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Investment Rating - The report initiates coverage on SMIC with a "Buy" rating, setting a target price of 133.59 yuan for its A-shares in 2025 [5][44] Core Views - SMIC is positioned as the leading wafer foundry in mainland China, benefiting from the AI-driven semiconductor cycle [1] - The company is expected to capitalize on the AI wave, with demand for advanced and mature process nodes driving growth [2][3] - SMIC's capacity utilization rate bottomed out in 1Q23 and reached 90.4% in 3Q24, indicating improving supply-demand dynamics [2][23] - The company's historical stock performance shows a positive correlation with the semiconductor cycle, suggesting potential upside as the cycle recovers [2][26] Key Drivers AI-Driven Semiconductor Cycle - The global semiconductor cycle is in an upward trend, driven by AI demand, with global semiconductor sales showing 12 consecutive months of YoY growth as of October 2024 [2][20] - AI-driven demand for cloud and terminal chips is expected to be a major factor in the current semiconductor cycle recovery [2][20] Advanced Process Node Demand - AI is driving demand for advanced process nodes, with SMIC well-positioned to benefit due to its leadership in mainland China's advanced process manufacturing [3][30] - SMIC has developed N+1 and N+2 processes, giving it strong pricing power in the domestic market [3][30] - The company is expected to benefit from the localization of AI chip demand and the push for domestic substitution [3][30] Mature Process Node Demand - Mature process nodes are expected to benefit from consumer recovery and accelerated domestic substitution [3] - China's semiconductor capacity increased by 365% from 2012 to 2022, leading globally, driven by strategic expansion and supply chain security concerns [35] - AI-driven innovation is expected to boost demand for traditional products like smartphones and PCs, as well as new categories like AI glasses and headphones [35][38] Financial Projections - Revenue is projected to grow to 56.7 billion yuan in 2024, 65.7 billion yuan in 2025, and 73.5 billion yuan in 2026 [4][44] - Net profit attributable to shareholders is expected to reach 4.02 billion yuan in 2024, 5.96 billion yuan in 2025, and 7.30 billion yuan in 2026 [4][44] - The smartphone segment is expected to be a key growth driver, with revenue growth of 40% in 2024, 25% in 2025, and 15% in 2026 [41][43] Valuation - SMIC is valued using a PB multiple, with a target PB of 7.05x for A-shares in 2025, reflecting its leadership in advanced process nodes in mainland China [44] - The A/H share premium is expected to remain stable at around 3.0x, consistent with historical trends [44][47] Historical Performance - SMIC's stock performance has been sensitive to US-China relations and the semiconductor cycle, with significant volatility during periods of US sanctions [15][16] - The company's capacity utilization has historically shown a strong correlation with its stock price, with periods of high utilization leading to better stock performance [26][27][28]

Investment Rating - Buy (首次) [4] Core Views - SMIC is a leading player in China's semiconductor foundry industry, ranking third globally with a 6% market share in 24Q3 [6] - The company achieved record-high revenue of 15.61 billion RMB in 24Q3, up 14.14% QoQ and 32.50% YoY [6] - SMIC is expected to achieve revenue of 56.4/65.2/73.3 billion RMB in 2024/2025/2026, with YoY growth of 24.7%/15.5%/12.5% respectively [7] Industry Overview - The foundry industry is capital-intensive and highly concentrated, with CR5 exceeding 90% [2] - Global foundry output value is expected to increase by 20% YoY in 2025, driven by AI and supply chain inventory improvements [2] - China's chip self-sufficiency rate was 18.3% in 2022, indicating significant room for domestic substitution [2] Company Operations - SMIC provides foundry services from 0.35μm to 14nm nodes, with total capacity reaching 880k wafers/month (8-inch equivalent) in 24Q3 [6] - The company has multiple 8-inch and 12-inch fabs in Shanghai, Beijing, Tianjin, and Shenzhen [6] - SMIC is the first Chinese company to achieve 14nm FinFET mass production and is leading domestic advanced node development [25] Financial Performance - 24Q3 revenue reached 15.61 billion RMB, with gross margin of 23.92% [74] - 2024-2026 revenue is forecasted at 56.4/65.2/73.3 billion RMB, with net profit of 4.0/5.3/6.8 billion RMB [7] - R&D expenses reached 3.895 billion RMB in 24Q1-Q3, up 7% YoY [51] Technology Development - SMIC has achieved mass production of 14nm FinFET and is developing N+1 process [39] - The company has 17,956 invention patent applications and 11,865 granted patents as of 24H1 [51] - Key R&D projects include 28nm ultra-low leakage platform and 55nm high-voltage display driver platform [79] Market Position - SMIC ranks third globally in foundry with 6% market share in 24Q3 [6] - The company is the top foundry in mainland China, leading domestic advanced node development [25] - SMIC's 12-inch capacity reached 880k wafers/month (8-inch equivalent) in 24Q3 [6] Capacity Expansion - SMIC added 21k 12-inch wafer capacity in 24Q3, bringing total capacity to 884k wafers/month [53] - Capacity utilization rate improved to 90.4% in 24Q3 [53] - The company plans to continue 12-inch fab expansion in 2024 [128] Competitive Landscape - The global foundry market is highly concentrated, with CR5 exceeding 90% [2] - TSMC dominates with 64.9% market share in 24Q3, followed by Samsung (9.3%) and SMIC (6.0%) [97] - China's foundry market grew from 39.1 billion RMB in 2018 to 77.1 billion RMB in 2022, with 18.5% CAGR [102] Future Outlook - AI demand is expected to drive foundry industry growth, with AI server revenue CAGR of 39% from 2022-2027 [62] - SMIC is well-positioned to benefit from domestic substitution and AI-driven demand [7] - The company's valuation is supported by its leading position in China's semiconductor industry [138]

