SMIC: Spreading its wings against the wind, delivering satisfying guidance

SMIC International (0981.HK/688981.SH) announced its 2024 second-quarter financial report on the evening of August 8, 2024, Beijing time, with the following key points:

1. Overall Performance: Revenue & Gross Margin, Significantly Exceeding Expectations. SMIC International achieved revenue of $1.901 billion in this quarter, an increase of 8.6% compared to the previous quarter, surpassing the upper limit of the guidance range (5-7% increase), and exceeding market expectations ($1.843 billion). The company's gross margin for this quarter was 13.9%, surpassing the upper limit of the guidance range (9-11%), and better than the market consensus of 11.2%. Both figures exceeded market expectations, mainly driven by a significant increase in wafer shipments.

2. Detailed Analysis of Three Core Indicators: Revenue, Gross Margin, and Capacity Utilization Rate. On the revenue side, the increase in revenue in this quarter mainly came from the increase in shipments, while the average selling price of products slightly declined. This was mainly due to the significant recovery in demand for 8-inch wafers in this quarter, leading to a structural decline in prices. Due to the structural recovery of some downstream businesses, inventory turnover was significant this quarter, and there was a noticeable improvement in capacity utilization rate.

3. Business Progress: Consumer Electronics and Smartphones are the Main Growth Drivers. The company benefited from the recovery in the smartphone market, leading to an increase in revenue from the smartphone business. Consumer electronics business became the largest source of revenue for the company this quarter, mainly driven by increased demand for 8-inch wafers from customers. The revenue from the China region still accounts for 80% this quarter, with the company's revenue mainly coming from domestic customers.

4. Guidance for the Next Quarter: SMIC International expects a 13-15% increase in revenue for the third quarter of 2024, corresponding to $2.15-2.19 billion, significantly exceeding market expectations ($1.87 billion); gross margin of 18-20%, also well above market expectations (12.08%).

Dolphin's View:

Overall, this financial report is very good. Both revenue and gross margin for this quarter exceeded market expectations. Although the wafer price slightly decreased this quarter, the company's wafer shipments significantly increased. The decline in product prices is mainly due to the structural impact of increased demand for lower-priced 8-inch wafers.

Compared to this financial report, the most surprising aspect is the company's quarterly guidance. SMIC International expects a 13-15% increase in revenue for the next quarter, corresponding to $2.15-2.19 billion (market expectation $1.87 billion); Gross margin of 18-20% (market expectation 12.08%) ****, both core data significantly exceeded market expectations. The company's inventory turnover has started to become apparent this quarter, and capacity utilization is gradually increasing **. The second half of the year will usher in the peak season for electronic products, and both 8-inch wafers and 12-inch wafers will continue to see improvements.

Although there is no significant AI revenue in the current business of SMIC, the company's stock price does not reflect too much related expectations. The overall performance of the company will be more closely related to the semiconductor industry and domestic semiconductor demand.

From ASML's financial report and the company's capital expenditure, even in a period of low performance, the company continues to maintain a countercyclical expansion pace. If downstream demand shows a significant improvement, with the release of new production capacity, the company's performance is expected to reach a new level. The quarterly guidance provided by the company this time will further strengthen the market's confidence in the company.

Here is a detailed analysis of SMIC by Dolphin:

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

Core Indicator 1: Revenue

In the second quarter of 2024, SMIC achieved revenue of $1.901 billion, an increase of 8.6% compared to the previous quarter, exceeding the upper limit of the guidance range (a quarter-on-quarter growth of 5-7%). The company's shipment volume continued to rise this quarter, while prices showed a slight decline.

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

1) Quantity dimension, SMIC's wafer shipments this quarter (equivalent to 8-inch) reached 2112 thousand pieces, an increase of 17.7% quarter-on-quarter;

2) Price dimension, SMIC's revenue per wafer this quarter (equivalent to 8-inch) was $900, a decrease of 7.7% quarter-on-quarter.

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

With an increase in downstream customer demand, $SMIC(688981.SH) saw some improvement in performance this quarter, but it remains relatively low. Even in a period of low performance, the company continues to maintain high capital expenditure. The company's capital expenditure this quarter was $2.251 billion, a 30% year-on-year increase.

Looking at ASML's financial report, mainland China continues to make significant purchases of ArF lithography systems, with the company contributing a significant share.

Looking ahead to the third quarter of 2024, SMIC has provided a quarterly guidance of a 13-15% quarter-on-quarter revenue growth, corresponding to an expected revenue of $2.15-2.19 billion for the next quarter (significantly exceeding the market's expectation of $1.87 billion). Dolphin believes that the pull from downstream customers directly drives the company's shipment volume increase. With the boost from the peak season of electronic products in the second half of the year, the company's revenue end will continue to improve.

