SMIC: With "national subsidies" in hand, can it withstand the cycle?

SMIC (0981.HK/688981.SH) released its fourth quarter financial report for the fiscal year 2024 (ending December 2024) after the Hong Kong stock market closed on February 10, 2025, Beijing time. The key points are as follows:

1. Overall performance: Revenue & gross margin both met expectations. Semiconductor Manufacturing International Corporation achieved revenue of USD 2.207 billion this quarter, a quarter-on-quarter increase of 1.7, which is in line with the guidance range (quarter-on-quarter growth of 0-2%) and meets market expectations (USD 2.197 billion). The company's gross margin this quarter is 22.6%, exceeding the upper limit of the guidance range (18-20%) and better than the market consensus expectation (19.1%). The company's performance growth this quarter was mainly driven by domestic demand in consumer electronics and PCs.

2. Detailed observation of three core indicators: revenue, gross margin, and capacity utilization rate. On the revenue side, through volume and price breakdown, $SMIC(00981.HK) the growth in revenue this quarter was mainly driven by the increase in product average prices, while shipment volume saw a quarter-on-quarter decline. The company's 12-inch wafer shipment proportion continued to increase this quarter, structurally driving up the product average price. The company's product shipment volume declined by 6.1% quarter-on-quarter, while the product average price increased by 8.3% quarter-on-quarter.

3. Business progress: Consumer electronics and PCs are the main sources of growth. $SMIC(688981.SH) this quarter, the consumer electronics business accounted for 40.2%, making it the company's largest source of revenue. The revenue proportion from PCs also increased to 19.1% this quarter. Both of these businesses were mainly driven by subsidy policies, improving demand. The company's revenue proportion from the Chinese market reached a new high this quarter, at 89%. Overall, the recent improvement in the company's operations was mainly driven by increased demand from domestic consumer electronics and PC customers. The increase in domestic demand has provided assurance for the company's performance improvement.

Domestic consumer electronics customers are the main driving force behind the company's growth this quarter, and the company continues to benefit from the increase in domestic demand.

4. Guidance for the next quarter: Semiconductor Manufacturing International Corporation expects a quarter-on-quarter revenue growth of 6-8% in the first quarter of 2025, corresponding to USD 2.34-2.38 billion, better than the market consensus expectation (USD 2.13 billion); gross margin is expected to be 19-21%, better than the market expectation (18.4%).

Dolphin's overall view: SMIC's latest financial report is quite good.

The company's revenue, gross margin, and other core data have improved this quarter, showing a stable and positive operational trend overall. In addition, the guidance for the next quarter, with a revenue growth of 6-8% quarter-on-quarter and a gross margin performance of 19-21%, has exceeded market expectations. The revenue growth reflects the demand situation. The company's overall gross margin has stabilized at around 20%.

Looking closely at each business situation, there are different implications:

1) Demand for 12-inch wafers is better, while 8-inch demand remains weak: The company's revenue from 12-inch wafers has increased for eight consecutive quarters, while revenue from 8-inch wafers is still at the bottom. Affected by demand, the proportion of 12-inch wafers has risen to 80%.

2) Consumer electronics and PC business perform well: Starting from the second half of 2024, both businesses have shown significant recovery. This is mainly due to the introduction of subsidy policies and the increase in domestic demand, making these two businesses the main drivers of the company's growth. With the implementation of mobile phone subsidies, Dolphin expects the company's mobile phone business to improve in 2025.

3) Revenue from the Chinese market accounts for nearly 90%: Although the traditional semiconductor industry has not yet shown significant improvement, the company has gained more domestic demand due to semiconductor frictions, and revenue from the Chinese market is gradually increasing.

Overall, although the company's business has not yet fully improved, the demand in some sectors is driving the improvement in the company's operations. In addition, the intensification of domestic subsidy policies in 2025 is expected to further stimulate downstream replacement demand. Considering the company's good guidance for the next quarter, its current operations are still stable and positive.

As for the recent rise in the company's stock price, Dolphin believes it is mainly catalyzed by two events: 1) After the implementation of national subsidies, domestic mobile phone sales have performed well recently, which is expected to drive improvement in the company's mobile phone business; 2) The emergence of Deepseek has brought opportunities for cost reduction in AI models. Non-top-tier computing power also has the chance to penetrate the core AI industry chain, enhancing market expectations for the company's operations.

Moreover, Dolphin also believes that the continuous rise in SMIC's stock price is related to changes in market perception of the company. From the perspective of global wafer market share, apart from TSMC's continuous increase, only SMIC has shown stable growth. Among the top six companies, UMC's revenue size is closest to SMIC, but the two have significant differences: 1) UMC's market share is declining, while SMIC has improved; 2) SMIC benefits from domestic demand and order transfers; 3) SMIC has already developed the capability to enter 10nm and below technologies. Therefore, in terms of certainty and growth, SMIC currently outperforms UMC, and the market has given SMIC a relatively higher valuation.

