SMIC: The decline is visible to the naked eye, but now the difference is good?

0981.HK/688981.SH On the evening of February 9, 2023, Beijing time, Longbridge Hong Kong released its 2022 fourth quarter financial report (as of December 2022) after hours, with the following points:

1. Overall performance: Revenue is again less than expected. $SMIC. HK achieved revenue of US$1,621 million in the quarter, down 15% sequentially, barely meeting the lower bound of guidance expectations (-10% to -15%) but below market expectations (US$1,649 million). The company's gross margin continued to fall back to 32% in the quarter, slightly exceeding market expectations (31.6%).

2. Take a closer look at the three core indicators: revenue, gross margin and capacity utilization. The revenue side is split through volume-price, $SMIC. SH's revenue decline in the quarter was mainly due to the decline in volume and price. The downturn in the semiconductor cycle has an impact on the company's shipments and product prices. In addition, the decline in the proportion of 12-inch wafers has also structurally reduced the average shipment price. As downstream demand continued to weaken, the company's inventories continued to rise, and SMIC lowered its capacity utilization rate as a result. The company's capacity utilization rate in the quarter plummeted to a historical low of 79.5% from 92.4% in the previous quarter, which also directly drove down the company's gross margin.

3. Business progress: The share of smartphones has rebounded. The share of smartphone business continued to recover in the quarter, mainly due to the decline in smart home and consumer electronics business in the quarter. Combined with the situation of the industrial chain, although the demand side of smartphones has not yet shown obvious signs of improvement, due to the earlier inventory digestion measures of some manufacturers, smartphones may usher in the opportunity of "difficult recovery" earlier. Affected by the weak downstream demand of some domestic customers, the proportion of revenue in China fell in the quarter.

4. Next quarter guidance: SMIC expects revenue to decline by 10%-12% sequentially in the first quarter of 2023 (corresponding to US$1.43-1.46 billion), significantly lower than market expectations (US$1.524 billion in revenue); Gross margin of 19-21%, significantly lower than market expectations (gross margin of 26%).

Dolphin Jun's overall view:

SMIC's earnings report is still not good, and although the gross margin met market expectations, the revenue side once again missed market expectations. Compared with this quarter's results, the company's guidance for the next quarter is less optimistic.

As Dolphin Jun mentioned in last quarter's earnings review "SMIC: Long-term Faith, Cannot Escape the "Cycle Curse", "The company may further reduce its capacity utilization rate next quarter." In the semiconductor downward channel, the company's performance will also likely further decline with the industry." In this quarter's financial report, the company's capacity utilization rate also delivered a "shocking" 79.5% (a sharp decline of 12.9% sequentially).

For next quarter guidance, it is less optimistic. Revenue will continue to decline, with guidance from a 10-12% sequential decline, suggesting that the company may still face a volume and price decline next quarter. Gross margin will also plummet, with the company only expecting a gross margin of 19-21% for the next quarter. Dolphin Jun believes that the company's shipments in the next quarter are still difficult to recover. In the face of rising inventory, the company may continue to reduce capacity utilization on the one hand, and may adopt inventory impairment treatment on the other hand.

From the performance level, SMIC has not yet seen signs of improvement. However, Dolphin Jun believes that the company has begun to respond to the current operating conditions, and the capacity utilization rate has been significantly reduced, which is actually partly to shift the focus to inventory digestion. Although in the short term, in the context of industry headwinds, the company's performance will face pain. But only when we go to the worst adversity will we usher in the opportunity for a "reversal of the dilemma".

From the perspective of investment, the market has long expected the company's poor performance. Although the answers to the quarterly report are less than expected, it may affect the confidence of some investors in the short term. But the sooner the "bottom" comes, the sooner it will be able to wait for the "bottoming out".

It is true that the semiconductor industry is still in a "downturn" downturn, but some semiconductor downstream has begun to show signs of inventory digestion. Dolphin Jun maintained his appearance in Semiconductor Avalanche? "The semiconductor industry is still in the left range, but the stock price reflects expectations and often goes ahead of the industry." ”

Regarding this financial report, Longbridge Dolphin Jun mainly focuses on the following issues:

1. Overall performance vs market expectations: SMIC's three core indicators, revenue, gross margin and capacity utilization, how did the company perform in the downward phase of the semiconductor cycle?

2. Specific sources of revenue growth: How much did the company's revenue contribute in terms of volume and price in the quarter? Does the downturn in the semiconductor industry have an impact on the company's shipments and prices?

3. The source of gross margin improvement: can the company's gross profit margin meet expectations in this quarter, and how do prices and costs change?

4. Business development: How are SMIC's downstream performers? What is the progress of domestic semiconductor customers?

5. Business performance: What changes has SMIC's operating situation changed in the quarter? Are inventory and accounts receivable reasonable? What about EBITDA?

