Drop, What Did the Management Discuss?" link Earnings Report Analysis

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