SMIC’s overall performance: The revenue side is in line with the guidelines, and the gross profit margin exceeds expectations again.
SMIC (00981, 688981.SH) On the evening of February 10, Beijing time, the Hong Kong stock market released its fourth quarter financial report for 2021 (as of December 2021) after the market. The main points are as follows:
1. Overall performance: The revenue side was in line with the guidelines, and the gross profit margin exceeded expectations again. Although SMIC delivered a record high quarterly revenue this quarter, the market has already had relevant expectations for the company’s revenue. The most eye-catching aspect of the company’s earnings report is its gross profit margin. The company’s gross profit margin also reached a record high of 35% this quarter, and once again exceeded market expectations (33.8%).
2. Take a closer look at the three core indicators: revenue, gross profit margin and capacity utilization rate. The revenue side is split by volume and price. Although SMIC’s shipments are still growing, price is the main driver of the company’s revenue growth this quarter. Under cost splitting, price is also the most critical factor for gross profit margin improvement. Although the cost side has risen, the price increase has been passed on and finally achieved a new high in gross profit margin. In terms of capacity utilization, the company saw a slight decline this quarter due to capacity expansion, but it is still at a record high of 99.4%.
3. Business progress: 28nm and below processes accounted for a new high, and domestic substitution continued . The proportion of 28nm and below processes has reached a new high, accounting for nearly 20%. The increase in the proportion of this node process reflects that the company is still expanding in terms of production capacity, while other customers have the ability to make up for the demand gap of H manufacturers. The proportion of revenue from mainland China and Hong Kong continues to increase, and the company’s revenue in this region accounts for nearly 70%. At the same time, it also reflects that the domestic substitution of Chinese semiconductors has not stopped and is constantly improving.
4. Guidance for the next quarter: SMIC expects a quarter-on-quarter revenue growth of 15-17% in the first quarter of 2022 and a gross profit margin of 36-38%. The two indicators both greatly exceeded the original market expectations of no revenue growth (1.579 billion) and gross profit margin decline (32.97%). The market has misjudged SMIC’s first-quarter performance. Both SMIC’s revenue and gross profit margin are expected to hit new highs in the next quarter.
Overall view:
SMIC, as a whole, delivered a good “answer sheet” this quarter. Although the quarterly revenue did not exceed expectations, the dazzling performance of gross profit margins brought better-than-expected results to the market.
Through the spin-off of Changqiao Dolphin, the higher-than-expected gross profit margin this time was mainly due to the excellent performance of the price increase. The rise in prices is not only driven by industry-level price increases, but also due to the structural improvement of the company’s products. The proportion of 28nm and below has reached a new high, which not only allows the market to see the saturation of the company’s customers, but also sees that the company continues to expand production. The increase in the proportion of domestic customers reflects that the long-term logic of domestic substitution continues.
Compared with the fourth quarter financial report, SMIC is even more surprising that the company has given more dazzling guidance for the next quarter . In the next quarter, SMIC’s revenue is expected to achieve a sequential growth of 15-17%. Combined with the previous guidance given by UMC (shipment volume maintained, price increased by about 5%), SMIC is expected to achieve a rise in volume and price in the next quarter. At the same time, the guidance of gross profit margin of 36-38% in the next quarter shows that the company is optimistic that the price will continue to increase in the next quarter. Based on the company’s guidance, SMIC’s next quarter financial report is expected to set a new record.
What do you need to know about SMIC?
SMIC is the largest chip manufacturing company in mainland China, with the most advanced process technology and the largest production capacity in mainland China. According to SMIC’s financial report, the company is a pure chip manufacturing factory, and the wafer revenue in the business accounts for more than 90%. So, under the background that China and the United States are constantly attaching importance to and overweighting the semiconductor industry, how do you view the current SMIC?
The research on SMIC is carried out from two perspectives: short-term, medium-term and long-term:
1) Long-term perspective: The deterministic trend of domestic substitution of semiconductors. The supply and demand gap in China’s semiconductor market supports the long logic of domestic substitution by chip manufacturing companies such as SMIC. As Mr. Changqiao Dolphin mentioned in “SMIC (Part 1) on the “Core” Technology of Leading Leaders’, “In 35% of the world’s semiconductor sales market, China only supplies 15% of the world’s wafers, There is a huge supply and demand gap in the Chinese market.”
2) Short-term and medium-term perspective: The performance driven by the industry boom has been released. The imbalance between supply and demand in the entire semiconductor industry has pushed up the industry’s prosperity. The demand side is facing the emergence of new demands such as new energy, 5G, and IoT, while the supply side is also affected by the shutdown of the epidemic and shipping. Chip manufacturing companies such as SMIC have achieved a double increase in revenue and profitability under the condition of rising chip prices, bringing about a period of performance release.