Here is a detailed analysis of Longbridge Dolphin Jun:

First, the core indicators look at SMIC: revenue, gross margin and capacity utilization

Core metric 1: Revenue side

SMIC's revenue of $1.621 billion in the fourth quarter of 2022 decreased 15% sequentially and below market expectations of $1.649 billion. The company began to experience a decline in volume and price this quarter, indicating that SMIC is also clearly affected by the downturn in the semiconductor industry cycle.

From the dimensions of volume and price, the main impact factors of SMIC's revenue decline in this quarter:

1) In terms of volume, SMIC's wafer shipments (equivalent 8 inches) reached 1,574,000 units this quarter, down 12.4% sequentially;

2) In terms of price, SMIC's single-wafer revenue (8-inch equivalent) for the quarter was $1,030, down 2.9% sequentially.

From the perspective of volume-price split, the decline in the company's revenue in this quarter was affected by the double decline in volume and price, of which the impact of shipments was relatively large.

SMIC's inventory in recent quarters has shown a trend of continuous increase, and the downstream market is weak, which directly affects the double-digit decline in shipments in this quarter. At the same time, under the influence of the decline in the entire industry, the average price of the company's products is difficult to maintain the performance of the past improvement.

Driven by the downturn in the industry cycle and higher inventories, capital expenditures for the quarter were lower than previously expected. By the end of the fourth quarter, the company's wafer production capacity (equivalent to 8 inches) was 1,980 thousand pieces, an increase of 1.4% sequentially. Actual completed capital expenditures for the quarter were slightly lower than expected at the end of the third quarter, and full-year 2022 capital expenditures were $6.35 billion (down from the company's previous estimate of $6.6 billion).

Looking ahead to the first quarter of 2023, SMIC gave quarterly guidance for a 10%-12% sequential decline in revenue, corresponding to the company's expected revenue of $1.43-1.46 billion in the next quarter, well below consensus expectations of $1.524 billion. Dolphin Jun believes that the company will still be dragged down by the industry in the next quarter, and the volume and price of the company's products will still be under pressure.

Core metric 2: Gross margin

SMIC's gross margin for the fourth quarter of 2022 was 32%, down 6.9pct sequentially and slightly above consensus expectations of 31.6%.

Split the company's cost structure and analyze the sources of SMIC's gross margin improvement in the quarter:

Monolithic gross profit = monolithic wafer revenue - monolithic fixed cost - monolithic variable cost

1) Single-wafer revenue: SMIC's single-wafer revenue (8-inch equivalent) for the quarter was $1,030, down $31 sequentially.

2) Fixed Cost (Depreciation and Amortization) per Piece: Fixed Cost per Chip (8-inch equivalent) was $261 for the quarter, up $31 sequentially.

3) Single-chip variable cost (other manufacturing expenses): Single-chip variable cost (8-inch equivalent) was $439 for the quarter, up $21 sequentially.

4) Single-chip gross profit: SMIC's single-chip gross profit (8-inch equivalent) for the quarter was US$330, a decrease of US$83 per unit sequentially.

Through the cost split, it was found that SMIC's gross profit margin declined again in the quarter, and the gross profit margin in the quarter declined, due to the decline in the average price of products, while the unit cost increased. This rise and fall caused the company's gross margin to plummet from 38.9% to 32%.

Specifically, the increase in unit fixed costs: SMIC's total depreciation and amortization in the quarter did not change significantly, while the increase in unit fixed costs was mainly due to the decrease in the company's shipments in the current quarter and the increase in the cost of amortization per piece; Higher Unit Variable Costs: Total variable costs decreased during the quarter as variable costs were partially related to shipments. However, there are still some variable costs that do not change with shipments, resulting in an increase in single-chip variable costs evenly distributed over the quarter.

Looking ahead to the first quarter of 2023, SMIC gave quarterly guidance of 19-21% gross margin, well below consensus expectations of 26%. The company will continue to be dragged down by industry weakness in the next quarter, and gross margin is unlikely to improve. For such a sharp drop in gross margin, Dolphin Jun believes that possible factors are: the price of some products in the industry is still declining; The company's shipments and capacity utilization continued to remain low in the next quarter; Under the squeeze of rising inventory, there is a possibility that the company will carry out inventory impairment.

Core metric 3: Capacity utilization

The capacity utilization index not only reflects SMIC's quarterly operating conditions, but also reflects the prosperity trend of the entire wafer manufacturing industry. The boom in the wafer manufacturing industry has driven SMIC and many of its peers to continue to experience full production. Now, with the downward signs of semiconductors, the order adjustment of downstream manufacturers will directly affect the capacity utilization rate of chip manufacturers.

SMIC's capacity utilization rate was 79.5% in the fourth quarter of 2022. SMIC's capacity utilization rate collapsed this quarter, with 79.5% being a "rare" low for the company, indicating that the industry has entered a "cold winter".

Looking ahead to the first quarter of 2023, while the company's capacity utilization rate reached a new low in the current quarter, it is still difficult to see significant signs of improvement for the next quarter. Combined with the company's revenue and gross margin guidance, Dolphin Jun expects the company's capacity utilization rate to reach a new low in the next quarter.

