Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Analysis

SMIC Posts Modest Q4 Growth, Cautious Q1 Outlook

In Q4 2023, Semiconductor Manufacturing International Corporation (SMIC) saw revenues increase by 3.6% quarter-over-quarter to $1.678 billion, with a sequential increase in profit from operations by 22.8%. However, gross margin declined by 3.4 percentage points to 16.4%. For the full year, revenue reached $6.322 billion, and the gross margin was 19.3%. The company ended the year with $47.8 billion in total assets and a negative 21.1% net debt to equity. For the first quarter of 2024, SMIC forecasts revenue to be flat to up 2% sequentially, with a notable decline in gross margin expectations to 9-11%.

The State of the Company in 2023

In 2023, the company navigated through a year marked by economic challenges, including a downturn that saw the broader foundry industry's output value diminish significantly. Struggling against high inventories, a macroeconomic downturn, and geopolitical tensions, the industry faced substantial corrections. Despite these hurdles, the company managed to climb from the bottom of the downturn in the first quarter to growth in the latter half of the year, ending fourth-quarter with revenues at $1.678 billion, up 3.6% sequentially, and a gross margin maintaining stability at 19.3%. Total annual revenue experienced a decline of 13% compared to the previous year, settling at $6.32 billion.

Financial Results and Positioning

Financially, the fourth quarter showed the company's resilience with operating profits rising 22.8% sequentially to $107 million and an EBITDA of $1.011 billion, representing an EBITDA margin of 60.2%. Full-year 2023 recorded an EBITDA of $4.064 billion with an EBITDA margin of 64.3% and a profit of $903 million attributable to the company. Despite operating in a tough industry climate, these figures illustrate the company's ability to maintain profitability. On the balance sheet, there were assets totaling $47.8 billion, including a substantial $16.7 billion in cash, with a net debt to equity at a negative 21.1%, indicating a strong liquidity position.

Outlook and Guidance for 2024

Looking ahead to 2024, the company anticipates moderate performance amidst ongoing macroeconomic and geopolitical challenges. With an emphasis on stability, mild growth is expected, catalyzed by an improving inventory situation and steady demand particularly in smartphones and connectivity. The revenue forecast is cautiously optimistic, with expectations to be flat or grow up to 2% sequentially in Q1, though gross margins may compress to between 9% and 11% due to product mix changes, depreciation, and price declines. For the full year, revenue growth is projected to at least match industry averages, in the mid-single-digit percentage range, with capital expenditures holding steady.

Strategies and Resilience

The company's strategic responses to the challenging market include a reinforced local presence in China, which is significant given it's the world's largest chip consumption market. Two decades of technology and product quality enhancements provide the company with resilience against industry cycles. Additionally, there's a strong commitment to supply chain security and diversification, embodying a prudent approach that seeks sustained profitability, cost control, and improved efficiencies as key operational objectives. These strategies underpin the company's confidence in maintaining its competitiveness through cyclical fluctuations.

Earnings Call Transcript 2023-Q4

[Operator]

[Interpreted] Welcome to Semiconductor Manufacturing International Corporation's Fourth Quarter 2023 Webcast Conference Call. Today's call will be simultaneous speech 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 webcast.

[Guang Li Guo, executive]

[Interpreted] Greetings. Welcome to SMIC's Fourth Quarter 2023 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 operating results for the fourth quarter and full year of 2023, followed by our guidance for the first quarter of 2024.

The fourth quarter operating results are as follows: Revenue was $1.678 billion, up 3.6% sequentially. Gross margin was 16.4%, down 3.4 percentage points sequentially. Profit from operations was $107 million, up 22.8% sequentially. EBITDA was $1.011 billion. EBITDA margin was 60.2%. Profit attributable to the company and non-controlling interests were $175 million and $63 million, respectively.

The company's unaudited operating results for full year of 2023 are as follows: Revenue was $6.322 billion; gross margin was 19.3%; profit from operations were $358 million; EBITDA was $4.064 billion; EBITDA margin was 64.3%; profit attributable to the company was $903 million; capital expenditure was $7.47 billion.

Moving to the balance sheet. At the end of 2023, the company had total assets of $47.8 billion, of which, total cash on hand was $16.7 billion. Total liability was $16.9 billion, of which, total debt was $10.2 billion. Total equity was $30.8 billion. Debt to equity was 33.1%, and net debt to equity was negative 21.1%.

In terms of cash flow, in 2023, we generated $3.358 billion cash from operating activities. Net cash used in investing activities was $6.208 billion. Net cash from financing activities was $2.466 billion.

For the first 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 9% to 11%.

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 operations.

[Haijun Zhao, executive]

Thank you for attending today's earnings call. Wishing everyone an early Happy Lunar New Year.