Core Indicator 2: Gross Margin

In the second quarter of 2024, SMIC's gross margin was 13.9%, up 0.2 percentage points from the previous quarter, surpassing the market consensus expectation (11.2%) and exceeding the upper limit of the guidance range (9-11%).

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

Gross Profit per Wafer = Wafer Revenue - Fixed Costs per Wafer - Variable Costs per Wafer

1) Wafer Revenue: SMIC's wafer revenue this quarter (equivalent to 8 inches) was $900, down $75 per wafer from the previous quarter.

2) Fixed Costs per Wafer (Depreciation and Amortization): The fixed costs per wafer this quarter (equivalent to 8 inches) were $332, down $19 per wafer from the previous quarter.

3) Variable Costs per Wafer (Other Manufacturing Expenses): The variable costs per wafer this quarter (equivalent to 8 inches) were $443, down $48 per wafer from the previous quarter.

4) Gross Profit per Wafer: SMIC's gross profit per wafer this quarter (equivalent to 8 inches) was $126, a decrease of $8 per wafer from the previous quarter.

Through cost breakdown, it is found that although the average selling price of SMIC's products has decreased this quarter, unit costs have also declined, resulting in a slight increase in the company's gross margin. Dolphin believes that with the increase in the company's shipment volume, some cost items have been diluted, which has a positive effect on the company's gross margin.

Looking ahead to the third quarter of 2024, SMIC continues to provide a quarterly gross margin guidance of 18-20%, significantly exceeding the market's expectation (12.08%). With a significant increase in shipment volume, the unit costs of the company's fixed costs and other items have been diluted. The increase in capacity utilization rate further drives the company's gross margin recovery.

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. Today, with the relative downturn in semiconductors, adjustments in downstream manufacturers' orders will directly affect the capacity utilization rate of chip manufacturers.

In the second quarter of 2024, SMIC's capacity utilization rate was 85.2%. This quarter, the company's capacity utilization rate has slightly rebounded but has not yet returned to a relatively full position. Dolphin believes that some customers have stocking needs, driving the continued increase in the company's shipment volume. Looking at the growth guidance for the next quarter, the company's capacity utilization rate is expected to continue to increase.

II. Business Segments of SMIC

After looking at the three core indicators, let's take a comprehensive look at SMIC's quarterly business situation together:

2.1 Various Downstream Markets

In this quarter, the revenue share of SMIC's smartphone business accounted for 32%, showing an increase in share. The shipment volume of smartphones in this quarter increased by 8% year-on-year, and the industry's recovery drove the continued improvement of the company's smartphone performance. The consumer electronics business accounted for 35.6% this quarter, becoming the company's largest source of revenue, mainly benefiting from the demand for stocking by some downstream customers.

The company has segmented its past other businesses, with the computer and tablet business accounting for 13.3%, and the industrial and automotive business accounting for a relatively low 8.1%. The company's computer and tablet business still remains relatively sluggish.

Overall, the growth in revenue this quarter is mainly driven by the smartphone and consumer electronics businesses.

2.2 Various Wafer Sizes

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

This quarter, the revenue share of 12-inch wafers at SMIC has fallen slightly to 73.6%. Looking at the specific proportions of the two sizes and the company's revenue, the revenue of 12-inch chips at SMIC increased by 5.8% quarter-on-quarter, while the revenue of 8-inch chips increased by 17.5% quarter-on-quarter. In fact, the revenue of both wafer sizes is growing. It's just that due to the significant recovery in demand for 8-inch wafers this quarter, the revenue share of 8-inch wafers has increased.

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 the adjustment in criteria, there are slight differences in the data.

Looking at the regional revenue for this quarter, the revenue from the China region continues to account for about 80%, with the domestic market being the company's main source of revenue. The growth of the company this quarter mainly comes from the increase in shipments of 8-inch wafer products to customers in the US region.

3. Financial Indicators of SMIC's Operation

3.1 Operating Expenses: Overall Stability on the Expense Side

From the perspective of operating expenses, SMIC's operating expenses this quarter were $178 million, a slight decrease, mainly due to an increase in other operating income this quarter.

Breaking down the operating expenses for this quarter, research and development expenses were $181 million, general and administrative expenses were $161 million, and sales and marketing expenses were $10 million. The increase in general and administrative expenses was mainly due to the increase in expenses related to the opening of new factories in the second quarter, while other expenses remained relatively stable.

3.2 Operating Indicators: Inventory Clearance Becomes Evident

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

① SMIC's inventory this quarter was $2.74 billion, a 1% decrease compared to the previous quarter;

② SMIC's accounts receivable this quarter was $1.235 billion, a 14.6% increase compared to the previous quarter.

