Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Analysis

SMIC posts revenue growth but warns of declining margins ahead

In the first quarter of 2024, SMIC achieved a revenue of $1,750 million, marking a 4.3% sequential increase, while gross margins fell to 13.7% due to higher depreciation. Despite an operating profit of $2.41 million and EBITDA of $887 million, the company warned of further gross margin declines to around 9-11% in Q2 2024, although revenue is anticipated to increase by 5-7%. Depreciation pressures are expected to persist due to ongoing high capital investments. The company continues to prioritize capacity expansion and R&D, deciding against a dividend for 2023 to support these efforts .

Introduction and Summary

The first quarter of 2024 showed promising signs of recovery for Semiconductor Manufacturing International Corporation (SMIC). Despite ongoing geopolitical uncertainties and volatile market demands, the company managed to achieve solid growth, illustrating its robust business model and strategic foresight.

Revenue and Gross Margins

SMIC reported a sequential revenue increase of 4.3%, reaching $1,750 million. This marks the fourth consecutive quarter of revenue growth. The key driver behind this growth was an increase in 8-inch equivalent wafer shipments, which went up by 7% to 1,795,000 pieces. However, the blended average selling price (ASP) declined by 3%, due to changes in product mix. Gross margins showed a decrease, down 2.7 percentage points to 13.7%, largely attributed to higher depreciation and amortization costs.

Regional Revenue Distribution

Revenue distribution remained relatively stable across regions, with China contributing 82%, America 15%, and Eurasia 3% of total revenue. This diversified customer base underscores SMIC's solid position in the global market despite regional demand fluctuations.

Product Segment Performance

In terms of segments, wafer revenue accounted for 93% while other revenue accounted for 7%. Within the wafer segment, smartphones, consumer electronics, and computer/tablet segments each contributed 31%, 31%, and 18% respectively, demonstrating balanced exposure across key market areas. The industrial and automotive segments made up the remaining 20%, highlighting diversified application fields.

Operational Efficiency and Challenges

The utilization rate of production facilities increased to 80.8%, up by 4 percentage points. Despite receiving rush orders, some production lines were nearly fully loaded, which caused delays in fulfilling all demands. The company prioritized consumer electronics orders, leading to deferred deliveries of computer and tablet products where demand is stable.

Technology and Research Development

Significant advancements were made in technology platforms critical for various applications such as smartphones, automotive, and IoT. Noteworthy is the launch of the first 28-nanometer AMOLED display driver platform in Mainland China, marking a significant milestone in performance and power consumption. SMIC also achieved accreditation for its automotive reliability testing center, bolstering its capabilities to support rapid automotive platform developments.

Second Quarter and Full Year Guidance

For the second quarter of 2024, SMIC expects revenue to grow by 5% to 7% sequentially, with gross margins falling between 9% to 11% due to anticipated depreciation costs. The company projects about a 20% increase in revenue for the first half of 2024 compared to the same period last year. While cautious about potential demand overdrafts in the second half of the year, SMIC aims to outgrow the industry average.

Financial Position

As of the first quarter's end, SMIC held total assets of $48.2 billion, including $15.4 billion in cash, and total liabilities of $17.3 billion. The company's total equity was $30.8 billion, establishing a debt-to-equity ratio of 33.5% and a net debt-to-equity ratio of negative 16.4%. This strong financial footing supports ongoing capacity expansion and strategic investments.

Capital Expenditure and Dividend Policy

Despite generating $470 million from operating activities, SMIC’s capital expenditures, necessary for capacity expansion and technology development, led to a negative free cash flow. Consequently, the company decided not to distribute dividends for 2023 to prioritize long-term growth investments. This decision aligns with strategic goals and has been approved by the Board of Directors.

Conclusion

SMIC’s first quarter of 2024 demonstrates a resilient and strategically positioned company amid global uncertainties. With continued focus on operational efficiency, technology advancement, and market expansion, SMIC is well-poised to strengthen its market position and drive future growth.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Semiconductor Manufacturing International Corporation's First Quarter 2024 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and telephone. Please be advised that if you join the meeting by phone, your dial-ins are in listen-only mode. However, after the conclusions of the management's presentation, we will have a question-and-answer session. At that time, you'll receive instructions on how to participate.Without further ado, I would like to introduce Ms. Guo Guangli, Senior Vice President and Board Secretary, to host the meeting.

[Guang Li Guo, executive]

[Interpreted] Greetings. Welcome to SMIC's First Quarter 2024 Webcast Conference Call. Attending today's call are Dr. Zhao Haijun, Co-Chief Executive Officer; Dr. Wu Junfeng, Senior Vice President and Person-in-charge of Finance.Let me remind you that today's presentation may contain forward-looking statements that do not guarantee future performance, but represent the company's expectations and are subject to the inherent risks and uncertainties.Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings statement is presented in accordance with International Financial Reporting Standards, IFRS, and all currency figures are in U.S. dollars unless otherwise stated.I will now hand the call to Dr. Wu Junfeng to introduce the company's financial status.

