China Semiconductors_ Chinese semiconductor foundry - Further GM improvement is key

Summary of Conference Call on China Semiconductors Industry Overview - The conference call focused on the Chinese semiconductor foundry industry, specifically discussing the performance and outlook of two major companies: SMIC (Semiconductor Manufacturing International Corporation) and Hua Hong Semiconductor. Key Points on SMIC - 4Q24 Performance: SMIC reported a revenue growth of 32% YoY, with a gross margin (GM) of 22.6%, an improvement from 20.5% in 3Q24 and 16.4% in 4Q23. This was attributed to a better product mix and increased shipments of 12" wafers [1][2]. - Capacity Expansion: SMIC plans to add new capacity of 50,000 wafers per month (wpm) each year in 2025 to meet demand, particularly for specific processes like HV-28nm and CIS [1]. - Market Outlook: The company anticipates higher than industry average growth in 2025, driven by early order pull-ins due to tariff concerns and government support [1][2]. - Guidance for 1Q25: SMIC expects a sequential growth of 6-8% QoQ, although GM may decline to 19-21% due to rising depreciation costs [2]. Key Points on Hua Hong - 4Q24 Performance: Hua Hong's revenue grew 18% YoY, but its GM was 11.4%, down from 12.2% in 3Q24. The company faced challenges due to intense competition and high depreciation costs [1][3]. - 1Q25 Outlook: The guidance for 1Q25 is weaker than expected, with projected sales of US$530-550 million and GM of 9-11%, below consensus estimates [3]. - Capacity Expansion: Hua Hong is ramping up its second 12" fab starting from 1Q25, which is expected to help meet specialty process demand [1][3]. Financial Metrics - SMIC Financials: - Revenue: US$2,207 million in 4Q24, up 32% YoY - Gross Profit: US$499 million, GM of 22.6% - Net Income: US$108 million, EPS of US$0.01 [2][13]. - Hua Hong Financials: - Revenue: US$539 million in 4Q24, up 18% YoY - Gross Profit: US$61 million, GM of 11.4% - Net Income: -US$25 million, EPS of -US$0.01 [3][21]. Analyst Ratings and Price Targets - SMIC: Maintained a Neutral rating with a target price raised to HK$47, implying a P/B of 2.0x based on 2025/26 averages [11]. - Hua Hong: Maintained a Sell rating with a target price raised to HK$24, implying a P/B of 0.8x based on 2025/26 averages [11]. Additional Insights - Market Dynamics: The overall semiconductor industry is experiencing a cyclical recovery, but the trailing-edge foundry space is facing structural oversupply, which may pressure ASP and GM recovery [11][12]. - Future Outlook: Analysts expect continued challenges for Hua Hong due to competition and cost pressures, while SMIC's favorable position may not lead to significant upside unless product and technology prioritization improves [11][12]. This summary encapsulates the key insights and financial metrics discussed during the conference call, providing a comprehensive overview of the current state and outlook of the Chinese semiconductor industry.