Investment Rating - The report assigns a "Buy" rating to SMIC (688981 SH) for the first time [17] Core Views - SMIC is a leader in China's integrated circuit manufacturing industry and one of the world's leading pure-play foundries, ranking 4th globally and 1st in China by 2023 sales [17] - The company benefits from its platform-based ecosystem model, providing one-stop services including design services, IP support, and photomask manufacturing [17] - Smartization and high-speed computing performance demands are key market drivers, with new smart terminal product upgrades catalyzing replacement cycles [17] - In Q3 2023, SMIC achieved record quarterly revenue of $2 17 billion, up 14% QoQ, with capacity utilization reaching 90 4% and gross margin improving to 20 5% [17] Financial Performance - Revenue is forecasted to grow from 57 477 billion yuan in 2024 to 74 245 billion yuan in 2026, with EPS increasing from 0 49 yuan to 0 81 yuan [17][19] - Net profit attributable to parent company is projected to rise from 3 905 billion yuan in 2024 to 6 437 billion yuan in 2026 [6][17] - Revenue growth rates are estimated at 27% for 2024, 14 1% for 2025, and 13 2% for 2026 [20] - Net profit growth rates are forecasted at -19% for 2024, 34 5% for 2025, and 22 5% for 2026 [21] Market Position - SMIC operates 8-inch and 12-inch wafer foundry services globally [17] - The company added 21k 12-inch wafer monthly capacity in Q3 2023, optimizing product structure and increasing average selling prices [17] - SMIC's current market capitalization stands at 777 7 billion yuan with a share price of 97 51 yuan as of December 27, 2024 [17] Valuation Metrics - The stock trades at 199x, 148x, and 121x projected 2024-2026 earnings respectively [17] - Price-to-sales ratios are estimated at 13 5x for 2024, 11 9x for 2025, and 10 5x for 2026 [23] - Price-to-book ratios are forecasted at 5 3x for 2024, 5 2x for 2025, and 5 0x for 2026 [23] Industry Outlook - The semiconductor industry is experiencing explosive growth driven by smart terminal upgrades and high-performance computing demands [17] - Replacement cycles for smartphones, PCs, wearables, and consumer electronics are showing gradual growth momentum [17]

Key Points Industry or Company Involved - **Industry**: Semiconductor, AI Chips, Advanced Manufacturing - **Company**: Zhong芯国际 (SMIC) Core Views and Arguments - **SMIC's Role in the Semiconductor Industry**: SMIC is the only domestic supplier of advanced process nodes in China, making it a critical bottleneck in the supply chain. - **Demand for Advanced Process Nodes**: The demand for advanced process nodes in China is growing rapidly, driven by the development of AI, 5G, and other high-tech industries. - **Supply Constraints**: The US sanctions have limited the access of Chinese companies to advanced process nodes from foreign suppliers, further increasing the demand for SMIC's services. - **SMIC's Competitive Advantage**: SMIC has been investing heavily in advanced process node development and has made significant progress in this area. - **Valuation**: The report suggests that SMIC's valuation is likely to improve due to its growing market share and improved financial performance. Other Important Points - **US Sanctions**: The US sanctions on SMIC have had a significant impact on the company's operations and have created opportunities for domestic growth. - **Advanced Process Node Development**: SMIC has been investing heavily in advanced process node development and has made significant progress in this area. - **Financial Performance**: The report suggests that SMIC's financial performance is likely to improve due to its growing market share and improved operational efficiency. - **Valuation Method**: The report suggests that SMIC's valuation should be based on a combination of PB and PE methods, taking into account its unique position in the market. References - [doc id='1'] - [doc id='2'] - [doc id='3'] - [doc id='4'] - [doc id='5'] - [doc id='6'] - [doc id='7'] - [doc id='8'] - [doc id='9'] - [doc id='10'] - [doc id='11'] - [doc id='12'] - [doc id='13'] - [doc id='14'] - [doc id='15'] - [doc id='16'] - [doc id='17']

Stock Performance and Trading Activity - SMIC received net purchases from southbound funds for 3 consecutive days, with a cumulative net purchase amount of HKD 2.366 billion, and its stock price rose by 11.47% during this period [1] - On December 24, the total trading volume of active stocks through the Hong Kong Stock Connect (including Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect) was HKD 15.969 billion, with a net purchase amount of HKD 2.056 billion [1] - SMIC's trading volume through the Hong Kong Stock Connect channel on December 24 was HKD 1.338 billion, with a net purchase amount of HKD 204 million [1]

