SMIC: After a long trough, finally seeing the light at the end of the tunnel

On the evening of May 9, 2024, Beijing time, SMIC International (0981.HK/688981.SH) released its first quarter financial report for 2024 (as of March 2024) after the Hong Kong stock market closed, with the following key points:

1. Overall Performance: Revenue & Gross Margin both exceeded expectations. SMIC International achieved revenue of 1.75 billion USD this quarter, a 4.3% increase compared to the previous quarter, exceeding the company's upper guidance (2%) and beating market expectations (1.691 billion USD). The gross margin for this quarter continued to decline to 13.7%, but exceeded market expectations (11.8%).

2. Detailed Analysis of Three Core Indicators: Revenue, Gross Margin, and Capacity Utilization Rate. On the revenue side, the increase in revenue this quarter mainly came from the increase in shipments, while prices continued to decline. Driven by the structural recovery of some downstream businesses, both shipments and capacity utilization rate increased, although current inventory levels remain relatively high.

3. Business Progress: Recovery in smartphones and consumer electronics. With the increase in shipments to domestic Android customers, both the smartphone and consumer electronics businesses saw improvements this quarter, each accounting for 30%. PC and other businesses declined this quarter. The proportion of revenue from China remained above 80% this quarter, with the company's business still focused on domestic customers.

4. Guidance for the Next Quarter: SMIC International expects a 5-7% increase in revenue for the second quarter of 2024 compared to the first quarter, corresponding to 1.84-1.87 billion USD, exceeding market consensus (1.71 billion USD); gross margin of 9-11%, below market expectations (11.85%).

Dolphin's View:

Overall, SMIC International's financial report this time is quite good. Both revenue and gross margin exceeded market expectations. Although the gross margin is still relatively low, the revenue side is already showing improvement. The revenue growth this quarter was mainly driven by the smartphone and consumer electronics businesses.

Considering the guidance provided by the company for the next quarter, although the gross margin is still guided at 9-11%, with revenue expected to grow by 5-7%, the company's current high inventory levels will continue to suppress the recovery of gross margin. However, the growth in revenue also indicates some recovery in downstream demand for the company Dolphin believes that driven by the downstream business, the company's revenue is expected to lead out of the trough, while the profit side will remain at a relatively low level in the short term. With the structural drive effect, as inventory is cleared and industry conditions improve, the company's profitability is also expected to increase.

Affected by the semiconductor industry cycle, both the company's performance and stock price have been greatly impacted. Historically, the current gross profit margin level is already at the company's lowest point. Any improvement in the downstream is expected to boost the company's performance. The current stock price of the company has already reflected the market's expectation of its downturn. Signals of industry and company improvement have the potential to drive the company's rise.

Here is Dolphin's detailed analysis of SMIC (Semiconductor Manufacturing International Corporation):

I. Core Indicators for SMIC: Revenue, Gross Profit Margin, and Capacity Utilization

Core Indicator 1: Revenue

In the first quarter of 2024, SMIC achieved revenue of $1.75 billion, an increase of 4.3% compared to the previous quarter, exceeding guidance expectations (2% increase). The company's shipment volume continued to rise this quarter, while prices continued to decline.

From the perspective of quantity and price, the main factors influencing the revenue growth of SMIC this quarter are:

1) Quantity dimension: SMIC's wafer shipments this quarter (equivalent to 8 inches) reached 1795 thousand pieces, an increase of 7.2% compared to the previous quarter;

2) Price dimension: SMIC's revenue per wafer this quarter (equivalent to 8 inches) was $975, a decrease of 2.7% compared to the previous quarter.

Breaking down the quantity and price, revenue rebounded this quarter mainly due to the increase in shipment volume, while product prices continued to decline.

Although the company's performance is still in a downturn, the company's capital expenditure remained relatively high this quarter. The company's capital expenditure this quarter was $2.235 billion, an increase of 77.52% year-on-year. Looking at ASML's financial report, mainland China is still heavily buying ArFi lithography systems, in which the company also contributed a significant share.

Looking ahead to the second quarter of 2024, SMIC has provided guidance of a 5-7% increase in revenue compared to the previous quarter, corresponding to expected revenue of $1.84-1.87 billion in the next quarter, significantly better than market consensus expectations ($1.71 billion). Dolphin believes that the improvement in shipment volume, coupled with declining prices, is mainly driven by the structural improvement in the company's downstream mobile phone and consumer electronics business.** Core Indicator 2: Gross Margin

In the first quarter of 2024, the gross margin of SMIC was 13.7%, a decrease of 2.7 percentage points compared to the previous quarter, outperforming market expectations (11.8%).