In 2023, we experienced a year of industry downturn, and the annual output value of foundry industry declined by double digits. After 2 years of global chip shortage and industry overheating, the semiconductor industry encountered deep corrections in market demand and industry competition caused by high inventories, a macroeconomic downturn and intensified geopolitical tensions, which persist till now. The industry was in the first U of the double U trend. In the second half of 2023, SMIC-related areas, like smartphones, consumer electronics and others, didn't show a significant turnaround. Although the inventory situation in the overall market have been mitigated and good news has been read in high-end product sales.

In the third quarter of 2023, the mobile industry chain underwent upgrades, which provided some innovative product companies with opportunities. They initiated rush orders and began to recover. However, since the total unit shipment of smartphones and computers for the full year of 2024 is expected to increase slightly and the industry has not seen full recovery. We are still monitoring closely to see whether the rush orders can sustain.

SMIC experienced the trough of the downturn cycle in the first quarter of 2023 buttoned out in the second quarter, continued to grow in the third and fourth quarter. In Q4, the company's revenue was $1.678 billion, up 3.6% sequentially, slightly beat the guidance. Gross margin was 16.4%, in line with the guidance. Across various platforms, mobile phone-related CMOS image sensor and display driver chips performed well. The revenue from CIS and ISP increased by more than 60% sequentially, and the production capacity was in short supply. The revenue from DDIC and TDDI increased by nearly 30% sequentially with strong competitiveness in 40-nanometer and 55-nanometer markets. The company has also built up good deployment in AMOLED technology application.

According to the unaudited financial results, the company's revenue in 2023 was $6.32 billion, down 13% year-over-year. Gross margin was 19.3%, basically in line with the company's guidance provided in the beginning of 2023. By region, revenue from China, America and Eurasia accounted for 80%, 16% and 4%, respectively. By size, wafer revenue from 8-inch and 12-inch accounted for 26% and 74%. Wafer revenue by application, smartphone, computer and tablets, consumer electronics, connectivity and IoT, industrial and automotive accounted for 27%, 27%, 25%, 12% and 10%, respectively. The company's capital expenditure was $7.5 billion. Monthly capacity was 806,000 8-inch equivalent wafers by the end of the year. And annualized capacity utilization rate was 75%.

In 2024, the company will still face the challenges from macroeconomic, geopolitics, industry competition and inventory for all products. We believe that the company's performance in the second U of the double U trend will be moderate. Along with the semiconductor ecosystem, the company will emerge from the downturn. The company will realize relatively stable and mild growth, driven by the combined influence of gradual improvement in customer inventories and continued rebound in demand for smartphone and connectivity. However, from the perspective of the overall market, the demand recovery is not strong enough to support a comprehensive and strong rebound of semiconductor industry.

Combining the above factors, the company's first quarter guidance is as follows: Revenue is expected to be flat to up 2% sequentially, and the gross margin is expected to be in the range of 9% to 11%. The main reasons for the decrease in gross margin in the first quarter are product mix change and SMIC [indiscernible] depreciation, pricing decline.

Based on the parameters that there are no significant changes in the external environment, the company's guidance for the year 2024 is the revenue growth is expected to be not less than industry average in the same market and around mid-single-digit percentage year-over-year. In 2024, the company plans to continue the progress of 12-inch fabs and capacity-building projects that have been announced in recent years. The capital expenditure is expected to maintain roughly flat compared to that of previous year.

Let me give some comments for the above guidance of revenue and capital expenditure. First, since 2022, the uncertainty of the global supply chain has been increased. The industry model of relying on others to supply domestic demand has caused anxiety among governments of various countries. With more and more capacity building based on geopolitical considerations, coupled with the macroeconomic cycle and lagging consumption, in the short term, it will be difficult for foundries to achieve high utilization seen in the past few years. During the process of continuous high investment, the company's gross margin is under the pressure of high depreciation. However, we will always target sustained profitability, strictly control costs and improve efficiencies.

Secondly, China is the largest chip consumption market in the world. We manufacture locally and have more opportunities. SMIC owns the advantages of market, technology and product quality, which have been accumulated for more than 2 decades and enable the company to be more resilient during the cyclical fluctuations. At the same time, the company also pays close attention to the security, reliability and resilience of the supply chain and spares no effort to promote the diversification and the localization of the supply chain.

Aim high, but stay grounded. Finally, we would like to extend our sincere thanks and best wishes to friends who care and support the development of the company.

[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]

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

[Leping Huang, analyst]

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[Operator]

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

[Szeho Ng, analyst]

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[Szeho Ng, analyst]

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[Operator]

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

[Xiaofei Zhang, analyst]

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[Xiaofei Zhang, analyst]

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[Xiaofei Zhang, analyst]

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[Operator]

[Interpreted] Our next question comes from the line of [ Xuzhou Wang ] from Citic Securities.

[Unknown Analyst]

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[Operator]

[Interpreted] Our final question today comes from the line of [ Jian Jun Zhang ] from Guosen Securities.

[Unknown Analyst]

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[Unknown Executive]

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[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 Fourth Quarter Webcast Conference Call. We thank you for joining us today. Goodbye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]