Focus on mature node to sustain high utilisation
- Leading foundry player in China with a worldwide market share of 5.4%
- Focusing on the mature niche (28-90mm) process, we expect revenue to increase at a CAGR of 23% in FY21-FY24, supported by localisation trend
- We forecast FY22/23 earnings to be 40%/66% higher than consensus due to a higher fab utilisation rate
- Initiate coverage with BUY and TP of HK$21.50 on improving ROE and undemanding valuation
China’s no.1 chip foundry company rides on the semiconductor localisation trend. Microcontroller unit “MCU” and auto chip localisation is expected to support SMIC’s revenue to grow at a CAGR of 24% in FY21-24 VS global foundry market CAGR of 8% in FY21-26.
Our forecasted revenue is 8%/10% higher and earnings are 40%/65% higher than the consensus in FY22/23F. While the market is concerned about increasing overall foundry capacity in 2022, we forecasted 5.3%/5.8% higher utilisation rate than the market consensus in FY22/23F due to strong mature node foundry demand especially for MCUs and auto chips in China.
Downstream customers started investing in auto and MCU chips, signalling strong foundry demand in the future. 73% of MCU vendors have significant capex for auto chip and MCU projects ranging from Rmb65.5m to Rmb3.7bn in 2021. 82% have increased their R&D expenses by over 40% y-o-y in FY21, as
indicated by the demand analysis done on lower stream clients.
Valuation:
We set our TP at HK$21.50 based on a 1.1x FY22F PB, in line with the historical average. The re-rating will be driven by a stronger ROE over the next two years.
Key Risks to Our View:
A more tightened technology ban from western countries, further material cost surges, and unexpected further weakening of demand for consumer electronics.