Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Analysis

SMIC Reports Growth Amid Market Challenges

SMIC's third-quarter earnings showed a revenue increase to $1.621 billion, a 3.9% rise from the previous quarter. However, gross margin slightly declined by 0.5 percentage points to 19.8%. Operation profit grew by 9.5%, reaching $87 million. The balance sheet remains robust, with total assets reaching $46.8 billion, including $17.4 billion in cash, while total liabilities stood at $16.2 billion. The company anticipates a 1-3% sequential revenue growth and a lower gross margin of 16-18% in the fourth quarter, reflective of an unstable market amidst geopolitical uncertainties.

Financial Performance and Guidance

The company reported a revenue of $1.621 billion, a 3.9% sequential growth. Operational profits rose by 9.5% to $87 million, showcasing healthy business performance. However, gross margin slightly fell by 0.5 percentage points to 19.8%, reflecting some pressure on profitability. The EBITDA stood robust at $901 million with a margin of 55.6%. Profit attributable to stakeholders summed up to $94 million for the company and $62 million for non-controlling interests. Looking ahead to Q4 2023, the forecast suggests a modest revenue growth of 1% to 3%, with gross margins anticipated to converge between 16% to 18%.

Market Dynamics and Inventory Challenges

The company faced a softer than expected market, missing out on the anticipated V or U-shaped rebound. While the market continues to be sluggish, exhibiting a double U-trend, the inventory level for high-demand products, notably from Chinese customers, has moved toward a healthier equilibrium. However, price wars have started to intensify due to a slow absorption rate of older inventories. The automotive sector, in particular, which previously suffered from a supply crunch, currently confronts an inventory overflow, prompting a strategy shift from expansion to defensive postures among customers.

Capital Expenditure and Capacity Expansion

The company has strategically directed its capital expenditure of $5.1 billion mainly towards expanding capacity and developing new fabrication plants. In light of the complex geopolitical impact on the supply, the company has adjusted its full-year capex forecast to approximately $7.5 billion. This investment is essential for keeping up with demand and preparing for future growth, which is mirrored in the increased monthly capacity to 796,000 8-inch equivalent wafers – a boost of 82,000 wafers since the year began.

Competitive Landscape and Business Focus

Amidst competitive reshuffling and cost pressures influenced by geopolitical scenarios, the company has seen its customers' market shares grow, thereby driving up business. The focus now pivots to core competencies and R&D investments, suggesting a cautious approach to expansion and a rigor in cost and inventory management. In spite of stable demand projections for mature foundries due to declining inventories, the absence of market drivers hinders expectations for substantial growth.

Outlook and Strategic Positioning

With the overall market showing signs of stabilization and a growing demand for mature foundries, the company is realigning its strategic focus. Despite a cautious year-end sentiment and the ongoing depreciation of new capacities burdening gross margins, the company aims to latch onto the general upward trend for long-term semiconductor demand by proceeding methodically in intensifying their business priorities, optimizing cost structures, and enhancing the product portfolio.

Earnings Call Transcript 2023-Q3

[Operator]

[Interpreted] Welcome to Semiconductor Manufacturing International Corporation's third quarter 2023 Webcast Conference Call. Today's call is [indiscernible] through the internet and telephone. Please be advised that if you join a meeting by phone, your dial-ins are in listen-only mode. However, after the conclusion of the management's presentation, we will have a question-and-answer session. At this time, you receive instructions on how to participate.Without further ado, I'd like to introduce Ms. Guo Guangli, Senior Vice President and Board Secretary to host the webcast.

[Guang Li Guo, executive]

[Interpreted] Greetings, welcome to SMIC's third quarter 2023 webcast conference call. Attending today's call are Dr. Zhao Haijun, Co-Chief Executive Officer; Dr. Wu Junfeng, Senior Vice President & 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 an inherent risk and uncertainties. Please refer to the forward-looking statement in our earnings announcement. Please note that today's earning 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 operating results for the third quarter, followed by our guidance for the fourth quarter.The third quarter operating results are as follows. Revenue was $1,621 million, up 3.9% sequentially. Gross margin was 19.8%, down 0.5 percentage points sequentially. Profit from operations was $87 million, up 9.5% sequentially. EBITDA was $901 million. EBITDA margin was 55.6%. Profit attributable to the company and non-controlling interest was $94 million and $62 million respectively.Moving to the balance sheet. At the end of the third quarter, the company had total assets of $46.8 billion, of which total cash on hand was $17.4 billion. Total liabilities was $16.2 billion of which total debt was $9.6 billion. Total equity was $30.6 billion. Debt-to-equity was 31.5% and net-debt-to-equity was negative 25.2%.In terms of cash flow, in the third quarter, we generated $801 million cash from operating activities. Net cash used in investing activities was $1,711 million. Net cash from financing activities was $358 million.For the fourth quarter 2023, our guidance is as follows. Revenue is expected to grow 1% to 3% sequentially and gross margin is expected to be in a range of 16% to 18%.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]

