SMIC Earnings: Second Quarter Guidance Outshined Peers but Full-Year Outlook Still Uncertain

We keep our fair value estimate on no-moat Semiconductor Manufacturing International Corporation 000981, or SMIC, at HKD 15 after the company reported unsurprising March quarter results and affirmed its full-year guidance. The stock is overvalued, in our view, due to expectations that the firm can offer new shares based on its higher A-share price, 10% lower 2024 and 2025 revenue forecasts than PitchBook consensus, and overlooking the heavy capital spending required to meet incremental demand in electric vehicles and industrial applications.

Management guides June quarter revenue to be USD 1.55 billion (up 6% quarter on quarter) and gross margin to be 20% at their midpoints. Full-year guidance is unchanged with revenue dropping low teens from 2022 and 20% gross margin. First-quarter results were of little surprise. Sales came in at USD 1.46 billion, down 10% sequentially. Gross margin of 20.8% was 11.2 percentage points lower than the previous quarter as utilization continued to decline with image sensors and specialty memory being the key culprits. Although the numbers mean SMIC hit its near-term trough one quarter earlier than we expected, we have not changed our 2023 forecasts because recovery in the second half should become less pronounced and more uncertain. We expect rigid depreciation and research and development expenses will weigh on operating margin, at about 6% in 2023. Our 2024 and 2025 revenue projections are 10% below PitchBook consensus, as the magnitude of recovery in 2024 remains highly uncertain, and multiple foundries expanding 28nm and 40nm capacities may limit upside in wafer prices once new sites begin production.

Even though management guidance suggests mild recovery on a group level, management said there are pockets of strength starting in the second quarter.