Second, SMIC looks at the business level

After reading the three core indicators, Longbridge Dolphin Jun and everyone took a comprehensive look at SMIC's quarterly business:

2.1 Downstream Markets: Smartphone share rebounded

SMIC's smartphone revenue share continued to recover to 28.6% in the quarter, mainly due to the decline in smart home and consumer electronics again this quarter. Among the segments, the proportion of revenue from other businesses continued to increase, rising to 39% in the quarter, significantly ahead of the first three types of businesses. In this other business, it mainly includes automotive, industrial and other application fields, mainly reflecting the demand in new energy and other fields.

Looking closely at SMIC's downstream situation, the smart home and consumer electronics businesses experienced a large sequential decline in the quarter, mainly because they have obvious optional consumption attributes and are greatly affected by the overall consumption side. The mobile phone business, which had previously been shrinking, continued to show a stabilizing trend this quarter. Dolphin Jun believes that although the demand side of smartphones has not shown obvious signs of improvement, due to the earlier inventory digestion measures of some manufacturers, smartphones may usher in the opportunity of "difficult recovery" earlier.

Although it is difficult for the mobile phone business to see the high growth performance of the past, it will still occupy a more important share. In the company's business, it will still account for more than 20% of the market in the future.

2.2 Each wafer size: 12-inch wafer suddenly declines

Starting in the first quarter of 2022, SMIC no longer disclosed the revenue share of each process node, only disclosing the revenue ratio of 8-inch and 12-inch wafers, which makes it impossible to see the change in revenue of each node in detail.

SMIC's 12-inch wafer revenue share declined during the quarter, falling back to 64.4%. Due to the decline in the proportion of 12-inch wafer revenue in the quarter, it affected the company's average shipment price to some extent. For the quarter, the share of 12-inch wafer revenue declined, mainly due to the impact of weak demand, some of the company's 12-inch customers lowered their shipment demand for the quarter.

Dolphin Jun believes that the decline in the 12-inch ratio in this quarter is a short-term phenomenon, which will still be the company's development center in the future. From the perspective of past production capacity and capital expenditure, SMIC will continue to increase the proportion of 12-inch products.

2.3 Distribution by region: China's income declined

SMIC adjusted its regional revenue distribution this quarter from "North America/Chinese mainland & Hong Kong/Europe & Asia" to the current "China/U.S./Eurasia." Due to the adjustment of the caliber, there are slight differences in the data.

Specifically: China: revenue accounted for 69.1%, down 6% month-on-month; US: revenue share of 25.3%, up 4.8% sequentially; Eurasia: Revenue as a percentage of 5.6%, up 0.8% sequentially.

From the perspective of regional revenue in the quarter, China saw a significant decline in revenue. This was mainly due to the significant decline in sales of smart home and consumer electronics in the quarter, mainly from customers in China. The lack of motivation for customers to pull goods directly affected the revenue performance of China in the quarter.

Third, the business data looks at SMIC

3.1 Operating expenses: declined

From an operating expense perspective, SMIC's operating expenses decreased sequentially to $236 million.

Breaking down operating expenses for the quarter, R&D expenses were $197 million, general and administrative expenses were $127 million, and consumer and marketing expenses were $0.8 billion. R&D expenses increased from the previous quarter, while general and administrative expenses decreased significantly, of which the increase in general and administrative expenses was mainly due to the commissioning of new plants in the quarter.

Operating expenses declined during the quarter, with higher R&D investments but a greater decline in general and administrative expenses resulting in lower expenses.

3.2 Operating indicators: Inventory indicators peaked

From the perspective of business indicators, it is mainly observed from the company's inventory and accounts receivable:

SMIC's inventory was $1.911 billion in the quarter, up 12.6% sequentially;

SMIC's accounts receivable for the quarter were $1.303 billion, up 7.2% sequentially.

Combining the relationship between inventory & accounts receivable and revenue in the balance sheet, inventory/revenue and accounts receivable/revenue were 118% and 80%, respectively, for the quarter. From an operational point of view, SMIC's inventories continue to rise and have reached a historical peak.

Combined with the company's inventory and capacity utilization data, you can basically see the company's trend. The company's capacity utilization rate remained near full capacity in the first quarter of 2022, and as the company's inventory continued to rise from the first quarter of 2022, the company's capacity utilization began to loosen from the second quarter. Then, combined with the current inventory situation, Dolphin Jun expects that the capacity utilization rate in the first quarter of 2023 may continue to be revised down to prioritize the digestion of the company's original inventory.

3.3 EBITDA metric: profit and depreciation are halved

From an EBITDA perspective, SMIC's EBITDA continued to be high in the fourth quarter of $1.063 billion.

Looking at the spin-off indicators, SMIC's EBITDA mainly comes from the release of operating profit and depreciation and amortization, and the profit side continued to decline in the quarter, while depreciation and amortization still increased. The estimated profit margin (before interest, interest, depreciation and amortization) for the quarter was 65.6%. Due to the asset-heavy nature of the manufacturing industry, most of the company's profits are eroded by depreciation and amortization.