Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Analysis

SMIC Reports Record High Revenue and Provides Cautious Q4 Guidance

In the third quarter of 2024, Semiconductor Manufacturing International Corporation (SMIC) achieved record revenue of $2.17 billion, a 14.2% increase sequentially, driven by optimized product mix and increased 12-inch shipments. Gross margin rose to 20.5%, reflecting a 6.6 percentage point improvement. For Q4, SMIC expects flat to 2% revenue growth, with gross margins projected between 18% and 20%. The company anticipates a decrease in overall utilization and shipments but aims to maintain revenue stability through product mix optimization, while full-year revenues are projected at approximately $8 billion, a 27% year-over-year increase.

Solid Revenue Growth in Q3 2024

In the third quarter of 2024, Semiconductor Manufacturing International Corporation (SMIC) reported impressive financial results, highlighting a significant rebound in revenue. The company achieved $2.171 billion in sales, marking a remarkable 14.2% increase sequentially. This surge in revenue represents a milestone for SMIC, exceeding the $2 billion mark for the first time in a single quarter. The growth is attributed to increased demand for semiconductor products, particularly in the 12-inch node category.

Margin Improvement Signals Efficiency Gains

The gross margin for the third quarter reached 20.5%, up 6.6 percentage points from the previous quarter. This improvement indicates enhanced operational efficiency and a better product mix. The increase in average selling prices (ASP) for some 12-inch nodes is also a contributing factor, as SMIC optimized its product offerings to capitalize on favorable market conditions. As a result, the company's EBITDA stood at $1.157 billion, with an impressive EBITDA margin of 53.3%.

Operational Insights and Shipment Dynamics

During the quarter, SMIC experienced a net increase in 12-inch shipments, while 8-inch shipments decreased, leading to a flat quantity in overall shipments compared to the previous quarter. This shift reflects a strategic response to market demands and ongoing geopolitical influences affecting inventory management. The company managed to increase its overall utilization rate to 90.4%, a rise of 5.2 percentage points, effectively diluting unit depreciation costs.

Regional Revenue Breakdown

On the regional front, SMIC reported diversified revenue streams, with Chinese customers representing 86% of total sales, the Americas contributing 11%, and Eurasia at 3%. Notably, in response to geopolitical tensions, the proportion of revenue from international customers declined by 6 percentage points. However, local demand is strengthening, as Chinese customers expand into mid- to high-end markets, reflected by a 6 percentage point increase in revenue from these clients.

Financial Position and Cash Flow Robustness

At the close of Q3 2024, SMIC maintained a solid financial position, with total assets amounting to $47.2 billion and cash on hand totaling $12.6 billion. The company carried total debt of $10.4 billion against total equity of $31.4 billion, yielding a manageable debt-to-equity ratio of 33.1%. Moreover, net cash generated from operating activities was $1.236 billion during the quarter. While investments totaled $1.345 billion, the negative net debt-to-equity ratio of 7.1% suggests a relatively low financial risk profile.

Guidance for the Fourth Quarter

Looking ahead, SMIC provided conservative guidance for the fourth quarter of 2024. The company anticipates revenue to remain flat to increase by 2% sequentially, indicating a stable demand perspective amid shifting market conditions. Gross margin is expected to range between 18% to 20%, suggesting some anticipated softness compared to the prior quarter, reflecting a cautious outlook for upcoming operations.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Semiconductor Manufacturing International Corporation's Third Quarter 2024 Webcast Conference Call. This call will be simultaneously streamed through the Internet and telephone. [Operator Instructions] With out 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 Third 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 to introduce the company's financial status.

[Junfeng Wu, executive]

[Interpreted] First, I will report our unaudited results for the third quarter, followed by our guidance for the fourth quarter. The third quarter results are as follows: revenue was $2,171 million, up 14.2% sequentially. Gross margin was 20.5%, up 6.6 percentage points sequentially. Profit from operations was $170 million. EBITDA was $1,157 million. EBITDA margin was 53.3%. Profit attributable to the company was $149 million. Moving to the balance sheet. At the end of the third quarter, the company had total assets of $47.2 billion, of which total cash on hand was $12.6 billion. Total liability were $15.8 billion, of which total debt was $10.4 billion. Total equity was $31.4 billion. Debt-to-equity was 33.1% and net debt to equity was negative 7.1%. In terms of cash flow, in the third quarter, net cash generated from operating activities was $1,236 million. Net cash used in investing activities was $1,345 million. Net cash used in financing activities was $97 million. For the fourth quarter 2024, our guidance is as follows: revenue is expected to be flat to up 2% 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]

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

[Haijun Zhao, executive]

[Interpreted] Good morning. Thank you for attending SMIC's Third Quarter 2024 Earnings Webcast Conference Call.

