Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Analysis

SMIC's Q2 2024 sees revenue surge amid geopolitical influences

In Q2 2024, SMIC saw a 9% sequential rise in revenue, reaching $1.9 billion, with 8-inch wafer shipments up 18%. The company's utilization rate increased to 85%. Geopolitical factors led to increased overseas revenue. For Q3 2024, SMIC expects a 13-15% sequential revenue growth and gross margins between 18-20%.

Strong Sales and Increased Utilization

SMIC saw significant improvements in the second quarter of 2024, driven largely by a recovery in demand for mid- and low-end consumer electronics. This increased demand led to a 9% sequential rise in quarterly revenue, reaching $1.9 billion. The company's overall utilization rate also saw a boost, climbing 4 percentage points to 85% as new capacity was swiftly put into production. The 8-inch wafer shipments particularly rose by 18%, although this did come at the cost of an 8% decline in blended average selling price (ASP) due to changes in the product mix. Of note, SMIC's 12-inch wafer capacity has remained almost fully utilized over recent quarters【4:0†source】.

Geopolitical Influence and Regional Revenue

Geopolitical disruptions have played a two-fold role for SMIC. On one hand, they helped some customers infiltrate the industrial chain, bringing incremental demand. On the other hand, they necessitated inventory buildups among overseas customers to stabilize market positions and hedge against risks. This geopolitical backdrop saw SMIC's revenue split with 80% coming from China, 16% from America, and 4% from Eurasia. Interestingly, the geopolitical scenario also contributed to an uptick in overseas revenue during the second quarter【4:0†source】.

Service Type and Wafer Applications

Breaking down the revenue, wafer-related sales accounted for 93%, while other services formed 7%. The applications of these wafers varied, with consumer electronics leading the way at 36%, followed by smartphones at 32%, and computers and tablets at 13%. Additional demand in connectivity and IoT, as well as industrial and automotive sectors, accounted for 11% and 8%, respectively. A particularly noteworthy driver was the BCD platform, which saw a more than 20% sequential revenue growth, and the RF CMOS platform, which increased by nearly 30%【4:0†source】【4:1†source】.

Financial Performance and Guidance

Financially, SMIC's unaudited results for the first half of 2024 were robust, with revenue increasing by 20.8% year-over-year to $3.65 billion. However, gross margins saw a decline to 13.8%, a 6.8 percentage point drop from the previous year. Profit attributable to the company stood at $236 million for the first half. Looking ahead to the third quarter, SMIC anticipates a 13% to 15% sequential revenue growth, with gross margins projected to be between 18% and 20%. These projections are underpinned by continued high demand for localization driven by geopolitical factors and tight supply conditions, especially in certain 12-inch nodes【4:1†source】.

Balance Sheet and Cash Flow

As of the second quarter end, SMIC had total assets worth $47.4 billion, with $13 billion in cash. The company's total liabilities were $16.4 billion, including $10.4 billion in debt, resulting in a debt-to-equity ratio of 33.7%. The net debt to equity ratio was a favorable negative 8.2%. Cash flows were mixed, with $19 million generated from operating activities, offset by $1.638 billion used in investing activities, and $46 million gained from financing activities【4:1†source】.

Strategic Capacity Expansion and Outlook

SMIC is planning to expand its capacity further, aiming to increase its output by 60,000 12-inch wafers per month by year-end compared to last year. Despite the broader macroeconomic uncertainties and shifting market dynamics, the company remains cautiously optimistic about the future. They aim to outperform the industry average growth rate and are targeting increased revenue in the second half of the year compared to the first. SMIC's focus remains on balancing short-term operational goals while driving long-term strategic initiatives【4:4†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Semiconductor Manufacturing International Corporation's Second Quarter 2024 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and telephone. [Operator Instructions]

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]

Greetings, welcome to SMIC's second 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 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 Wu to introduce the company's financial status.

[Junfeng Wu, executive]

First, I will report our unaudited results for the second quarter and the first half of 2024, followed by our guidance for the third quarter. The second quarter results are as follows: Revenue was $1,901 million, up 8.6% sequentially. Gross margin was 13.9%, up 0.2 percentage points sequentially. Profit from operations was $87 million. EBITDA was $1,056 million. EBITDA margin was 55.5%. Profit attributable to the company was $165 million.

Moving to the balance sheet. At the end of the second quarter, the company had total assets of $47.4 billion, of which total cash on hand was $13 billion. Total liabilities was $16.4 billion, of which total debt was $10.4 billion. Total equity was $31 billion. Debt to equity was 33.7% and net debt to equity was negative 8.2%.

In terms of cash flow, in the second quarter, we generated $19 million cash from operating activities. Net cash used in investing activities was $1,638 million. Net cash from financing activities was $46 million.

The company's unaudited results for the first half of 2024 are as follows: Revenue was $3,651 million, up 20.8% year-over-year. Gross margin was 13.8%, down 6.8 percentage points year-over-year. Profit from operations was $90 million. EBITDA was $1,943 million. EBITDA margin was 53.2%. Profit attributable to the company was $236 million.

For the third quarter 2024, our guidance is as follows: Revenue is expected to grow 13% to 15% sequentially, and gross margin is expected to be in the range of 18% to 20%. This concludes the financial status. Thank you.