As a listed company, SMIC is still most concerned about the company’s business progress and performance. Among them, the three core indicators that affect the performance are mainly revenue, gross profit margin and capacity utilization rate , which are also the most concerned data for SMIC’s financial report. The increase in chip prices has directly brought about an increase in the company’s revenue, and at the same time, it has also improved the company’s gross profit margin in the cost structure. Similarly, as the world’s leading chip manufacturing company, SMIC’s financial report data can also reflect the changes in the entire chip manufacturing industry, such as whether chip price increases are continuing, and whether there is a shortage of raw material costs and other industry issues.
Regarding this financial report, Changqiao Dolphin Jun mainly focuses on the following issues:
1. Overall performance vs market expectations: Did SMIC’s three core indicators, revenue, gross profit margin and capacity utilization rate exceed expectations?
2. The specific source of revenue growth: How much did the company’s revenue growth in this quarter contribute in terms of volume and price?
3. The source of the increase in gross profit margin: The company’s gross profit margin increased in this quarter, and how did prices and costs change? Will the increase in raw material prices still have an impact?
4. Business development: Under the general direction of chip autonomy, how is the progress of domestic substitution? What is the production capacity of SMIC’s various process nodes?
5. In terms of operating performance: What changes did SMIC have in this quarter? Are inventories and accounts receivable reasonable? What is the situation with EBITDA?
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Core indicators look at SMIC:
Revenue, Gross Margin and Capacity Utilization
Core Indicator 1: Revenue Side
In the fourth quarter of 2021, SMIC achieved revenue of US$1.580 billion, a quarter-on-quarter increase of 11.6%, in line with company guidance expectations (11-13%). The company’s revenue growth for the quarter was driven by both higher wafer shipments and higher prices. Among them, the increase in wafer shipments comes from the company’s expansion, while the price increase is mainly driven by the industry’s high prosperity and the increase in capacity structure.
From the perspective of volume and price, the main drivers of SMIC’s revenue growth this quarter are:
?In terms of volume , SMIC’s wafer shipments this quarter (equivalent to 8 inches) reached 1,723,000 wafers, an increase of 0.2% from the previous quarter.
?In terms of price , SMIC’s single-wafer revenue (equivalent to 8 inches) this quarter was US$917, an increase of 11.4% month-on-month. From the perspective of volume and price split, the main driver of the company’s revenue growth this quarter came from price increases . SMIC’s single-wafer revenue stood at US$900 for the first time, reflecting the continued improvement of wafer prosperity from the price side.
Core Indicator 2: Gross Profit Margin
In the fourth quarter of 2021, SMIC’s gross profit margin was 35%, an increase of 1.9pct from the previous quarter, exceeding market consensus (33.8%). The higher-than-expected performance of the company’s quarterly gross profit margin was mainly due to the increase in product prices.
Split the company’s cost structure and analyze the source of SMIC’s increase in gross profit margin this quarter:
Gross profit per wafer = revenue per wafer – fixed cost per wafer – variable cost per wafer
1) Single-wafer revenue: SMIC’s single-wafer revenue (equivalent to 8 inches) this quarter was US$917, an increase of US$94 per wafer from the previous quarter.
2) Monolithic fixed cost (depreciation and amortization): This quarter, the monolithic fixed cost (equivalent to 8 inches) was US$228, an increase of US$16/piece from the previous quarter.
3) The variable cost of a single piece (other manufacturing expenses): This season, the variable cost of a single piece (equivalent to 8 inches) is US$368, an increase of US$29 per piece from the previous quarter.
4) Gross profit per sheet: SMIC’s gross profit per sheet (equivalent to 8 inches) this season was US$321, an increase of US$49/piece from the previous quarter.
Through cost separation, it is found that SMIC’s monolithic fixed costs and variable costs have increased this quarter, and the increase in quarterly gross profit is mainly caused by price.
The increase in monolithic fixed costs is mainly due to the release of the company’s new production capacity, which is still in the process of capacity expansion. The increase in variable costs is mainly affected by costs such as materials. The increase in the final gross profit margin indicates that the company has passed on the increase in cost items through price increases.
Core Indicator 3: Capacity Utilization
The capacity utilization index not only reflects the quarterly operation of SMIC, but also reflects the prosperity trend of the entire wafer manufacturing industry. The boom in the wafer manufacturing industry has driven SMIC and many of its peers to continue to see full production.
In the fourth quarter of 2021, SMIC’s capacity utilization rate was 99.4%, and the capacity utilization rate exceeded 100% for two consecutive quarters. The company’s capacity utilization rate fell slightly this quarter, which was due to the company’s expansion . Combined with the 105% capacity utilization rate previously announced by UMC, the entire wafer manufacturing industry is still at a historically high capacity utilization rate.
