Source: Observer
&#34;SMIC's main task now is not to make huge profits, but to supply key semiconductors to the domestic market in a challenging external environment,&#34; said a semiconductor industry insider.
On the evening of May 9th, SMIC announced its first quarter report for 2024, achieving revenue of 12.59 billion RMB (approximately 1.74 billion USD), a year-on-year increase of 23.4%. Meanwhile, Taiwan's TSMC and the American company GlobalFoundries achieved revenues of 17.1 billion USD and 15.1 billion USD respectively during the same period.
This means that SMIC has surpassed the two former companies, becoming the world's second-largest pure wafer foundry enterprise after TSMC.
The revenue growth of SMIC further confirms the gradual recovery trend of the global semiconductor market. The company's management mentioned that in the first quarter of this year, global customers' willingness to stock up has increased, and urgent orders have even been received in areas such as smartphones. Against this backdrop, SMIC's capacity utilization rate reached 80.8% in the first quarter, an increase of 12.7 percentage points year-on-year and 4 percentage points quarter-on-quarter.
However, SMIC's net profit is under significant pressure. In the first quarter, the company's net profit attributable to shareholders was 510 million RMB, a 68.0% year-on-year decrease; after deducting non-recurring gains and losses such as reduced investment income, SMIC's net profit attributable to shareholders was 620 million RMB, a 33.3% year-on-year decrease; the gross profit margin was 13.7%, a decrease of approximately 7 percentage points year-on-year, the lowest level since the global financial crisis in the fourth quarter of 2009.
Based on this, although SMIC's revenue has reached the second in the global industry, its profit level still lags behind its main peers. In the first quarter of this year, TSMC's net profit was 330 million USD, a 35% year-on-year decrease; GlobalFoundries' net profit was 130 million USD, a 47% year-on-year decrease; TSMC's revenue was 18.33 billion USD, a 17% year-on-year increase, and net profit was as high as 6.98 billion USD, a 9% year-on-year increase, with a gross profit margin of 53.1%.
Affected by performance and other factors, SMIC's A-shares fell nearly 2% on May 10th, with a current market value of approximately 342 billion RMB.
From SMIC's financial reports and performance conference information, there are two main factors leading to the decline in the company's net profit.
The first is price wars among peers.
Zhao Haijun, Co-CEO of SMIC, revealed at the performance conference that domestic competitors expanding capacity have brought significant price pressure to the company.
He specifically mentioned display driver chips and image sensors, &#34;Sometimes orders worth tens of millions suddenly flow to competitors, and we do see new capacity of similar products from peers coming online, so we may see further price drops for some standard chips.&#34;
The second major factor is production line depreciation.
In the past two years, despite the continuous downturn in the global semiconductor market, SMIC has continued to expand capacity in Beijing, Shanghai, Shenzhen, and other places. The first quarter report for this year disclosed that by the end of the period, the company's monthly capacity equivalent to 8-inch wafers was 815,000 pieces, compared to 732,000 pieces in the same period last year, an 11.3% year-on-year increase.
Correspondingly, in the first quarter of this year, SMIC's capital expenditure reached 15.9 billion RMB, lower than the previous quarter's 16.7 billion RMB, but with a high year-on-year increase of 83%; total research and development expenditure was 1.34 billion RMB, a 15.7% year-on-year increase, with research and development expenditure accounting for 10.6% of revenue
With the continuous expansion of domestic wafer foundries such as SMIC, Hua Hong Semiconductor, and JCET, China's integrated circuit production reached 98.1 billion units in the first quarter of this year, a year-on-year increase of 40%. Market research firm TrendForce predicts that by 2027, the proportion of mainland China in the global mature process (28nm and more mature processes) capacity will increase from 29% in 2023 to 39%.
However, the rapid expansion of production capacity has put tremendous pressure on the profit margins of companies like SMIC due to the depreciation of production lines.
In the first quarter of this year, SMIC's gross margin plummeted from 40.7% in the first quarter of 2022 to 13.7%. The company stated that with the expansion of production capacity, depreciation has been increasing each quarter. The gross margin guidance for the second quarter of this year is between 9% and 11%, indicating a further decline in gross margin.
As domestic chip companies expand production, concerns about overcapacity have been raised by foreign media.
However, there is still a significant gap in domestic demand for integrated circuits. According to data from the General Administration of Customs, in the first four months of this year, China imported 168.01 billion integrated circuits, an increase of 14.8%, valued at 832.5 billion yuan, an increase of 15.9%.
Even though SMIC continues to expand production, there are still situations where demand exceeds supply in certain areas.
Zhao Haijun revealed that in the first quarter of this year, some 12-inch production lines were close to full capacity and could not fully meet all orders. Therefore, priority will be given to urgent orders related to market share, such as mobile phones and other consumer electronics. At the same time, after coordinating with customers, delivery times for computers and tablets will be postponed.
In fact, there is a huge demand for mature process chips in areas such as automotive, industrial, and IoT. Looking at TSMC's financial report, 35% of revenue in the first quarter of this year still came from mature processes, while the revenue share from the 3nm process, which has been in mass production for over a year, was only 9%, with Apple being the only customer.
Therefore, for SMIC, in the context of obstacles in advanced process development, temporarily setting aside profits to vigorously expand mature process production is also preparing to seize a large share of the mature process market in the future.
Some industry executives also pointed out that SMIC's main task at present is not to earn huge profits, but to help supply critical semiconductors to the domestic market, as external forces have been trying to hinder China's technological progress. According to the financial report, in the first quarter of this year, SMIC's revenue from the Chinese market accounted for 81.6%, higher than the 75.5% in the same period last year.
Zhao Haijun candidly stated at the performance meeting that local production to meet local demand is a &#34;global trend,&#34; which also applies to China. &#34;We expect that the next two years will be a peak period of continuous expansion of chip industry capacity.&#34;
&#34;It takes time for the market to absorb the new production capacity. If we say that the industry will grow by 8% this year and the new production capacity will reach 20%, it means that 12% of the new capacity will not receive any orders.&#34; However, Zhao Haijun also mentioned that this is not a problem for SMIC, as the company has been closely cooperating with strategic customers in its expansion plans.
For the semiconductor industry, the prosperity of downstream industries is crucial.
According to market research firm Canalys, in the first quarter of this year, the global smartphone, PC, and tablet markets have all resumed growth, with growth rates of 10%, 3%, and 1% respectively
Although the growth rate in some areas is not high, it is still a positive sign for the semiconductor industry.
Zhao Haijun also admitted at the performance meeting that aside from price pressures, the company has seen signs of global demand recovery, especially in the Chinese smartphone market. &#34;All Chinese smartphone manufacturers have positive plans this year... They are either trying to maintain their market share or expand it, and they are all becoming more aggressive.&#34;
Against this backdrop, the early pull-in demand from some of SMIC's customers is still ongoing, with the company providing a revenue guidance of 5%-7% growth quarter-on-quarter for the second quarter of this year. For the whole year, assuming no major changes in the external environment, SMIC's goal is to achieve revenue growth exceeding the industry average.
Zhao Haijun also mentioned at the performance meeting that due to better-than-expected customer orders, SMIC's revenue in the first half of this year is expected to grow by 20% compared to the same period last year. However, the company is still &#34;cautiously and closely&#34; monitoring whether the first half of the year's order boom will affect demand in the second half of the year, and how it will affect demand. &#34;We do not have a clear forecast for the second half of the year.&#34;

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SMIC's main task now is not to earn huge profits, but to supply key semiconductors to the domestic market in a challenging external environment

SMIC's net profit in the first quarter fell by 68%, but the immediate concern is not profit