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Record high GPM on surging wafer price

■ 3Q21 net profit declined 29% qoq, forming 77% of our FY21F forecast. We deem this in line as we project a strong quarter in 4Q21F.
■ FY21F capacity is on track to expand c.16% yoy. The Shenzhen new fab will commence production in 2H22F, lifting capacity further by 8% yoy.
■ Reiterate Add. TP raised to HK$32.90, still based on 2.3x P/BV in FY21F.

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3Q21 net profit fell 29% qoq due to decrease in other gains

SMIC’s 3Q21 core net profit fell 29% qoq (+25% yoy) to US$321m due to higher depreciation and R&D expenses and lower other gains. 3Q21 revenue grew 31% yoy to US$1.42bn, with wafer shipment revenue (94% of 3Q21 revenue) rising 7.8% qoq, driven by c.1.5% pts qoq drop in wafer shipment and c.9% qoq ASP growth, thanks to wafer price hikes and product mix improvement at mature nodes (28nm/40nm/55nm). China remained the largest revenue contributor at 67% of 3Q21 revenue. Gross profit margin (GPM) expanded 3.0% pts qoq (+8.9% pts yoy) to 33.1% due to ASP hikes and a higher utilisation rate. SMIC sees another strong quarter in 4Q21F and guides revenue to increase 11-13% qoq (+60-63% yoy) due to greater capacity (c.+2% qoq or c.+16% yoy) and a moderate jump in ASP (c.+4% qoq, or +30% yoy), thanks to strong demand for mainstream semi components (PMIC, WiFi, display drivers, fast charger, CMOSs, etc.). The company also guided 4Q21F GPM will hover at 33-35% due to higher ASP and better utilisation rates (101% in 4Q21F vs. 100.3% in 3Q21).

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Continues to expand capacity to meet robust domestic demand

Capex was US$1.08bn in 3Q21 (US$1.3bn in 1H21), below its full-year target of US$4.3bn due to logistics disruptions and US export restrictions. However, we believe SMIC can achieve its capacity expansion target to reach 600k wpm (8” equiv) in FY21 as it will add another 10k wpm in 4Q21F. In order to meet fast-growing domestic demand due to the strong localisation trend (we believe Chinese IC designers prefer to domestically produce semi components due to ample government support), SMIC plans to further expand its capacities in FY22F and onwards. SMIC said that it will add 1) 40k wpm in the Shenzhen new fab (to be completed in 2H22F), 2) 100k wpm in the Beijing Jingcheng project, and 3) 100k wpm in the Shanghai Lingang fab. We project 17% revenue growth in FY22F, underpinned by c.12% wafer shipment growth and wafer price increase of only c.4% as we
expect wafer prices to decline in 2H22F. However, we forecast GPM to slide c.2.7% pts yoy to c.27.5% in FY22F (we believe GPM will peak in 4Q21F at c.33.1%) due to an increase in depreciation expenses (+c.20% yoy in FY22F).

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Reiterate Add

We reiterate Add on SMIC as we believe it will be a key beneficiary of the robust semiconductor localisation trend. We raise our FY22F/23F EPS by c.21%/1% on higher wafer shipment and wafer price assumptions. Our target price rises to HK$32.90, still
based on 2.3x FY21F P/BV, 1.5 s.d. above its 3-year average, reflecting China’s favourable semiconductor industry outlook. Potential share price catalysts include removal of export restrictions by the US government and technology breakthrough in 10nm or below processes. Risks: slow progress in FinFET technology and faster-than-expected wafer price erosion.