Greeting. Welcome to today's earnings call.From the market side in the second half of the year, we haven't seen V or U-shaped rebound that expected at the beginning of this year. The overall market still remains at the bottom showing a double U-trend.In the China market, the high product inventory problems that started since the third quarter of last year has been mitigated and the inventory has decreased to a relatively healthy level. End-user companies and system companies have managed their supply chain and plan for localization. Chinese customers have relatively good demand for new products with some commodity products in short supply, which has also brought big impact to old products. The inventory digestion of the old products has been slowing down and a homogeneous price competition has been intensifying.The speed of these docking and the pace of converting to new chips are varying across different regions globally. In the field of mobile phone, consumer and industry, Chinese customers have basically returned to a balanced in and out inventory level, but the American and European customers' inventories still remain at historically high levels.Besides, the inventory of automotive-related product is now in relatively high level after being in short supply for 3 years, which has caused major customers to be alert to the market correction and to tighten their orders placing rapidly. After more than one year's ups and downs in the market, customers have experienced a shift from aggressive expansion 2 years ago to tough defense this year.They have become more focused on core business and R&D investments, more stringent on inventory and cost control and more cautious on the pay part and PO placing.Geopolitical factors have brought duplication of construction and uncertainty of supply chain to the industry's medium- to long-term development and have brought the Gray Rhino effect. All segments of the industry supply chain are exploring strategies and paths and we are also maintaining conscious observation and persistent attempts.For the company, our customers' market share has increased due to the industry chains reshuffle grow by geopolitics and cost competition, which drives the growth of the company's business. In the third quarter of this year, revenue was $1.62 billion, up 3.9% sequentially, which was at the midpoint of the guidance. Gross margin was 19.8%, down 0.5 percentage points comparing to the previous quarter.The company's overall shipment continue to increase up 9.5% sequentially. The uneven demand recovery for different products and a relatively big proportion of commodity standard products led to a decrease in the company's wafer ASP. This situation was consistent with what we reported in our last quarter's earnings call.In terms of revenue by region, the start time of overseas destocking pace, especially for mobile phone and consumer-related ICs was later than that of domestic, so now it is still undergoing a difficult time for destocking, which enabled a further increase in China region proportion to 84% of total revenue while revenue from other regions accounted for 16%. By service type, revenue from wafer accounted for 9/10 and others around 1/10. The proportions remain stable.By application, wafer revenue from smartphone, IoT, consumer electronics and others accounted for 26%, 12%, 24% and 38% respectively. The demand for CIS, ISP and RF Bluetooth applied in a domestic end products was relatively good with sequential revenue growth of 24% and 28% respectively. The inventory of display driver recovered to a healthy level.With sequential revenue growth of 16%, the demand for specialty memory was strong, especially for NOR Flash, which grew by 27% sequentially. In the third quarter, wafer revenue contribution from 8-inch accounted for 26% with a slight increase of 1 percentage point, but the utilization rate for 8-inch was still lower than that of 12-inch. Wafer revenue contribution from 12-inch accounted for 74%.The capital expense expenditure this year are mainly used for capacity expansion and new fabs infrastructure. The company's capital expenditures in the third quarter was $2.1 billion and the accumulative capital expenditures for the first 3 quarters were around $5.1 billion.Considering the increasingly complex geopolitical impact on equipment delivery cycle, in order to ensure the production of initiated projects, the company allow its equipment suppliers to make early deliveries.As the current delivery cycle in the global equipment supply chain has been improved, the number of equipment to be delivered to the fabs before end of this year is expected to increase substantially compared to the original forecast. The full year capital expenditures are expected to be raised to around $7.5 billion.As of the end of the third quarter, the company's monthly 8-inch equivalent capacity increase to 796,000 wafers with an increase of 82,000 wafers comparing to the beginning of this year. Since the total capacity as the denominator increased, despite that, the shipments increase in the third quarter sequentially, the utilization rate decreased by 1.2 percentage points to 77.1%.As of now except for high performance computing chips related to data centers, wafer backside processing, dual wafers and 3 wafers copper and copper bounding and advanced packaging of chiplets, there are no new drivers or momentum in other scale markets.At the end of the year, everyone is relatively cautious and willing to leverage the momentum and growth into the future. The company expects to maintain a moderate trend in the fourth quarter with a slight increase in revenue.The gross margin will be dragged by the continuous depreciation burden of the new capacity, which is expected to be in the range of 16% to 18%. In recent years, the company has carried out continuous capacity expansion with high capital expenditures. The continuous incremental depreciation will also put more and more pressure on the company's gross margin.Looking forward to the next year, we see that the overall market has been stabilized. The demand for mature foundries will grow due to the declining inventories. However, we haven't seen drivers and momentum for significant growth for the market. It is still need to wait for the recovery of global macroeconomics.We think this is the fundamental situation for the coming year. Under such an environment, the company will continue to focus on its own business one step at a time to capture the general trend of long-term demand growth for semiconductors.Here, we would like to express our gratitude once again to the community who have cared for, helped and supported us for a long time. Thank you all.

[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]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Leping Huang from Huatai.

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Our next question comes from the line of Szeho Ng from China Renaissance.

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language] connectivity, RF, high voltage driver, DDIC, [ CMOC major ], specialty memory and CO, [Foreign Language] 70%. [Foreign Language] specialty memory [Foreign Language]

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language] loading, utilization [Foreign Language]

[Operator]

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

[Xiaofei Zhang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Xiaofei Zhang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Xiaofei Zhang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Xiaofei Zhang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Xiaofei Zhang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language] market price [Foreign Language]

[Operator]

Our next question comes from the line of Yuan Wang from CITIC Securities.

[Yuan Wang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language] CMOC major [Foreign Language] cover to cover [Foreign Language] CMOC major [Foreign Language] DDIC [Foreign Language] power supply [Foreign Language] power supply [Foreign Language]

[Yuan Wang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language] power management [Foreign Language] copper to copper bonding, hybrid bonding [Foreign Language]

[Yuan Wang, analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Operator]

We'll be taking our final question from the line of [ Ting Zhangcho ] from Guosen Securities.

[Unknown Analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Operator]

I'd now like to turn the call back to Ms. Guo Guangli for 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 third quarter webcast conference call. We thank you for joining us today. Have a good day.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]