SMIC: The potential risk for next year is "increased volume without increased price" (24Q3 conference call)
Semiconductor Manufacturing International Corporation (SMIC) (0981.HK/688981.SH) released its third-quarter financial report for the fiscal year 2024 (ending September 2024) after the Hong Kong stock market closed on November 7, 2024 (Beijing time):
The following is a summary of the Q3 2024 earnings conference call for SMIC. For an interpretation of the financial report, please visit SMIC: Can it support the hopes of the whole village?
1. $SMIC(00981.HK) Core Financial Information Review:
2. Detailed Content of SMIC's Financial Report Conference Call
2.1 $SMIC(688981.SH) Executive Summary:
1）Business Progress
Shipment Volume and Product Structure
The shipment volume of 12-inch wafers increased, while the shipment volume of 8-inch wafers decreased, resulting in total shipments remaining basically flat quarter-on-quarter.
ASP increased quarter-on-quarter, mainly due to the rapid ramp-up of high-value-added 12-inch capacity and optimization of the product mix.
Capacity utilization rate increased by 5.2 percentage points quarter-on-quarter, reaching 90.4%, effectively diluting unit depreciation costs.
Regional Revenue Distribution
The proportion of revenue from Chinese customers increased by 6 percentage points to 86%
The Americas and Eurasia accounted for 11% and 3% respectively.
Service Type and Application Market Distribution
Service Type: Wafers accounted for 94%, other revenue accounted for 6%
- 12-inch wafers: Revenue proportion increased to 78.5%, mainly due to capacity nearing full load and rapid validation of new capacity.
- 8-inch wafers: Revenue proportion decreased to 21.5%, due to some orders being moved forward to the second quarter; strong demand for BCD (Bipolar CMOS-DMOS) platform boosted 8-inch utilization.
Application Market: Consumer Electronics: 43%; Smartphones: 25%; Computers and Tablets: 16%; Connectivity and Internet of Things (IoT): 8%; Industrial and Automotive: 8%
Performance Guidance
Plans to add 30,000 pieces/month of 12-inch capacity, but validation will take time; overall utilization rate and shipment volume are expected to decline quarter-on-quarter Enhancing mixed ASP through product portfolio optimization to ensure stable or slight revenue growth.
It is expected that the total monthly production capacity will reach approximately 950,000 8-inch equivalent wafers by the end of the year.
Financial Performance
Revenue and Profit
Revenue: USD 2.171 billion, a quarter-on-quarter increase of 14.2%.
Gross Margin: 20.5%, a quarter-on-quarter increase of 6.6 percentage points.
Operating Profit: USD 170 million.
EBITDA: USD 1.157 billion, with an EBITDA margin of 53.3%.
Net Profit attributable to the company: USD 149 million.
Cash Flow
Net cash flow from operating activities: USD 1.236 billion.
Net cash flow used in investing activities: USD 1.345 billion.
Net cash flow used in financing activities: USD 97 million.
Financial Guidance
Q4 Revenue: Expected to remain flat to grow by 2% quarter-on-quarter.
Q4 Gross Margin: Expected to be between 18% and 20%.
Full-year Revenue: Expected to be approximately USD 8 billion, a year-on-year increase of about 27%, outperforming the industry average growth level.
Full-year Gross Margin: Expected to be around 17%.
2.2 Q&A Analyst
Q: How do you view the industry cycle for next year, and in which product areas are the opportunities for local substitution mainly concentrated?
A: Based on this year's foundation, the outlook for next year is as follows: Through close communication with customers and their end customers, we expect the demand for Rev Wafer in the fields of smartphones, automotive manufacturing, and industrial applications to exceed this year, with AI-related demand expected to grow by over 10%. Excluding AI and HPC, the overall dollar growth rate is expected to be between 4% and 9%, not reaching double digits. Additionally, as multiple production capacities are gradually released, the supply-demand imbalance may ease, potentially leading to a certain degree of price reduction. Overall wafer shipments are expected to achieve double-digit growth, but revenue growth may remain in single digits.
From an industry perspective, the recovery is not yet complete, with the industrial and automotive sectors showing relatively weak performance. Recent announcements from major suppliers in Europe and the United States indicate significant market pressure. However, as inventory is gradually consumed, the market has expectations for recovery in the second half of next year. If the industrial and automotive sectors recover, overall performance may exceed current expectations. In the Chinese market, demand in the photovoltaic and battery sectors is significant, and after inventory consumption, it will bring benefits to SMIC and other peers.
In terms of application areas, among SMIC's five major business directions (smartphones, consumer electronics, wearables and IoT, industrial, and automotive), all areas except industrial and automotive are expected to achieve growth. Consumer applications remain the core contribution to the company's revenue, covering a wide range, with the exception of those clearly attributed to smartphones, all other consumer electronics fall within this category. Furthermore, although unit prices may decline due to easing market supply and demand, overall demand volume is still expected to grow, with multiple areas anticipated to maintain single-digit growth.
