Chinese Foundries Face Nascent Recovery, but Easily Disrupted by Geopolitics and New Capacity

Our fair value estimates for Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor are unchanged at HKD 10.80 and HKD 16.50, respectively, after both firms reiterated their view of a better second half fueled by a recovery in consumer electronics demand. We view SMIC as overvalued and Hua Hong as fairly valued; SMIC’s expansion is more capital-intensive than Hua Hong's, and it has more motive to cut prices to fill up usage of its upcoming plants. The return of price hikes and upticks in automotive and industrial demand are the main upside surprises to our fair value estimates.