UBS: SMIC's quarterly results exceed expectations, but gross margin is under pressure; earnings forecast downgraded

UBS published a research report indicating that SMIC (00981.HK) achieved a quarterly profit increase of 4.5% in the fourth quarter of last year, outperforming typical seasonal patterns and exceeding guidance and market expectations, primarily benefiting from a slight increase in wafer shipments and average prices of mixed products. Other income increased by 64% quarter-on-quarter due to the shipment of photomasks nearing the end of the year. The gross margin was 19.2%, in line with the guidance of 18% to 20%, but lower than the market expectation of 20%. The gross margin declined by 2.8 percentage points quarter-on-quarter due to rising depreciation expenses.

In terms of demand, SMIC's management indicated that the demand for BCD processes, memory, and memory-related products remains strong, with supply unable to meet demand, and price increases are expected to be realized by 2025. Other product areas such as CIS and LCD driver chips are seeing stable prices due to industry capacity being reallocated to BCD and other high-demand areas.

The firm raised SMIC's revenue forecast for 2026 to 2029 by 4% to reflect greater localization opportunities and improved supply-demand dynamics, while lowering the profit forecast by 8% to 18% to account for higher depreciation burdens. The rating is maintained at "Neutral," with a target price of 76 yuan