But at the same time, it can be seen that the difference is that UMC’s capacity utilization rate can still be maintained at 105% this quarter, while SMIC’s performance has fallen slightly, and the differences between the two manufacturers are also different in the pace of expansion and customer structure. SMIC currently focuses on customers in China and Hong Kong, while UMC has relatively more international customers and is more dispersed in terms of geographical distribution of customers.
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At the business level, SMIC looks at SMIC
After reading the three core indicators, Mr. Changqiao Dolphin and everyone will look at SMIC’s quarterly business situation in an all-round way:
3.1 In terms of downstream markets: the proportion of other fields such as automobiles continues to increase
In this quarter, the proportion of SMIC’s smartphone business revenue continued to decline to 31.2%, and the impact of the smartphone business on the company’s performance gradually became smaller. In each sector, other business income has become the company’s largest source of income, accounting for 32.4%. These other businesses mainly include automotive, industrial and other application fields, reflecting the strong demand driven by new energy vehicles.
Judging from the proportion of each downstream of SMIC, with the increase in demand for automobiles and IoT, the proportion of smartphones in the semiconductor industry is showing a downward trend .
3.2 Each process node: 28nm and below hit a new record high
This quarter, SMIC’s 28nm and below node revenue hit a record high of 18.6%, compared with only 5% in the same period last year.
In 20Q4, it only accounted for 5%. At that time, it was mainly due to the restriction of H manufacturers, and H manufacturers, as the company’s major domestic customers, were limited in shipments and affected related production capacity. Today, the proportion of 28nm and below continues to hit a record high, indicating that 1) the production capacity side: the company continues to expand the production capacity of the 28nm and below process; 2) the demand side: the demand gap for H manufacturers to withdraw has been made up by other customers, etc. .
3.3 In terms of wafer size: 12-inch accounted for more than 60%
In terms of wafer size, 90nm and below are generally classified as 12-inch wafers in the market.
The proportion of SMIC’s 12-inch wafer revenue declined slightly this quarter, and remained above 60%. Judging from the increasing trend of production capacity ratio, SMIC’s future focus is still on 12-inch wafers, and the revenue ratio of 12-inch products has increased from less than half of the past to more than 60%.
In the fourth quarter, SMIC’s 12-inch wafer revenue increased significantly, reaching US$894 million, a year-on-year increase of 78.6%. 12-inch wafer revenue hit a record high again, mainly due to the expansion of 12-inch production capacity and the increase in product prices.
3.4 Distribution of various regions: when domestic substitution is in progress
The proportion of SMIC’s mainland and Hong Kong customers’ revenue increased again to 68.3% this quarter, close to the historical high of 20Q3. After the H manufacturers were restricted, the proportion of the mainland and Hong Kong regions once fell to about 55%, but now it has returned to nearly 70%. On the one hand, it shows that SMIC’s current customer structure is relatively stable, mainly domestic customers; on the other hand, it shows that other domestic customers have filled the gap of H manufacturers. The long-term logic of domestic substitution of semiconductors is and continues to improve.
Four
Operating data to see SMIC
4.1 Operating expenses: various expense ratios remained stable
From the perspective of operating expenses, SMIC’s operating expenses in the fourth quarter were US$133 million, which was relatively stable compared to the previous quarter.
In terms of operating expenses for the quarter, research and development expenses were US$172 million, general and administrative expenses were US$104 million, and consumer and marketing expenses were US$08 million. Among the three expenses, the R&D expense ratio remained at 11% for the third consecutive quarter. The slight increase in the proportion of general and administrative expenses was mainly due to the increase in expenses related to the trial operation of the new plant in Shenzhen.
4.2 Operating indicators: maintaining a reasonable level of inventory and accounts receivable
From the perspective of operating indicators, we mainly observe two aspects of the company’s inventory and accounts receivable:
? SMIC’s inventory was US$1.194 billion, an increase of 8% month-on-month;
?The accounts receivable of SMIC was 1.215 billion US dollars, an increase of 12.1% month-on-month.
? Combining the relationship between inventory & accounts receivable and revenue in the balance sheet, inventory/revenue and accounts receivable/revenue in the fourth quarter were 75.6% and 76.9%, respectively . From the perspective of operating indicators, the proportion of inventories and accounts receivable are maintained at a relatively reasonable level.
4.3 EBITDA indicator: standing firm on a new level
From the perspective of EBITDA, SMIC’s earnings before interest, tax, depreciation and amortization in the fourth quarter reached 1.167 billion US dollars, close to the highest point in history.
Looking at the indicators, SMIC’s EBITDA mainly comes from the release of operating profit and depreciation and amortization. The quarter-on-quarter increase in this quarter is mainly due to the increase in the company’s operating profit. The estimated profit margin (before interest, tax, depreciation and amortization) for this quarter reached a record high of 73.8% for the same period, standing at a new level of over 60%.