[Guang Li Guo, executive]

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

[Haijun Zhao, executive]

Good morning. Thank you for attending SMIC's second quarter 2024 earnings webcast conference call. In the second quarter, from the perspective of demand with the gradual recovery of mid- and low-end consumer electronics all the links in the industrial chain from fabless to end-user companies have been more willing to restock and build up inventory than 3 months ago in order to seize opportunity to gain more market share. At the same time, due to the disruption and changes in the supply chain brought by the geopolitics, some customers got the opportunity to penetrate into the industrial chain, therefore, bringing incremental demand to the company. In response to the changing market, customers' rapid requests for inventory adjustments were usually delivered to the company through rush orders and products pull in.

In terms of supply, the company has seen a recovery in 8-inch utilization rate, while the 12-inch capacity has been nearly fully loaded for the past few quarters. In the first half of this year, a certain amount of new effective capacity was released and quickly put into production. As a result, the company's overall utilization rate increased by 4 percentage points to 85%.

Combining the above factors, the company's revenue and gross margin both beat guidance in the second quarter. Revenue increased by 9% sequentially to $1.9 billion, of which 8-inch equivalent wafer shipments increased by 18% sequentially to more than 2.11 million and blended ASP declined by 8% sequentially due to the changes in product mix.

In terms of region, revenue from China, America and Eurasia accounted for 80%, 16% and 4%, respectively. Due to the geopolitical considerations and response to the demand of Chinese market, some overseas customers needed to build up inventory so as to stabilize their market share and hedge against the market risks. They pulled in some products from second half to the first half. Thus, there was an increase in the proportion of overseas revenue in the second quarter.

By service type, wafer revenue accounted for 93% and other revenue accounted for 7%. Wafer revenue by application, smartphone, computer and tablets, consumer electronics, connectivity and IoT, industrial and automotive accounted for 32%, 13%, 36%, 11% and 8%, respectively. By size, demand for 8-inch picked up and wafer revenue contribution from that accounted for 26%, up by 2 percentage points sequentially, while wafer revenue from 12-inch accounted for 74%.

In terms of product platforms, the growth driver in the second quarter primarily came from platforms widely used in the consumer electronics and smartphones. Let's take some examples. BCD platform, including PMIC, switch regulators, LED drivers, et cetera, its revenue increased more than 20% sequentially. RF CMOS platform, including Bluetooth, WiFi, receiver transceiver, et cetera, its revenue increased nearly 30% sequentially.

According to the unaudited results for the first quarter and second quarter, the company's revenue for the first half of this year increased by 21% to $3.65 billion compared to the same period of last year, and the capital expenditure totaled nearly $4.5 billion. By the end of the second quarter, the company's monthly capacity was 837,000 8-inch equivalent wafers.

In the third quarter, the company's guidance is: Revenue is expected to grow 13% to 15% sequentially. Gross margin is expected to be in the range of 18% to 20%. The main reasons are: Firstly, due to the geopolitical impact demand for localization accelerates, which leads to capacity for chipset in the main markets being in short supply. Capacity is particularly tight in certain 12-inch nodes, and price is trending upwards. Secondly, the newly expanded capacity this year is all 12-inch capacity, which is relative high value added. The fully utilized incremental capacity will generate revenue and optimize product mix. Combining the above reasons, the company's blended ASP in the third quarter is expected to increase sequentially, which drives the sequential increase in gross margin.

Generally, the fourth quarter follows traditionally seasonal pattern. We are now taking a cautiously optimistic route, and there is still some uncertainty with this fourth quarter. According to the unaudited results for the first half of this year and guidance for the third quarter, the overall landscape for this year is more or less defined based on the premise that there is no significant changes in the external environment. The company's goal is to achieve annual growth in its revenue at a rate that shall exceed the industry average rate in the same market. And it is expected that the revenue to be recorded in the second half of this year will exceed that record in the first half.

In terms of capacity expansion, the overall capacity is expected to increase around 60,000 12-inch wafers per month by the end of this year compared to that of last year.

Since the start of this year, both the macro environment and markets have seen new influencing variables, transmitting to changes in demand in all areas of the industry chain compared to the beginning of the year. Facing the complex external environment, the company will continue to dedicate in wafer manufacturing, meet customer needs and balance short-term operating objectives while focusing on the company's long-term development. We will create vision-based strategic plans, how to being the leader in local technology capabilities and embrace headwinds and opportunities.

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]

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 will now like to open up the call for Q&A. Operator, please proceed.

[Operator]

[Operator Instructions] The first question comes from the line of Leping Huang from Huatai Securities.

[Leping Huang, analyst]

[Foreign language]

[Unknown Executive]

[Foreign language]

[Operator]

Next question comes from the line of [ Chung so Fe from Hitong Chungchin ].

[Unknown Analyst]

[Foreign language]

[Unknown Executive]

[Foreign language]

[Operator]

Thank you for the questions. One moment for the next question. Next question comes from the line of Hu Jian from Guosen.

[Jian Hu, analyst]

[Foreign language]

[Unknown Executive]

[Foreign language]

[Operator]

Our next question comes from the line of [ Jan Tuan ] from Citic Securities.

[Unknown Analyst]

[Foreign language]

[Unknown Executive]

[Foreign language]

[Operator]

Thank you for the question. I would now like to hand the call back to Ms. Guo Guangli for our closing remarks.

[Guang Li Guo, executive]

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

[Operator]

This concludes SMIC's second quarter webcast conference call. We thank you for joining us today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]