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 144% and 65% respectively. From the perspective of operational indicators, SMIC's inventory has clearly started to decline from a high level, driving the company's gross profit margin to rise.

By combining the company's inventory and capacity utilization data, one can basically see the company's trend. When the inventory/revenue ratio exceeds 100% by the end of 2022 and continues to rise, the company clearly lowers its capacity utilization rate. As downstream customer demand picks up, inventory starts to clear, and the company gradually increases its capacity utilization rate.

Therefore, based on the current inventory situation, it is expected that SMIC's capacity utilization rate in the third quarter of 2024 will further increase, but it will still not reach full capacity.

3.3 EBITDA Indicator: Starting to Rebound

From the EBITDA perspective, SMIC's EBITDA before interest, taxes, depreciation, and amortization was $1.056 billion this quarter, showing a slight rebound.

Breaking down the indicator, SMIC's EBITDA mainly comes from the release of operating profit and depreciation and amortization. The rebound this quarter is mainly due to the increase in profit (increased shipment volume driving the company's performance improvement). The profit margin (EBITDA) for this quarter has increased to 55.5%. Due to the heavy asset nature of the manufacturing industry, most of the company's profits are eroded by depreciation and amortization

Dolphin Research on SMIC International Historical Articles:

Financial Report Season

May 10, 2024 Conference Call "SMIC International: Full-year Revenue Growth to Exceed Industry Average (24Q1 Conference Call)"

May 9, 2024 Financial Report Review "SMIC International: Long Valley, Finally Seeing the Light at the End"

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

February 6, 2024 Financial Report Review "SMIC International: Counter-cyclical Expansion, Leading to Collapse Guidance"

November 10, 2023 Conference Call "W-Shaped Trend, Recovery Postponed by a Year (SMIC International 3Q23 Conference Call)"

November 10, 2023 Financial Report Review "SMIC International: Long Cycle, Waiting for the East Wind"

August 11, 2023 Conference Call "Increment of Mobile Phones, Unexpectedly Coming from 'Trade-in' (SMIC International 2Q23 Conference Call)"

August 11, 2023 Financial Report Review "SMIC International in 'Sparse' State: How Long Until Recovery?"

May 12, 2023 Conference Call "12-inch Urgent Orders, Semiconductor Structural Recovery Begins (SMIC International 23Q1 Conference Call)"

May 11, 2023 Financial Report Review "SMIC International: Chip Cycle Can't Hide the Alpha Light"

February 10, 2023 Conference Call "High Depreciation Pressures Gross Margin, Improvement Depends on Second Half of the Year (SMIC 22Q4 Conference Call Summary)" 2023 February 10 Financial Report Review "SMIC: Visible Decline, But Is Now the Best Time?"

2022 November 11 Conference Call "Despite Semiconductor Downturn, Capital Expenditure Not Reduced (SMIC 22Q3 Conference Call)"

2022 November 11 Financial Report Review "SMIC: Long-term Belief, Can't Escape the 'Cycle Curse' Either"

2022 August 12 "Semiconductors Enter Downturn Cycle, How Will SMIC Respond? (22Q2 Conference Call Summary)"

2022 August 11 "[Price Increases Stalled, SMIC Resists the 'Cycle Robbery']](https://longbridgeapp.com/topics/3297694)"

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

2022 May 12 Financial Report Review "Epidemic Kneels, Market Kneels? SMIC's Performance Doesn't 'Kneel' Either"

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

2022 February 10 Financial Report Review "SMIC: 'Rise' Continues, Performance Continues to Shine | Reading Financial Reports"

2021 November 12 Conference Call "After Exceeding Expectations, Facing a Big Drop, What Did SMIC Management Discuss?"

2021 November 11 Financial Report Review "Stop Questioning Whether the Cycle Has Peaked, SMIC Still Going Strong!"

2021 August 6 Conference Call "[After SMIC's 21Q2 Financial Report, How Does Management View It?](https://longbridgeapp.com/topics/1010228? August 5, 2021 Financial Report Review "Rising Chinese 'Chip' Power"

In-depth

December 29, 2022 "Semiconductor Avalanche? Real Resilience Only After the Most Brutal Decline"

June 24, 2022 Industry In-depth "Cancellations, Cancellations, Cancellations, Is the Semiconductor Industry Really Going to 'Change'?"

July 16, 2021 Company In-depth "SMIC (Part 2): The Undervalued Chinese 'Chip'"

July 9, 2021 Company In-depth "SMIC (Part 1): Discussing the 'Chip' Strategy of the Leading Dragon"

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"

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