With the support of domestic demand, the company's exposure to the semiconductor cycle has weakened. Revenue continues to grow, and the gross margin remains stable at around 20%. SMIC is gradually revealing its profitability, bringing more expectations to the market.

The following is a detailed analysis of SMIC by Dolphin:

I. Core Indicators of SMIC: Revenue, Gross Margin, and Capacity Utilization Rate

Core Indicator 1: Revenue

In the fourth quarter of 2024, SMIC achieved revenue of $2.207 billion, a quarter-on-quarter increase of 1.7%, in line with the guidance range (quarter-on-quarter growth of 0-2%). The company's shipment volume decreased quarter-on-quarter this quarter, while prices continued to rise significantly.

To analyze the revenue growth of SMIC this quarter from the dimensions of volume and price:

1) Volume Dimension: SMIC's wafer shipments (equivalent to 8-inch) reached 1,992 thousand pieces, a quarter-on-quarter decline of 6.1%;

2) Price Dimension: SMIC's single wafer revenue (equivalent to 8-inch) was $1,108, an increase of 8.3% quarter-on-quarter.

From the perspective of volume and price breakdown, the revenue recovery this quarter was mainly due to the increase in average product prices, while the company's product shipment volume saw a decline this quarter. The increase in the average product price this quarter was mainly due to the higher proportion of 12-inch product shipments, which structurally pushed up the company's average product price.

In addition, the company's capital expenditure increased to $1.66 billion this quarter, a quarter-on-quarter growth of 40.8%. This was influenced by seasonal factors at the end of the year. Additionally, due to export restrictions from Western countries, the company accelerated the import pace of certain equipment.

Looking ahead to the first quarter of 2025, SMIC provided a quarterly guidance of 6-8% revenue growth quarter-on-quarter, corresponding to $2.34-2.38 billion, better than the market consensus expectation (quarter-on-quarter decline to $2.13 billion). Driven by downstream demand for 12-inch wafers, the company's revenue continues to improve.

Core Indicator 2: Gross Margin

In the fourth quarter of 2024, SMIC's gross margin was 22.6%, a quarter-on-quarter increase of 2.1 percentage points, better than the market consensus expectation (19.1%), exceeding the upper limit of the guidance range (18-20%).

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

Single wafer gross margin = Single wafer revenue - Single fixed cost - Single variable cost

1) Single wafer revenue: SMIC's single wafer revenue (equivalent to 8-inch) was $1,108, an increase of $85 per wafer 2) Fixed Cost per Unit (Depreciation and Amortization): The fixed cost per unit (equivalent to 8-inch) for this quarter is $396, an increase of $72 per unit compared to the previous quarter.

3) Variable Cost per Unit (Other Manufacturing Expenses): The variable cost per unit (equivalent to 8-inch) for this quarter is $462, a decrease of $28 per unit compared to the previous quarter.

4) Gross Profit per Unit: The gross profit per unit for SMIC this quarter (equivalent to 8-inch) is $251, an increase of $41 per unit compared to the previous quarter.

By breaking down the costs, it is found that the main source of the company's gross profit margin growth this quarter comes from the increase in average product price. Although the company's unit fixed cost (depreciation and amortization) has increased this quarter, the company's unit variable cost has decreased, ultimately driving the increase in gross profit per unit this quarter.

The recent improvement in SMIC's gross profit margin is mainly benefited from the increase in shipment average price. Changes in shipment volume will also affect the company's unit cost at the scale level.

Looking ahead to the first quarter of 2025, SMIC continues to provide a gross profit margin guidance of 19-21%, better than market expectations (18.4%). Although the semiconductor cycle has not fully recovered, the company benefits from domestic demand and the increase in the proportion of 12-inch wafers, leading to a stable improvement in the company's overall gross profit margin.

Under the influence of previously high capital expenditures, the company's depreciation and amortization situation will increase. The expansion of the company's production capacity can also dilute the company's unit cost to a certain extent. The increase in the proportion of 12-inch wafers, driving the average price upward, is the main reason for the recent improvement in gross profit margin.

Core Indicator 3: Capacity Utilization Rate

The capacity utilization rate indicator not only reflects SMIC's quarterly operating conditions but also reflects the overall prosperity trend of the wafer manufacturing industry. During the relatively sluggish period of semiconductors, paying attention to the capacity utilization rate indicator helps to grasp the supply and demand changes of the company and the industry.