[Junfeng Wu, executive]

[Interpreted] First, I will report our unaudited financial results for the first quarter of 2024 followed by our guidance for the second quarter. The first quarter operating results are as follows. Revenue was $1,750 million, up 4.3% sequentially. Gross margin was 13.7%, down 2.7 percentage points sequentially. Profit from operations was $2.41 million. EBITDA was $887 million. EBITDA margin was 50.7%. Profit attributable to the company was $72 million.Moving to the balance sheet. At the end of the first quarter, the company had total assets of $48.2 billion, of which total cash on hand was $15.4 billion. Total liability was $17.3 billion, of which total debt was $10.3 billion. Total equity was $30.8 billion. Debt to equity was 33.5% and net debt to equity was negative 16.4%.In terms of cash flow, in the first quarter, we generated $470 million cash from operating activities. Net cash used in investing activities was $1,328 million. Net cash from financing activities was $44 million.For the second quarter 2024, our guidance is as follows. Revenue is expected to grow 5% to 7% sequentially and gross margin is expected to be in the range of 9% to 11%. This concludes the financial status.Next, let me recap the relevant matters related to the company's 2023 annual report. According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profits during the annual reporting period and its accumulated undistributed profits are positive, but no cash dividends are distributed, the company should provide a key explanation on matters related to the cash dividend plan in the earning webcast after the disclosure of the annual report and before the record date of the Annual General Meeting.The technical capability, product capacity, revenue scale and market share are important indicators for foundry in IC market to measure its competitiveness and market position. The company is currently in an important period of capacity construction rollout and continuously increasing market share. Both capacity construction, research and development activities require significant capital expenditure. Therefore, currently, the company's free cash flow, the difference between operating cash flow and capital expenditure investments is negative.At present prioritizing the use of funds for core business, including capacity construction and research and development activities, can help enhance the company's core competitiveness and corporate value, ensure that the company maintain its leading position in fierce market competition and maximize the protection of investor interest. Based on aforementioned consideration, the company plans not to pay dividends for the year 2023.This arrangement is more in line with the company's long-term development needs and the long-term interest of shareholders and in accordance with relevant laws and regulations, regulatory documents and the company's profit distribution policy. There are no circumstances that harms the interest of the company and its shareholders. The plan has been reviewed and approved by the Board of Directors and published in annual report and will be submitted for approval at the Annual General Meeting. We would like to thank our shareholders for their understanding and support.

[Guang Li Guo, executive]

[Interpreted] Thank you, Dr. Wu. Next, I will hand the call to Dr. Zhao Haijun to comment on operations.

[Haijun Zhao, executive]