Regarding localization substitution, although the substitution speed is relatively slow, it has reached a certain proportion, and the incremental space is expected to be limited in the short term. Domestic terminal enterprises generally have an international perspective and still prefer the participation of international suppliers. In this context, the potential risk for next year is "increment without price increase," meaning that with stable sales prices, the risk of price compression increases
Q: How is the supply and demand situation in the current competitive environment? Has the trend of releasing new domestic production capacity slowed down? With the government's stricter review of new expansions, are small manufacturers facing more challenges? This year, market prices have adjusted; what is your outlook for next year's price environment? Where are the opportunities in the power device sector, especially against the backdrop of excess domestic IDM capacity, and how does SMIC position itself to seize opportunities?
A: Overall, we are closely monitoring the launch and release of new capacity projects in the industry. The projects currently under construction are mainly expansion plans announced in previous years or orders placed last year, with few new projects being initiated or announced. Most of this new capacity is gradually being implemented by listed companies, but given the current situation, the announcement of new projects in the foundry sector has significantly decreased, so we expect the number of new projects next year to further decline. This year, the increase in capacity has peaked; although there will still be an increase next year, the growth rate will be lower than this year. The overall industry is experiencing significant excess capacity, especially in the current macroeconomic environment where the global economy has not fully recovered, and the European economic situation remains sluggish. The last industry peak was in the third quarter of 2022, and it has yet to return to that level of prosperity. The current capacity utilization rate of comparable peers is about 70%, below the normal level of 80%, indicating a clear overall excess capacity. We expect limited industry recovery next year and will continue to optimize the development of end customers to maintain our responsiveness.
In the power device sector, there is a certain degree of excess capacity globally, and the Chinese market is no exception. However, from a segmented perspective, most of this excess capacity consists of old capacity built before 2000 or memory capacity originally intended for Moore's Law, which lacks the technical capability to meet current market demands for high-end power devices. For example, in the case of new energy vehicles, the demand from emerging automakers is rapidly changing; for instance, the popularity of 48V systems has made power line designs lighter and more efficient, which raises higher requirements for suppliers' quality control and process capabilities. Many existing excess capacities and traditional equipment cannot meet these demands.
In this context, SMIC's advantage lies in its strong process control capabilities and complete technology platform. For the high-end power device manufacturing demand that foreign companies are reluctant to invest in due to technical difficulties, we have the capability to undertake and expand capacity to meet market needs.
Q: With rapid capital expenditure release, how do you view the capital expenditure planning and capacity layout for 2025? Will the capacity for power devices rely on existing capacity or new factory construction?
A: SMIC has not announced any new project constructions at present; capital expenditure and capacity growth are based on previously planned projects, which include Shanghai, Beijing, Tianjin, Lingang, and Shenzhen, and are being gradually advanced according to the established timetable. This year, the new capacity exceeded 60,000 wafers, which is an increase compared to last year, but is basically in line with the average annual increase of 50,000 wafers over the past two years. The overall pace of capacity expansion has not undergone significant changes.
The capacity for power devices mainly relies on existing resources, achieved through adjustments in logic circuit capacity. Some logic circuit capacity has been transferred to the high-end power device sector. SMIC fully utilizes its technological accumulation in BCD and CIS fields, applying relevant experience to the manufacturing of power ICs. At the same time, most equipment can be shared, requiring only a small amount of additional dedicated equipment, such as that used for back-end processes, while the remaining equipment comes from existing plans, so there has been no overall increase in investment
Q: What is the company's vision for the power device business in the future? Is there a goal to become the industry leader domestically? What scale do you hope to achieve in two to three years?
A: SMIC's focus in the power device field remains on the continuous advancement of Moore's Law, concentrating R&D and capital expenditures on technologies related to logic circuits. At the same time, in the packaging and testing phase, the company tends to collaborate with external enterprises. Through communication with existing customers and their downstream clients, we have realized that there are shortcomings in certain segments of the current supply chain, which sometimes require multiple suppliers to participate together to meet demand, thereby increasing passivity to some extent. To enhance competitiveness, the company is committed to building a comprehensive product platform to meet the diverse needs of customers in power device production.
In terms of scale planning, SMIC currently focuses on foreign customers, especially in the industrial and power sectors. Many foreign customers originally relied on overseas supply chains, but with the improvement of domestic manufacturing capabilities, SMIC hopes to shift some production demands to domestic sources by providing high-quality manufacturing and resource support. This trend aligns with foreign customers' expectations for supply chain diversification. It is expected that in the coming years, the Chinese market will undertake about one-third of the global demand for power devices, and SMIC plans to establish corresponding production capacity for this market to meet the needs of domestic and foreign customers while achieving localized production transformation.