Analyzing the reasons for the change in SMIC's gross margin this quarter by breaking down the cost structure of the company:

Gross Margin per Wafer = Revenue per Wafer - Fixed Cost per Wafer - Variable Cost per Wafer

Revenue per Wafer: SMIC's revenue per wafer this quarter (equivalent to 8 inches) was $975, a decrease of $27 per wafer compared to the previous quarter.

Fixed Cost per Wafer (Depreciation and Amortization): The fixed cost per wafer this quarter (equivalent to 8 inches) was $351, a decrease of $8 per wafer compared to the previous quarter.

Variable Cost per Wafer (Other Manufacturing Expenses): The variable cost per wafer this quarter (equivalent to 8 inches) was $490, an increase of $12 per wafer compared to the previous quarter.

Gross Margin per Wafer: SMIC's gross margin per wafer this quarter (equivalent to 8 inches) was $134, a decrease of $31 per wafer compared to the previous quarter.

Through the cost breakdown, it was found that SMIC's gross margin declined compared to the previous quarter, mainly due to the decrease in unit revenue this quarter. Considering the current inventory and capital expenditure situation, the company's gross margin is expected to remain relatively low.

Looking ahead to the second quarter of 2024, SMIC has provided a gross margin guidance of 9-11%, below market expectations (11.85%). Dolphin believes this is mainly due to two reasons: 1) high inventory, which will continue to suppress the improvement of gross margin; 2) the company's high capital expenditure, which will continue to increase depreciation and amortization expenses.

Core Indicator 3: Capacity Utilization Rate

The capacity utilization rate indicator not only reflects SMIC's quarterly operating conditions, but also reflects the overall trend of the wafer manufacturing industry. With the semiconductor industry relatively sluggish, adjustments in downstream manufacturers' orders will directly affect the capacity utilization rate of chip manufacturers.

In the first quarter of 2024, SMIC's capacity utilization rate was 80.8%. Although the company's capacity utilization rate is still low this quarter, it has shown some improvement. Dolphin believes that with some downstream recovery, driving continued increase in shipments, the capacity utilization rate is expected to return to 80%. Looking at the growth guidance for the next quarter, the company's capacity utilization rate is expected to continue to improve.

II. Business Perspective on SMIC After looking at the three core indicators, let's take a comprehensive look at the quarterly business situation of SMIC with Dolphin and everyone:

2.1 Various downstream markets

In this quarter, SMIC's revenue from the smartphone business accounted for 31.2%, continuing to rise, and was the main source of revenue growth for the company this quarter. This was mainly driven by the increase in shipments from downstream Android customers. In addition, the consumer electronics business also showed a significant recovery.

The company has segmented its past other businesses, with the computer and tablet business accounting for 17.5%, and the industrial and automotive business accounting for a lower proportion of 7.2%, both experiencing varying degrees of decline.

There are growth and decline in various businesses, and the revenue growth this quarter is mainly influenced by structural factors in the business.

2.2 Various wafer sizes

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

In this quarter, SMIC's revenue from 12-inch wafers continued to increase, reaching 75.6%. Specifically, looking at the proportion of the two sizes and the company's revenue, the revenue from 12-inch chips in this quarter increased by 6.3% compared to the previous quarter, while the revenue from 8-inch chips decreased by 1.4%.

2.3 Regional distribution

SMIC has re-adjusted the criteria for regional revenue distribution from the original "North America/ Mainland China and Hong Kong/ Europe and Asia" to the current "China Region/ US Region/ Europe-Asia Region". Due to this adjustment, there are slight differences in the data.

Looking at the regional revenue for this quarter, the revenue from the China Region continues to maintain around 80%, with the domestic market being the company's main source of revenue. The increase in shipments from domestic Android customers is the main driver of growth for the company this quarter.

3. Operating data for SMIC

3.1 Operating expenses: Expenses remain stable

From the perspective of operating expenses, SMIC's operating expenses this quarter were $237 million, showing a slight increase, mainly due to a decrease in other operating income this quarter.

Breaking down the operating expenses for this quarter, research and development expenses were $188 million, general and administrative expenses were $116 million, and sales and marketing expenses were $9 million, with all expenses remaining relatively stable

3.2 Operating Indicators: Inventory Remains High

From the perspective of operating indicators, the main observations are made on the company's inventory and accounts receivable:

① SMIC's inventory this quarter is $2.768 billion, an increase of 1.2% compared to the previous quarter;

② SMIC's accounts receivable this quarter is $1.078 billion, a decrease of 7.9% compared to the previous quarter.

③ Combining the relationship between inventory & accounts receivable and revenue in the balance sheet, this quarter's inventory/revenue and accounts receivable/revenue ratios are 158% and 62% respectively. From the perspective of operating indicators, SMIC's inventory remains high, continuing to suppress the company's gross profit margin recovery.