Market Activity - SMIC led in net financing purchases with a total of 1.384 billion yuan [1] - Other companies with significant net financing purchases include Accelink, Cambricon, Ingenic, ZTE, Woer, Newsea, AMEC, Runze, Runxin, and Wus, all with net purchases exceeding 300 million yuan [1] - 10 stocks had net financing purchases exceeding 300 million yuan [1] - Last week (December 16 to December 20), 1,659 stocks received net financing purchases, with 68 stocks having net purchases exceeding 100 million yuan [1]

Stock Performance - Hong Kong semiconductor stocks mostly rose with Pentamaster Corporation surging 16% [1] - HG Semiconductor and SMIC gained 6 90% and 6 88% respectively [1] - Solomon Systech and Hua Hong Semiconductor also performed well increasing by 4 44% and 4 15% respectively [1] - Shanghai Fudan Microelectronics and China Electronics Huada Technology rose 3 82% and 2 44% respectively [1]

Investment Rating - Maintain "Overweight" rating [2] Core Views - SMIC achieved record-high revenue in Q3 2024 driven by strong domestic demand for wafers, with revenue reaching RMB 15.6 billion, up 14% QoQ and 33% YoY [4] - Q3 gross margin improved significantly to 21%, up 7 percentage points QoQ, due to higher ASPs for 12-inch wafers [4] - Capacity utilization exceeded 90% in Q3, up 5 percentage points QoQ [4] - SMIC expects Q4 revenue to grow 0-2% QoQ with gross margin between 18-20% [4] - The company added 20k 12-inch wafer capacity in Q3 and plans to add another 30k in Q4, reaching total capacity of 950k 8-inch equivalent wafers by year-end [4] - CAPEX in Q3 was RMB 8.4 billion, down 48% QoQ, returning to Q1 2023 levels [4] Financial Performance - 2024E revenue is projected at RMB 57.5 billion, up 27.1% YoY [5] - 2024E net profit attributable to parent company is estimated at RMB 3.8 billion, down 20.2% YoY [5] - 2024E gross margin is forecast at 19.4%, with net margin of 6.7% [5] - ROE is expected to be 2.6% in 2024, improving to 3.9% by 2026 [5][7] - 2024E EPS is projected at RMB 0.48, with P/E of 193x and P/B of 5.11x [4][7] Industry Outlook - China's 12-inch wafer capacity is expected to account for 25% of global capacity by 2026, becoming the world's largest [4] - SMIC is well-positioned to benefit from the localization trend in wafer manufacturing [4] - The semiconductor industry is experiencing a moderate recovery, with consumer markets gradually improving [4] Valuation and Projections - 2024-2026 net profit attributable to parent company is projected at RMB 3.8 billion, RMB 4.9 billion, and RMB 6.1 billion respectively [4] - 2024-2026 EPS is estimated at RMB 0.48, RMB 0.61, and RMB 0.77 respectively [4] - 2024-2026 P/E ratios are projected at 193x, 152x, and 122x respectively [4] - 2024-2026 P/B ratios are estimated at 5x, 4.9x, and 4.7x respectively [4]

Investment Rating - Strong Buy (Maintained) with a target price of 123.7 CNY/53.5 HKD [1] Core Views - Revenue in Q3 2024 reached a historical high of 15.609 billion CNY, a YoY/QoQ increase of 32.50%/14.14%, in line with previous guidance [1] - Gross margin improved significantly to 23.92%, up 10.27pct QoQ, exceeding the guidance range of 18%-20% [1] - Q4 2024 revenue is expected to grow 2% QoQ, with gross margin projected to be between 18%-20% [1] - Local demand continues to rise, with capacity utilization increasing to 90.4% and product mix optimization driving margin recovery [2] - The semiconductor industry cycle is recovering, with AI innovation driving demand growth, particularly in the AI sector, which is expected to grow over 10% [2] - Domestic substitution is accelerating, benefiting leading domestic foundries like SMIC, which is expanding capacity in 28nm and above processes [2] Financial Performance - Q3 2024 revenue: 15.609 billion CNY, +32.50% YoY, +14.14% QoQ [1] - Q3 2024 gross margin: 23.92%, -0.13pct YoY, +10.27pct QoQ [1] - 2024E revenue: 57.806 billion CNY, +27.7% YoY [6] - 2024E net profit: 3.826 billion CNY, -20.7% YoY [6] - 2025E net profit: 5.495 billion CNY, +43.6% YoY [6] - 2026E net profit: 6.796 billion CNY, +23.7% YoY [6] Industry Outlook - The semiconductor industry is expected to continue growing, with AI and HPC sectors driving demand [2] - Domestic substitution is accelerating, with SMIC well-positioned to benefit from this trend due to its leading technology and capacity expansion [2] Valuation - 2025E PB multiple: 6.5x, target price: 123.7 CNY [2] - 2025E PB multiple for H-shares: 2.6x, target price: 53.5 HKD [2]