In the fourth quarter of 2024, SMIC's capacity utilization rate is 85.5%, and the company's capacity utilization rate has decreased this quarter. Dolphin believes that the current demand still shows structural characteristics, where the company's demand for 12-inch wafers is relatively good, while the demand for 8-inch wafers remains sluggish, which directly affects the company's capacity utilization rate this quarter.

II. Business Perspective on SMIC

After reviewing the three core indicators, Dolphin and everyone will take a comprehensive look at SMIC's quarterly business situation:

2.1 In Various Downstream Markets

This quarter, SMIC's smartphone business revenue accounted for 24.2%, although the proportion has decreased, the quarterly revenue is still around $500 million. The consumer electronics business maintained a relatively high proportion of 40.2% this quarter, making it the company's largest source of revenue. Under the influence of subsidy policies, the company's consumer electronics revenue has seen significant improvement in the past two quarters (Combined with a year-on-year growth of 36% in Qualcomm's IoT business).

The company has segmented its previous businesses, with the share of the computer and tablet business continuing to rise to 19.1% this quarter, while the industrial and automotive business remains at 8.2%. Driven by subsidy policies, the company's computer and tablet business has seen continuous growth, while the industrial and automotive business remains stable.

Overall, the growth in the company's revenue this quarter is mainly driven by consumer electronics, computers, and tablets, both of which benefit from the push of subsidy policies. With the intensification of national subsidy policies in 2025, the company's mobile phone business is also expected to see a rebound.

2.2 Revenue by Wafer Size

Since the first quarter of 2022, SMIC has stopped disclosing revenue proportions for each process node, only reporting the revenue proportions for 8-inch and 12-inch wafers, making it impossible to see detailed revenue changes for each node.

This quarter, the revenue proportion of SMIC's 12-inch wafers reached a new high of 80.6%. Specifically, looking at the proportions of the two sizes and the company's revenue, the revenue from 12-inch chips increased by 4.4% quarter-on-quarter, while the revenue from 8-inch chips declined by 8.3%. Overall, the current semiconductor market (for consumer electronics and PCs) has good demand for 12-inch wafers, while demand for 8-inch wafers remains weak. With the increase in the proportion of 12-inch wafers, the average selling price and gross margin of the company's products have steadily risen.

2.3 Regional Distribution

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

From this quarter's regional revenue, the revenue from the China region continues to rise to 89.1%, indicating that the domestic market is becoming increasingly important for the company's performance. In January, the US BIS issued another semiconductor ban, further expanding the scope of restrictions, which will further drive semiconductor companies to shift orders to domestic manufacturers, and the revenue from the China region is expected to continue to rise.

The shift in demand for domestic production has mainly increased the demand for the company's 12-inch wafers, enhancing the company's operational performance. Although the traditional semiconductor industry has not yet shown significant signs of recovery, the demand for domestic production is currently an important driving force for the company.

3. Operating Data of SMIC

3.1 Operating Expenses

From the perspective of operating expenses, SMIC's operating expenses for this quarter are $285 million, slightly increased, mainly due to an increase in R&D expenses and administrative expenses this quarter. The operating expense ratio remains at 12.9%.

Breaking down this quarter's operating expenses, research and development expenses are $217 million, general and administrative expenses are $167 million, and sales and marketing expenses are $10 million. The increase in general and administrative expenses is mainly due to the increased expenses related to the establishment of new factories in the fourth quarter.

3.2 Operating Indicators:

From the perspective of operating indicators, we mainly observe the company's inventory and accounts receivable:

SMIC's inventory this quarter is $2.958 billion, an increase of 2.8% quarter-on-quarter;
SMIC's accounts receivable this quarter is $840 million, a decrease of 10.5% quarter-on-quarter.

Combining the relationship between inventory & accounts receivable and revenue in the balance sheet, the inventory/revenue and accounts receivable/revenue ratios for this quarter are 134% and 38.1%, respectively. From the perspective of operating indicators, SMIC's inventory ratio has slightly rebounded. As the traditional semiconductor industry has not yet fully recovered, the company's current operations also show a structural characteristic of "strong demand for 12-inch wafers and weak demand for 8-inch wafers," which has also impacted the inventory side.

Combining the company's inventory and capacity utilization data, we can basically see the trend of the company's operational changes. When the inventory/revenue ratio broke 100% at the end of 2022 and continued to rise, the company significantly lowered its capacity utilization. As downstream customer demand began to recover, inventory started to deplete, and the company gradually increased its capacity utilization. However, with the inventory ratio not continuing to decline this quarter, the company also lowered its capacity utilization again to 85.5%.