Combining the company's inventory and capacity utilization data, the trend of the company can be seen. In the first quarter of 2022, the company's capacity utilization rate was still close to full load. With the continuous increase in the company's inventory since the first quarter of 2022, the company's capacity utilization rate began to loosen from the second quarter onwards. Therefore, considering the current inventory situation, Dolphin Jun expects that although the capacity utilization rate in the second quarter of 2024 will increase due to demand-side factors, it will still remain relatively low.

3.3 EBITDA Indicator: Decline

From the perspective of EBITDA, SMIC's EBITDA before interest, taxes, depreciation, and amortization this quarter is $0.887 billion, continuing to decline.

Breaking down the indicators, SMIC's EBITDA mainly comes from the release of operating profit and depreciation and amortization. The decline this quarter is mainly due to the decrease in profit (Dolphin Jun believes it is mainly due to the continued decline in gross profit margin this quarter). The profit margin (EBITDA) for this quarter has fallen to 50.7%. Due to the heavy asset nature of the manufacturing industry, most of the company's profits are eroded by depreciation and amortization.

End of Content

Dolphin Research on SMIC Historical Articles:

Earnings Season

February 7, 2024 Conference Call "Shuffling of Mature Processes, Takes 4-5 Years (SMIC 4Q23 Conference Call)"

February 6, 2024 Earnings Review "SMIC: Countercyclical Expansion, Leading to Collapse"2023 年 11 月 10 日电话会《W-shaped trend, recovery postponed for a year (SMIC 3Q23 conference call)》

2023 年 11 月 10 日财报点评《SMIC: Long cycle, waiting for the east wind)》

2023 年 8 月 11 日电话会《Increment of mobile phones, unexpectedly from "trade-in"? (SMIC 2Q23 conference call)》

2023 年 8 月 11 日财报点评《"Sparse" SMIC: How long to wait for recovery?》

2023 年 5 月 12 日电话会《12-inch urgent orders, semiconductor structural recovery begins (SMIC 23Q1 conference call)》

2023 年 5 月 11 日财报点评《SMIC: Chip cycle cannot hide the alpha light》

2023 年 2 月 10 日电话会《High depreciation crushes gross margin, improvement depends on the second half of the year (SMIC 22Q4 conference call summary)》

2023 年 2 月 10 日财报点评《SMIC: Visible decline, but is bad good now?》

2022 年 11 月 11 日电话会《Even though semiconductors are declining, capital expenditures are not reduced (SMIC 22Q3 conference call)》

2022 年 11 月 11 日财报点评《SMIC: Long-term faith, can't escape the "cycle curse"》

2022 年 8 月 12 日《Semiconductors enter a downturn, how will SMIC respond? (22Q2 conference call summary)》

2022 年 8 月 11 日《Prices can't rise anymore, SMIC resists the "cycle robbery"》2022 年 5 月 13 日电话会《 Limited impact of the epidemic, semiconductor presents structural shortages (Summary of SMIC conference call)》

2022 年 5 月 12 日财报点评《 Epidemic kneels, market kneels? SMIC's performance does not "kneel"》

2022 年 2 月 11 日电话会《 Alpha beyond industry price increases, SMIC's expansion in production continues》

2022 年 2 月 10 日财报点评《 SMIC: Continuous "rise" in voices, performance continues to be strong | Reading financial reports》

2021 年 11 月 12 日电话会《 After exceeding expectations, why did SMIC's management face a big drop?》

2021 年 11 月 11 日财报点评《 Stop questioning whether the cycle has peaked, SMIC is still thriving!》

2021 年 8 月 6 日电话会《 After SMIC's 21Q2 financial report, how does the management view it?》

2021 年 8 月 5 日财报点评《 SMIC: The rising Chinese "chip" force》

In-depth

2022 年 12 月 29 日《 Semiconductor avalanche? Real resilience only comes after the most brutal decline》

2022 年 6 月 24 日 Industry in-depth《 Canceling orders, canceling orders, canceling orders, is the semiconductor really about to "change"?》

2021 年 7 月 16 日 Company in-depth《 SMIC (Part 2): The underestimated Chinese "chip"》

2021 年 7 月 9 日 Company in-depth《 SMIC (Part 1): Discussing the strategy of the leading "chip" company》Live Broadcast

May 13, 2022 " SMIC (00981.HK) 2022 First Quarter Earnings Conference Call "

February 11, 2022 " SMIC (00981.HK) 2021 Fourth Quarter Earnings Conference Call "

November 12, 2021 " SMIC (00981.HK) 2021 Third Quarter Earnings Conference Call "

August 6, 2021 " SMIC (00981.HK) 2021 Second Quarter Earnings Conference Call "

May 14, 2021 " SMIC (00981.HK) 2021 First Quarter Earnings Conference Call "

Risk disclosure and statement in this article: Dolphin Research Disclaimer and General Disclosure