SMIC: Full-year revenue growth expected to exceed industry average (24Q1 conference call)

SMIC International (0981.HK/688981.SH) announced its first quarter financial report for 2024 on the evening of May 9, 2024, after the Hong Kong stock market closed (as of March 2024). The key points from the conference call are as follows:

For a detailed interpretation of SMIC International's 2024 first quarter financial report, please refer to " SMIC International: Emerging from a Long Downturn "

I. $ SMIC(00981.HK) Financial Report Highlights:

II. $ SMIC(688981.SH) Detailed Content of the Financial Report Conference Call

2.1. Key Points from Management's Statements:

1. Operational Aspects:

① Industry Trends: The industry is in a recovery phase, with global and domestic customers increasing their willingness to stock up to cope with market uncertainties. Domestic customers are pulling in shipments early to gain market share, while foreign customers are increasing inventory due to geopolitical factors.

② Strategic Focus: Management plans to reduce costs, optimize management mechanisms, enhance production capacity and technological leadership, and maintain the company's leading position in intense market competition. The company is focusing on stabilizing production capacity and controlling costs to address future market challenges.

③ The company is currently in a critical period of capacity construction and increasing market share, with negative free cash flow. Key funds are being used for capacity construction and research and development activities.

④ Dividend Policy: The company has decided not to distribute profits for the year 2023, prioritizing core business development to enhance the company's core competitiveness and market position.

⑤ Financial Guidance: Sales revenue in the second quarter is expected to increase by 5% to 7% on a quarter-on-quarter basis, with a gross margin expected to be between 9% and 11%. The annual target is to achieve sales growth exceeding the industry average, with prices fluctuating with the market, ongoing depreciation pressure, and depreciation pressure increasing with capacity release.

2.2. Q&A Analyst Interactions

Q: Can you elaborate more on the impact of changes in product mix on ASP?

A: In fact, you are asking about two aspects: first, the price trend of the product mix, and the future price trends over the next few quarters. Currently, we see a situation where, especially in the international market, demand exceeds supply, particularly for 12-inch productsDespite the urgent orders, prices have remained stable. However, we are also facing price competition within the industry. Many strategic customers may choose to abandon orders, leading to a decrease in market share. Therefore, we must collaborate with customers to maintain market share.

Q: Regarding the decline in prices, will it slow down in the coming quarters, or will the competition remain fierce?

A: As for price changes, the prices of most products have not decreased since February. However, in the standard product market, we are facing competitive pressure and must collaborate with strategic customers to maintain our share. Except for the 12-inch products in short supply, prices of other products have been relatively stable since February, while the 8-inch product market remains sluggish, and is expected to recover only after mid-year. Although the price of 12-inch products is stable, continuous development of similar products by other manufacturers may bring competitive pressure, leading to price reductions. However, these standard products do not occupy the entire market share, so the impact of price reductions will be diluted by the stable prices of other products. Overall, the average selling price in the second quarter may slightly decrease, but the impact is limited.

Q: Can you provide a detailed overview of the product portfolio, specifically which chips are included in consumer products and which customers have significantly increased their market share in this market?

A: We have observed three market factors. Firstly, the recovery of the international consumer market, with old products sold out and demand increasing for new products, especially products like low-power Bluetooth and MCUs, leading to increased exports and industry demand growth. Secondly, this year is a sports year, so sales of products like set-top boxes and TVs have increased, not only in China but also internationally. Thirdly, in the smartphone market, especially Chinese manufacturers, are expanding production capacity this year, possibly to maintain or expand market share. Therefore, there is a shortage in the smartphone market, with every manufacturer striving to produce but still unable to meet demand.

Q: Which products contribute the most to the company's 28-nanometer technology? With which customers are we currently closely cooperating, mainly Chinese or overseas customers? When will the company start mass production of OLED driver ICs?

A: SMIC began large-scale production of 28-nanometer technology in 2014. The 28-nanometer technology has flexible platform iteration characteristics, with a new iteration released every two years. 28nm is gradually integrated into MCUs and driver ICs. SMIC's 28-nanometer capacity is already full, but with increasing market demand, the capacity is insufficient.

Q: You mentioned that the company's overall guidance is to achieve sales revenue growth exceeding the industry average. What is your view on the growth rate of the global semiconductor foundry industry? Additionally, regarding the "double march," does the recovery in the first and second quarters mean that we have passed the second march?

A: SMIC strictly stipulates that annual revenue growth will exceed the industry average for foundries. While we are leaders in the second tier, we also recognize the differences in business with the first tier. Therefore, we respect the forecasts of industry leaders, consider them, and then compare the remaining portion with the industry average for foundriesWe have been following the industry's development closely, striving to fulfill our commitments.

