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As of August 13, SMIC's stock price has risen for four consecutive trading days. Beijing Business Daily reporters noticed that many institutions including Lyon and Yamato have recently raised their ratings on SMIC, mainly because the company's performance exceeded expectations. According to SMIC's second quarter results, the company's revenue was US$1.901 billion and its net profit was US$165 million, both exceeding expectations. Although it has not recovered, SMIC's "mentality" is very optimistic, and it has further increased its production capacity and bet on 12-inch wafers. From the industry's point of view, fluctuations in chip market demand are inevitable, and what SMIC needs is to play against the cycle.

Revenue and net profit both exceeded expectations

For SMIC, which is engaged in wafer production, capacity utilization is a barometer of performance. In 2023, its capacity utilization rate dropped from 92% in the previous year to 75%. Now the company's capacity utilization rate has rebounded to 85.2%.

The ups and downs are mainly affected by the supply and demand relationship. In 2023, the chip market inventory was high and demand slowed down. Now, with the gradual destocking of downstream and the recovery of demand, SMIC's performance has recovered.

SMIC Co-CEO Zhao Haijun said in response to the second quarter's performance: For the chips needed for high-end smartphones, whether DDIC or CMOS, domestic chip manufacturers have almost no inventory, the market is in short supply, and growth is expected in the fourth quarter. As for commonly used chips such as WiFi, Zhao Haijun said that the market demand in the fourth quarter mainly depends on whether manufacturers prepare in advance for the coming year.

Due to the large size of SMIC, the impact of the cycle is more significant. Under the influence of the previous "chip shortage", the company's revenue and profits continued to grow in the three years from 2020 to 2022, and its net profit attributable to shareholders increased by approximately 142% and 148% in 2020 and 2021, respectively.

Although SMIC has recovered slightly this year, its profits are still fluctuating. Judging from the month-on-month data, in the fourth quarter of last year, the company's operating profit was approximately 1.74 billion yuan, an increase of approximately 44% month-on-month, but in the first quarter of this year, it fell again to approximately 528 million yuan, a month-on-month decline of nearly 70%.

In any case, SMIC is quite optimistic. Previously, the market estimated that the company's sales revenue and net profit would be US$1.84 billion and US$76.3 million respectively. Obviously, SMIC's second quarter operating performance exceeded market expectations. By comparison, the company's sales revenue in the second quarter was slightly higher than the forecast, and the net profit was more than double the forecast.

In an investor relations event, it stated that the company's revenue guidance for the third quarter is a 13%-15% month-on-month increase, with a gross profit margin of between 18% and 20%. In addition to the supply and demand imbalance in the local market, the company is also actively expanding production of 12-inch wafers, which have relatively high added value and are beneficial to the company's revenue.

At the same time, SMIC is also aware that the fourth quarter is traditionally an off-season and market demand is uncertain, but the company said that the overall pattern this year can be roughly determined. Under the premise that there are no major changes in the external environment, the company's sales revenue in the second half of the year can exceed that in the first half.

At the close of August 13, SMIC's share price was 49.2 yuan, rising for four consecutive trading days, with a cumulative increase of 4.19% and a cumulative turnover rate of 3.47%. In terms of capital flow, the stock has generally seen an inflow of funds in the past five days, which is higher than the industry average, with a total inflow of 397.5994 million yuan on the 5th.

Will the expansion work?

"12-inch wafer" has become the key word in SMIC's response and a growth point of market attention. Compared with 8-inch wafers, due to its larger area, more chips can be cut out, reducing the cost of a single chip. From the application point of view, high-performance processors and high-end memory chips currently use more 12-inch wafers.

Industry observer Major General Ding analyzed to the Beijing Business Daily reporter that in the field of mobile phones, AI mobile phones undoubtedly have a greater demand for 12-inch wafers. As the performance of mobile phone GPUs improves, the integration of circuits will also be higher, requiring more components to be integrated per unit area, and using 12-inch wafers for production is more ideal.

But at the same time, experts also pointed out that 12-inch wafers are not a substitute for 8-inch wafers. Mature process chips in mobile phones, such as RF chips and power management chips, are still produced using 8-inch wafers. In other words, the recovery in downstream demand is good for wafers in all lines, but for the upstream, 12-inch products have greater profit margins.

In order to adapt to market trends, SMIC previously planned to expand its production capacity by 340,000 12-inch wafers. Regarding the execution of the plan, SMIC said: "For some time, we have not been able to meet customer demand, that is, supply has exceeded demand. We are trying to speed up the construction of production capacity as much as possible."

Although SMIC is increasing production, it does not intend to trade low prices for market share. On the contrary, it is quite confident in terms of price. Zhao Haijun said that the current situation is that the company's product prices are steadily rising. The company will not take the initiative to reduce prices, and increasing capacity utilization is not for low-price competition.

Some market voices said that although downstream customers' "restocking" has driven up demand, this may only be a short-term behavior and may fall again. How will SMIC deal with the situation of "oversupply" after expanding production? In this regard, Zhao Haijun said that while overall demand has rebounded, some departments are indeed reducing inventory, such as digital TVs and speakers. However, the company can transfer the new production capacity to those promising products and applications in the future, thereby taking advantage of the market growth.

Industry insiders point out that for a large company like SMIC, counter-cyclical production expansion is not uncommon. To a certain extent, its production rhythm does have to "bet against" the market cycle. Compared with the short-term profit risks, missing out on opportunities is an even more unacceptable result for SMIC.

A Beijing Business Daily reporter interviewed SMIC on related issues, but no response was received as of press time.

Beijing Business Daily reporter Tao Feng and Wang Zhuli