As we shared in August, in the first half of the year, domestic customers restocked and built up inventory in order to gain market share, and overseas customers hold in some shipments from the third quarter to the second quarter in order to hedge against market risk grew by geopolitics. In the third quarter, the net-net of 12-inch shipment increased and 8-inch shipment decrease led to the sequentially flat quantity in quarterly shipments.

This is the first factor. Along with the accelerating demand for localization and the undersupplied situation for chipset capacity in the mainstream market, the price for some 12-inch nodes improved and product mix optimized. As a result, the blended ASP in the third quarter increased sequentially.

This is the second factor. Combining the above factors, the company's revenue in the third quarter increased by 14% sequentially to $2.17 billion, a record high, reaching the milestone of $2 billion in a single quarter for the first time. In the third quarter, the incremental 21,000 12-inch monthly capacity with relatively high added value was quickly pulled into production, which further improved the product mix and increased the blended ASP sequentially. The overall utilization rate increased by 5.2 percentage points sequentially to 90.4%, which effectively diluted the per unit depreciation cost. Combining the above factors, the company's gross margin in the third quarter increased by 6.6 percentage points sequentially to 20.5%

In terms of revenue by region, China, Americas and in Eurasia accounted for 86%, 11% and 3%, respectively. As we mentioned in August, due to the geopolitical considerations and response to the demand of Chinese market, some overseas customers did some shipment pull-in into the second quarter. Thus, the proportion of overseas revenue in the third quarter decreased by 6 percentage points sequentially.

Under the situation of accelerating demand for localization and overall positive demand for exports, Chinese customers have gradually entered the mid- to high-end markets. Thus, the proportion of revenue from Chinese customers in the third quarter increased by 6 percentage points sequentially. By service type, revenue from wafer and others accounted for 94% and 6%, respectively. By final application, wafer revenue from smartphone, computer and tablet, consumer electronics, connectivity and IoT, industrial and automotive accounted for 25%, 16%, 43%, 8% and 8%, respectively.

Consumer application is by far the company's largest category in terms of revenue share because we have a broader definition for it. We have seen that the demand in the consumer market has gradually recovered. Consumer product upgrade has been implemented and the demand for exports has remained positive.

By size, wafer revenue from 8-inch decreased to 21.5% due to some shipment pulled into the second quarter, while wafer revenue from 12-inch increased to 78.5% because the overall 12-inch capacity was nearly fully loaded and its new capacity was quickly verified and pulled into production.

In terms of product platforms, strong demand for BCD brought in orders and drove up the 8-inch utilization rate. -- in the fourth quarter, the company's guidance is revenue is expected to be flat to up 2% sequentially. Gross margin is expected to be in the range of 18% to 20%. In the past few quarters, 12-inch capacity was in short supply and some orders couldn't be fulfilled as scheduled. The fourth quarter follows traditionally seasonal pattern. Customers review their plans made at the beginning of the year and do adjustments downward in the fourth quarter if there are unmet goals. Although in the fourth quarter, customers' willingness for order placing and goods receiving is not that strong. After the negotiation with customers, the impact on the shipment in the fourth quarter is expected not too much.

Additionally, around 30,000 12-inch monthly capacity is expected to be released in the fourth quarter, but it takes time to do verification. In conclusion, the overall utilization rate and shipments in the fourth quarter are expected to decrease. We hope to improve the blended ASP through product mix optimization, thereby ensuring the revenue in the fourth quarter to remain unaffected, flat to slightly increase sequentially. And thus, the gross margin is expected to be relatively stable.

According to the results of the first 3 quarters and the fourth quarter guidance at the midpoint, the company's full year revenue is expected to be around $8 billion, approximately 27% year-over-year growth, which is better than the industry average growth rate in the same market. The full year gross margin is expected to be around 17%.

By the end of the year, the monthly capacity is expected to reach around 950,000 8-inch equivalent wafers. In order to meet the existing customer needs, the company accelerates the capacity deployment of power device so as to fully support the development of automotive, industrial and new energy markets.

During the previous round of upturn cycle, the company's revenue hit its highest point in the third quarter of 2022. Due to the impact of complex external factors, this cycle has been extended longer than before and the recovery in the industry is relatively mild. Next, we will strengthen our confidence in development, maintain our strategic focus, dedicate in wafer manufacturing and accelerate the platform verification. Given the intensified competition in the industry, we will work to stabilize our market share and consolidate our position in the industry.

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. [Operator Instructions]. I would now like to open up the call for Q&A. Operator, please assist.

[Operator]

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

[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]

[Operator Instructions] Next question comes from the line of Jan Shao from Haitong [indiscernible]

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Our next question comes from the line of Hu Jian from Guosen.

[Jian Hu, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Junfeng Wu, executive]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

Our next question comes from the line of Jie Chen of Tianfeng.

[Junjie Chen, analyst]

[Foreign Language]

[Haijun Zhao, executive]

[Foreign Language]

[Operator]

[Interpreted] 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 Third 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.]