Cycle likely to peak in 2Q22F
? SMIC posted a record quarterly net profit of US$534m in 4Q21, some 26% above our forecast, primarily due to better-than-expected ASP growth.
? We expect robust wafer shipments (+22% yoy) but moderate ASP growth (+9% yoy) in FY22F, driven by the rapid growth in mature nodes capacity.
? Maintain Add. TP is lower at Rmb71.50 to reflect the prolonged US entity list restriction and potential decline in wafer prices.
Record 4Q revenue and net profit, driven by robust ASP growth
SMIC’s 4Q21 net profit surged 108% yoy (+66% qoq) to US$534m, driven by robust wafer shipments (+22% yoy, +0.2% qoq), and ASP growth (+33% yoy, +6.2% qoq) amid strong domestic demand for high voltage drivers, microcontroller units (MCU) and ultra-low power logic. 4Q21 GPM further expanded to 35% (+1.9% pts qoq) thanks to product mix change and increase in ASP. Capex in 4Q21 reached US$2.13bn (47% of FY21’s), mainly for mature nodes capacity expansion. FY21 core net profit grew 106% yoy to US$1.47bn, driven by 20% wafer shipments growth, 38% ASP growth and 7.2% pts GPM gain.
1Q22F ASP set to grow by another 10%, GPM to reach 36-38%
Management said that across-the-board foundry capacity shortages are switching to the phase of a structural shortage but expects overall foundry supply to improve in 2H22F. SMIC guides for 1Q22F revenue growth of 15-17% qoq, with a c.10% ASP growth and GPM of 36-38%. We expect 1Q22F wafer ASP/shipments to grow 10%/6% yoy. SMIC has increased the number of long-term agreements (LTA) with key customers which will help to limit downside risk from wafer prices but would also cap ASP growth in FY22F.
Capacity continues to grow rapidly but ASP set to peak in 2Q22F
SMIC’s capacity rose by 16% yoy to 604k (8” equivalent) in FY21. With a US$5bn capex, we estimate wafer capacity will rise c.22% yoy (adding 130k-150k 8” equiv. wfpm) in FY22F. We expect SMIC’s wafer shipments to grow 22% yoy in FY22F (+18% yoy in FY21) amid strong demand from electric vehicles, IoT, mid-to-high end analogue, MCU and power management applications. However, smartphone (CIS, TDDI and fingerprint ICs) and consumer electronics demand should slow down. Given that we believe overall foundry supply will improve in 2H22F, we expect wafer ASP to peak in 2Q22F before softening in 2H22F. We estimate wafer ASP will grow by 9% in FY22F but fall 5% FY23F amid an oversupply. Although we expect higher depreciation costs of US$2.2bn in FY22F (US$1.87bn in FY21), we estimate that GPM will expand further to 33.8% in FY22F (33.1%/35.0% in 3Q/4Q21) due to wafer price hikes and high utilisation rates. On the back of stronger wafer ASP growth and GPM improvements, we raise FY22F/23F EPS by 51%/71%.
Maintain Add but on lower target price of Rmb71.50
We maintain Add as we think SMIC will continue to benefit from strong domestic demand for mature process nodes. We lower our TP to Rmb71.50 as we now use 5x FY22F P/BV (previously 7x FY21F), to reflect the prolonged US entity list restriction that limits its advanced process technology development, as well as the potential risk of wafer price declines. Share price catalysts are removal of export restriction by the US government and accelerated FinFET technology development. Risks: faster-than-expected wafer price erosion and delays in equipment delivery from suppliers.