3.3 EBITDA Indicators:

From the EBITDA perspective, SMIC's earnings before interest, taxes, depreciation, and amortization this quarter are $1.28 billion, continuing to improve.

Breaking down the indicators, SMIC's earnings before interest, taxes, depreciation, and amortization mainly come from the release of operating profits and depreciation and amortization. The calculated profit margin (before interest, taxes, depreciation, and amortization) for this quarter remains at 58%. Due to the capital-intensive nature of the manufacturing industry, a large portion of the company's profits is eroded by depreciation and amortization.

Dolphin Investment Research SMIC Historical Article Review:

Earnings Season

November 8, 2024 Conference Call “SMIC: The potential risk for next year is 'increment without price increase' (24Q3 Conference Call)”

November 7, 2024 Earnings Review “SMIC: Can it bear the hopes of the whole village?”

August 9, 2024 Conference Call “SMIC: 12-inch capacity is nearly fully loaded (24Q2 Conference Call Summary)”

August 8, 2024 Earnings Review “SMIC: Soaring against the wind, delivering explosive guidance”

May 10, 2024 Conference Call “SMIC: Full-year revenue growth will exceed industry average (24Q1 Conference Call)”

May 9, 2024 Earnings Review “SMIC: Long valley, finally about to see the light”

February 7, 2024 Conference Call “The reshuffle of mature processes requires 4-5 years (SMIC 4Q23 Conference Call)”

February 6, 2024 Earnings Review “SMIC: Counter-cyclical expansion, guidance collapses”

November 10, 2023 Conference Call “W-shaped trend, recovery may be delayed by a year (SMIC 3Q23 Conference Call)”

November 10, 2023 Earnings Review “SMIC: Long cycle, waiting for the favorable wind)”

August 11, 2023 Conference Call “The increment in mobile phones actually comes from 'trade-in'? (SMIC 2Q23 Conference Call)”

August 11, 2023 Earnings Review “The 'bland' SMIC: How much longer to wait for recovery?” May 12, 2023 Conference Call: 12-inch urgent order, semiconductor begins structured recovery (SMIC 23Q1 Conference Call)

May 11, 2023 Earnings Report Commentary: SMIC: The chip cycle cannot hide the light of alpha

February 10, 2023 Conference Call: High depreciation crushes gross margin, improvement depends on the second half (SMIC 22Q4 Conference Call Summary)

February 10, 2023 Earnings Report Commentary: SMIC: Decline is visible, but is bad now good?

November 11, 2022 Conference Call: Even with the semiconductor downturn, capital expenditure remains unchanged (SMIC 22Q3 Conference Call)

November 11, 2022 Earnings Report Commentary: SMIC: Long-term belief cannot escape the "cycle curse"

August 12, 2022: Semiconductors enter a downturn cycle, how will SMIC respond? (22Q2 Conference Call Summary)

August 11, 2022: Price increases have stalled, SMIC endures the "cycle disaster"

May 13, 2022 Conference Call: Limited impact from the pandemic, semiconductor shows structured shortage (SMIC Conference Call Summary)

May 12, 2022 Earnings Report Commentary: Pandemic down, market down? SMIC's performance does not "kneel"

February 11, 2022 Conference Call: Alpha outside of industry price increases, SMIC expands production again

February 10, 2022 Earnings Report Commentary: SMIC: The "rise" continues, performance remains strong | Reading the financial report November 12, 2021 Conference Call: What did the SMIC management communicate after the performance exceeded expectations but faced a significant drop?

November 11, 2021 Financial Report Commentary: Stop questioning if the cycle has peaked, SMIC is still strong!

August 6, 2021 Conference Call: How does the management view SMIC after the Q2 2021 financial report?

August 5, 2021 Financial Report Commentary: SMIC: The rising Chinese "chip" force

In-depth

December 29, 2022: Semiconductor Avalanche? True elasticity will only come after the most severe drop

June 24, 2022 Industry Depth: Order cuts, order cuts, order cuts, is the semiconductor really going to "change"?

July 16, 2021 Company Depth: SMIC (Part 2): The undervalued Chinese "chip"

July 9, 2021 Company Depth: SMIC (Part 1): Discussing the leading company's "chip" strategy

Live Broadcast

May 13, 2022: SMIC (00981.HK) Q1 2022 Performance Conference Call

February 11, 2022: SMIC (00981.HK) Q4 2021 Performance Conference Call

November 12, 2021: SMIC (00981.HK) Q3 2021 Performance Conference Call August 6, 2021, "Semiconductor Manufacturing International Corporation (00981.HK) Q2 2021 Earnings Conference Call"

May 14, 2021, "Semiconductor Manufacturing International Corporation (00981.HK) Q1 2021 Earnings Conference Call"

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