The first and second quarters of last year were the low point for SMIC, while the performance from the fourth quarter to the first and second quarters of this year has been better. Originally concerned that too many orders in the first half of the year might lead to a downturn in the second half, forming a "W" trend. However, due to capacity constraints, orders could not be fully executed, leading the trend to continue into the third quarter. Although the third quarter will not decline as expected, we remain cautiously optimistic about the second half of the year, striving to maintain growth.

Q: Regarding the issue of revenue structure, the consumer electronics sector has grown rapidly this quarter, while the performance of computers and tablets has been relatively weak. This may be due to the outstanding performance of certain consumer electronics products. It is uncertain whether this is a one-time or sustained trend that could lead to changes in customer structure. Also, I would like to know which platforms are currently at full capacity. If these platforms are at full capacity, where does the 5% to 7% quarter-on-quarter growth this quarter mainly come from in terms of new platforms?

A: The consumer market is gradually recovering, with orders for low-power Bluetooth, IoT, and MCUs returning one after another. Market forecasts at the end of last year showed that general MCU inventory could be maintained for 7 years, but by April and May of this year, these inventories were basically sold out, and the market began to pick up. After major sporting events like the Olympics end, demand for products such as set-top boxes and televisions will also rise, with the market expected to remain active in the third quarter. As for the fourth quarter, it may tend to stabilize. SMIC's growth is mainly constrained by capacity, such as the expansion of 12-inch capacity in Shenzhen and Beijing. Mobile-related products are the main growth drivers, including display drivers, fast charging, etc., but capacity shortages remain a limiting factor. With the expansion of capacity, SMIC's revenue will increase, but it will also bring pressure on gross margins, as additional capacity will increase depreciation costs.

Q: Can the outlook for the global supply and demand situation be understood as a time point where the supply chain has rebalanced after the disruptions of the past few years? Capital expenditures for the company performed well in the first quarter, is this trend likely to continue throughout the year?

A: We can see the situation in the third quarter, but we cannot guarantee that it will continue until the end of the year. Our goal is to work with customers to maintain this situation, ensuring that second-half revenue is not lower than the first half. As for the first question, it involves a popular practice globally known as "local for local." Each region is building its own capacity because purchase orders from last year and this year have already been issued, and the delivery of goods typically takes one to one and a half years. Although the announced investments were orders from a year ago, they will only be delivered this year. However, everyone is aware of the problem of oversupply and needs to wait for market growth to absorb capacity. If everyone expects only an 8% growth in the foundry industry this year, but actual capacity reaches 20%, there will be an oversupply situation. Therefore, next year may see reduced investments and adjustments to market demand. SMIC currently may hold a 5.5% market share in the foundry industry, increasing slightly every year, despite the increase in 12-inch capacity, but it has not led to oversupply in the entire industry because our customer base and R&D platform should support a higher market share. Therefore, the current capacity expansion we see has not resulted in oversupply or SMIC being unable to take ordersQ: I saw a third party making some predictions about the global semiconductor market, saying it could reach $1 trillion by 2030. From your perspective as a professional, how much do you agree with this number?

A: I agree with this number because with the emergence of new technologies such as artificial intelligence, the global semiconductor market is experiencing significant growth demand. Developments in areas like generative artificial intelligence will bring about a large amount of new demand. We are currently seeing phenomena such as the need for larger memory in low-end smartphones, indicating an increasing demand for semiconductor products. However, this growth is uneven, with different companies and regions having varying market shares. Therefore, we must be aware of the imbalance between market supply and demand. Some regions may face supply shortages, while others may have excess capacity. In this scenario, strategic partnerships with customers, future planning, and research and development investment become particularly important, and simply pursuing increased production volume is not the most critical factor.

Q: You mentioned earlier about the figure of approximately 35,000 pieces this year. Do you think this growth rate will be maintained in the coming years?

A: Growth mainly depends on the supply chain situation and whether other companies are also urgently purchasing equipment. The timing of equipment delivery is not precise, and we expect to spend $7.5 billion this year. KPI refers to the time it takes for engineering completion and equipment arrival at SMIC, not the purchase orders already issued, so 80% to 85% of most companies' KPIs are used for equipment purchases. To calculate the total annual growth amount, you can divide the equipment input required for every 10,000 pieces by every million dollars. This is a basic algorithm, so in analysis, attention should be paid to the actual amount of equipment received by the company, not the order quantity.

Q: I would like to understand the situation of our capacity expansion and depreciation this year. Specifically, how much is the depreciation expected to increase in the second quarter compared to the first quarter?

A: We have already mentioned the expected annual depreciation at the last earnings conference, which is roughly expected to increase by about 2-3%. For the second quarter, with the increase in capacity construction and additional equipment, depreciation is expected to increase slightly compared to the first quarter.

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