Q: With the rapid procurement of equipment, this year has seen strong domestic equipment purchasing momentum. Will this drive a significant increase in capacity? Or will capacity release remain stable due to geopolitical factors?
A: Major domestic equipment companies have been listed one after another, and their quarterly order forecasts and public information reflect the dynamics of market demand. For example, ASML from the Netherlands has disclosed the amount of equipment purchased by China this year and the potential downward trend of future orders. Overall, market share cannot be significantly increased in a short period. Each order typically requires a strict binding process, and if production is to be transferred from one region to another, it usually takes a cycle of 24 months, even if accelerated, it still requires at least 12 months. Additionally, for mature processes, there is no need for excessive strategic reserves, so order transfers do not always lead to significant expansion of foundry capacity.
Some capacity may be more related to IDM or memory rather than pure foundry areas. Considering this background, it is expected that in 2024, SMIC's capacity increment will be slightly lower than in 2023, while capacity growth in other areas may maintain a level similar to this year, without significant increases.
Q: Given the high load of mature processes domestically, what are the company's plans for future capacity expansion in the 28-55nm range?
A: SMIC's capacity expansion strategy differs from traditional practices. The traditional expansion model typically follows Moore's Law, such as building a new factory every 18 months during the 40nm logic process period. However, SMIC's expansion approach places greater emphasis on flexibly responding to market demand. We mainly undertake the second wave of demand for logic processes, including mobile devices, the Internet of Things, embedded storage, BCD, HV, CIS, and other fields, while expanding platforms for ultra-low power RF, connectivity, MCU, and more SMIC is committed to building multi-node and multi-platform capabilities when constructing new production capacity to meet a wide range of market demands. Each process node covers at least three sub-sectors and establishes multiple product platforms. For example, in the new expansion projects in Shanghai Lingang, Shenzhen, and Beijing, the company has equipped capabilities that support advanced processes and diversified platforms, ensuring coverage of diverse needs from domestic and international customers. At the same time, we provide comprehensive support for multiple market sectors through a thorough platform layout.
Q: Has the demand from overseas customers been affected in the third quarter? Is there any demand overdraw situation?
A: SMIC's overall capacity and revenue increased in the third quarter, mainly due to the production of new capacity. Some overseas customers locked in prices and pulled goods in advance based on long-term supply agreements (LTA) to avoid potential policy changes affecting the supply chain, which led to demand being brought forward in the third quarter. However, there are no similar issues in the fourth quarter, and customer inventory can meet the annual demand.
In absolute terms, overseas customer demand has remained stable, with no significant fluctuations. However, some European companies' financial reports show a significant decline in their business due to market conditions. Some customers rapidly increased demand when signing LTA agreements, but as these agreements expire (such as those ending in the 2022-2024 period), demand has receded. This has a limited impact on revenue, as the proportion of LTA agreements in SMIC's customer structure is relatively small, and most of these companies are growth-oriented, with lower demand volatility.
Looking ahead, SMIC expects no significant fluctuations in revenue in the first quarter of next year, and overall business performance will be relatively stable.
Q: From the perspective of AI innovation, have you observed a large-scale upturn trend and opportunities in the domestic industry? TSMC has increased its investment in COWOS technology; are there similar opportunities domestically?
A: The semiconductor industry is revitalized by the development of AI, which is encouraging news. The growth in AI-related demand provides strong support for the industry, indirectly benefiting many sectors. Currently, some production capacity may be prioritized for AI-related applications, especially in high-performance computing (HPC) and packaging testing, which may lead to tight capacity in other application areas.
The domestic market has taken different paths in AI innovation. For example, in the AIoT sector, smart TVs achieve automatic picture quality optimization through AI, and air conditioners use AI to detect user locations to enhance the experience. In these applications, products with neural processing units (NPU) are gradually increasing, and even some non-industry-leading companies are performing well in these niche areas.
The development of AI is not limited to data centers or large models like ChatGPT; it has also created numerous innovative opportunities in the Internet of Things and consumer electronics, bringing broad growth momentum to the global semiconductor industry.
Q: With the growth of BCD demand, the utilization rate of 8-inch capacity has significantly increased. Domestic companies using BCD technology are gradually emerging from a downturn. What is the outlook for the BCD industry's prosperity and competitive environment in the future?
A: The improvement in technology has driven a significant increase in demand, especially in the AIoT and home artificial intelligence fields, where these applications have raised higher requirements for energy management. In addition, the rapid development of data centers has further stimulated the demand for BCD technology. In the future, as the quality of energy management continues to improve, the BCD industry is expected to maintain a good development trend and demonstrate strong market potential in multiple fields.
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