[Interpreted] Good morning. Thank you for attending SMIC's first quarter 2024 earnings call.First, let us share with you what we have observed in the first quarter. In the first quarter, the IC industry was still in the recovery stage and customer inventory gradually improved. Compared to 3 months ago, we have noticed that our global customers are more willing to build up inventory, leveraging inventory certainty in the face of market uncertainties. For domestic customers, some managed to gain a larger market share and require their products to be pulled in to secure their positions, while others, upon witnessing competitors restocking, also made preparations to build up inventory in advance to these initiatives responding to rapidly changing market demand. For overseas customers, some raised their inventories to their desired levels due to geopolitical consideration and thus they also had some degree of products pull-in.Combining the above factors, the company's first quarter revenue and gross margin both beat guidance. Utilization rate increased by 4 percentage points sequentially to 80.8%. Revenue increased by 4.3% sequentially to $1,750 million, realizing 4 consecutive quarters of growth. Breaking down the revenue, 8 inch equivalent wafer shipment increased by 7% sequentially to 1,795,000 pieces. Blended ASP declined by 3% sequentially due to the product mix change and other factors. In the first quarter, depreciation and amortization increased, and thus, gross margin decreased by 2.7 percentage points sequentially to 13.7%.In terms of revenue by region, revenue from China, America, and Eurasia accounted for 82%, 15%, and 3%, respectively. The proportion was relatively stable. By service type, wafer revenue accounted for 93% and other revenue accounted for 7%. Wafer revenue by application, smartphone, computer and tablet, consumer electronics, connectivity and IoT, industrial and automotive accounted for 31%, 18%, 31%, 13% and 7%, respectively. We received some rush orders in the first quarter, but some of our production lines were almost fully loaded and could not fulfill all demand.We prioritize the rush orders of consumer electronics related to market share. Therefore, we negotiated with customers to push back the delivery time for products such as computers and tablets, which demand is generally stable. By size, wafer revenue from 8-inch and 12-inch accounted for 24% and 76%, respectively.In terms of the platform, the company has been accelerating the development of technology platforms for mainstream application scenarios such as smartphone, consumer electronics, automotive, IoT, et cetera, and establishing diversified platforms at each node. The company has focused on the layout of high-V, CIS, RF SOI, spatial memory, NOR Flash, NAND Flash, non-volatile memory, BCD and other platforms to realize the rapid iteration of customer products from consumer to industrial and to automotive grade.In terms of the platform for display drivers, the company has provided customers with a full range of multi-node platforms from large, medium to small screens. While keeping this market share in large and medium screens, the company has continued to make progress in platforms for small screen drivers related to smartphones and consumer electronics. The company has launched the first 28-nanometer AMOLED display driver platform in Mainland China, with performance and power consumption reaching first-class level in industry.Additionally, automotive grade and other related platform developments have also been rolled out for 28 nanometers. Company's automotive reliability testing center has achieved laboratory accreditation certificate from CNAS, China National Accreditation Service for Conformity Assessment, which provides strong support for the company's continuous, rapid introduction of automotive process platforms.Next, let's look into the second quarter. For the second quarter, the company's guidance are, revenue is expected to grow 5% to 7% sequentially. Gross margin is expected to be in the range of 9% to 11%. The main reasons are, first, the company has seen continued demand for pull-in from some customers. The shipment is expected to continue to increase and blended ASP is expected to decrease due to the product mix change and price decline. The overall situation of shipment volume increasing and blended ASP declining will continue in the second quarter.The company -- second, the company has offset the impact of price cuts by reducing costs and increasing efficiency. However, along with the increase in capacity scale, depreciation is expected to rise quarter-by-quarter. So the gross margin is expected to decline sequentially.For the whole year, we would like to share our views with you in 3 aspects. First, about the annual guidance. The first quarter's revenue beat guidance and revenue is expected to continue to increase in the second quarter. By doing some calculations, you can figure out that the company's revenue in the first half of this year is expected to increase by nearly 20% compared to the same period of last year. However, we are still cautiously and closely observing whether the urgent cooling requirements from customers in the first half of this year is an early overdraft of the demand in the second half of the year.We don't have clear visibility on the second half of the year, but we will continue to work hard. Based on the premise that there is no significant changes in the external environment, the company's 2024 revenue growth target is to exceed the industrial average in the same market.Second, about the price, as China's local new capacity continues to come online, competition in the industry has been increasingly fierce and the pricing for commodity products basically follows the market trends. The company fulfilled its long-termism through constructing quality technology platforms that lead peers in Mainland China by 1 to 2 generations, offering competitive products to customers and establishing long-term partnership with strategic customers to confront and engage in a competition together with customers.Third, about the depreciation pressure. In order to satisfy customers' mid to long-term demand, the company is in the stage of continuous high investment and expansion of 12-inch high-quality capacity. Along with the release of company's new project capacity and rise of revenue scale, the corresponding increase in depreciation pressure will persist for a certain period of time into the future.It takes time for new projects to go from loss-making to realize economic scale and benefits. This is industry rule. The company will continue to optimize the management mechanism, focusing on capacity stabilization, cost control, technology leadership and customer first as 4 pivots to continue to strive. We believe that as long as there is demand from customers, along with our technology and capacity readiness, we can ultimately be bigger, better and stronger despite the fierce competition.Finally, I would like to thank all employees, customers, suppliers, investors and community for their attention, trust and support to the company. Thank you.

[Guang Li Guo, executive]

[Interpreted] Thank you Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Zhao and Dr. Wu. Chinese questions will be answered in Chinese. English questions will be answered in English. Please limit your questions to 2 per person.I would now like to open up the call for Q&A. Operator, please assist.

[Operator]

[Operator Instructions] First question comes from the line of Sunny Lin from UBS.

[Sunny Lin, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Sunny Lin, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Sunny Lin, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Our next question comes from the line of Leping Huang from Huatai Securities.

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

The next question comes from the line of Zhang Xiaofei from Haitong.

[Xiaofei Zhang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Xiaofei Zhang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Xiaofei Zhang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

The next question comes from the line of [ Ziyuan Wang from CTIC Securities ].

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Thank you for the questions. One moment for the next question. There are no more questions at this time. I would now like to hand the call back to Ms. Guo Guangli for closing remarks.

[Guang Li Guo, executive]

[Interpreted] Thank you for participating in today's conference call. Thank you for your trust and support.

[Operator]

[Interpreted] This concludes SMIC's first quarter webcast conference call. We thank you for joining us today.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]