How far is SMICs road to becoming king?

 How far is SMICs road to becoming king?

SMIC is one of the leading integrated circuit foundry enterprises in the world. It is also the Chinese mainlands most advanced technology, largest and most complete and multinational professional foundry enterprise. It mainly provides 0.35 to 14 nanometer multi technology nodes and integrated foundry and supporting services for different process platforms.

SMIC has never been so popular since its establishment. As the most advanced foundry enterprise in mainland China, especially after the US sanctions against high-tech enterprises in China continuously, it has great responsibilities. The performance of the stock market can also be illustrated by one or two.

(source: wind)

According to the regional income classification, the companys incremental income mainly comes from China, with a year-on-year increase of 51.5% according to the mainland accounting standards; in terms of quarter by quarter, the domestic revenue of 20q2 continued to increase, accounting for 66.1%; the revenue of North America achieved zero growth, accounting for a continuous decline.

(source: company announcement)

According to the capacity scale and utilization rate, the companys capacity scale continues to increase, and the current capacity utilization rate is basically full load. Since 19q3, the capacity utilization rate has been above 97%.

(source: company announcement)

(source: company announcement)

(source: company announcement)

According to the classification of technology nodes, the revenue mainly comes from processes above 28nm, of which 0.15/0.18um, 55g65nm and 40g45nm processes account for the largest proportion. Since the small-scale mass production of 19q4, the revenue share of advanced process is also expanding.

(source: company announcement)

The companys current process layout and advanced process progress: the company has a comprehensive layout in the mature process field, and each technical node is basically involved; the R & D and business progress in the field of advanced technology is relatively smooth. At present, the company has realized the R & D and mass production of 28nm HKC + process and 14nm FinFET process, and the second generation finfetn + 1 technology platform has entered the customer introduction stage And the next generation of advanced technologies and processes are also being developed simultaneously.

In addition, in the semi annual report, the company also gave corresponding prospects for future performance: the company disclosed that although the first half of the year was affected by the epidemic, the semiconductor market demand was strong, and the company expected to achieve a revenue growth of 15% - 19% in 2020. Meanwhile, by the end of the year, the production capacity of 8-inch and 12 inch wafers will be increased by 30000 pieces and 20000 pieces respectively.

The second generation advanced process is progressing smoothly and has entered the customer product verification stage.

In addition, the demand for mature process application platforms is as strong as ever, such as power chips, camera sensors, radio frequency Internet of things and special storage devices.

In order to meet the demand of mature process platform and ease the bottleneck of current production capacity, SMIC will increase the production capacity of 30000 8-inch wafers and 20000 12 inch wafers per month by the end of this year. At the same time, SMIC will continue to promote the R & D progress to seize the market opportunities of mature and advanced nodes.

Although the companys revenue has increased, since the Sino US trade friction, several cloudy clouds have floated over SMIC, making its development uncertain.

1) The companys production equipment contains a large number of American equipment, and raw materials from abroad are also more. If the US side sanctions, the company will have a great impact. Of course, this situation is not limited to SMIC international, but also exists in most other domestic semiconductor enterprises.

(source: SMICs prospectus)

(source: SMICs prospectus)

2) Huaweis further sanctions will have a certain impact on the companys future revenue.

Frankly speaking, Huaweis first sanction by the United States is a great benefit to the company and most domestic semiconductor companies, although it will have a certain negative impact on Huawei itself. The return of global communication giants to China not only brings huge market increment, but also brings the feedback of advanced technology, which promotes the technological upgrading of domestic semiconductor enterprises. At the 2019 Beijing Microelectronics International Conference and icworld conference, SMIC co CEO said that the return of Huawei, the ecological leader, is driving Chinas semiconductor industry.

However, on May 15 this year, the U.S. Department of commerce further revised the rules and issued the most severe sanctions against Huawei, requiring that after September 15, all manufacturers in the world, who use American equipment or technology, can not produce or sell their chips for Huawei without the approval of the U.S. government, which has a significant impact on domestic and even global enterprisesuff08 It can be said that there is no need to use the extreme.

Most domestic semiconductor companies have been covered with a layer of haze in the future development. Because many enterprises use a large number of American production equipment, including SMIC, after September 15, without the permission of the U.S. government, it will not be able to contract for Huawei. Of course, the coexistence of danger and opportunity will benefit domestic manufacturers of equipment and raw materials to a certain extent. However, their pressure will also increase. The market and even the country are looking forward to the rapid improvement of their technology, which will take time.

After Huawei was sanctioned for the first time, Huawei made strategic adjustments and began to transfer some order strategies to China. SMIC, as the shoulder handle of the semiconductor industry in mainland China, naturally benefited (Netcom Huawei sent technicians to SMIC to assist in the rapid production of new products in its advanced process. Of course, this still needs to be obtained from the company Confirmed).

Looking at the companys financial report, we can find that the companys customers have been officially introduced into the company in 19q4 to produce 14nm advanced process chips. Its largest customer is Huawei, which mainly produces 14nm mobile phone chips for Huawei. In 20q1 and Q2, although the company did not specifically split the performance of 14nm and 28nm, the proportion of both increased steadily, from 6% of 19q4 to 7.8% of 20q1 and 9.1% of Q2. It is very likely that the company will make full use of its power to OEM chips for Huawei before September 15, and TSMC should have similar phenomenon. After September 15, the company will apply to the U.S. government for OEM chips for Huawei, and its future performance is expected to be affected.

(source: company announcement)

3) If the companys capital expenditure is large in the future, it will also bring about large depreciation and amortization, which will affect the companys gross profit performance.

The company estimates that the annual capital expenditure in 2020 will be 6.7 billion US dollars, which is significantly higher than the US $1.813 billion and US $2.032 billion in 2018 and 2019. In the future, the companys gross profit margin will be affected by the conversion of construction in progress to fixed assets. In the 20q2 performance guidelines, the company said that in the future, according to the Hong Kong stock accounting standards, the gross profit margin of Q3 company will be between 19% and 21%, significantly lower than 25.8% and 26.5% of Q1 and Q2.

2. Should SMIC be supported?

(source: company announcement)

(source: company announcement)

So should government subsidies be?

This topic has the final say of many circles. Not only SMIC, but also many high-tech companies in China have been given some government support. I really cant understand why many people opposed the support. What we call the market is the final say. Lets briefly review the history of semiconductor development.

Recently, all countries still provide various kinds of support to enterprises in their own countries. Indias strong imitation policy in the field of medicine has not seen other western countries talk about it with great fanfare; Toshiba of Japan sold its storage company and excluded Chinese enterprises from the bidding under the intervention of the Japanese government; the United States has been negotiating with the European Union on the Airbus issue, potentially It is proved that the EU has been subsidizing enterprises; trump publicly threatened Ge to reduce its subsidy amount for the sake of manufacturing industrys backflow when the United States launched a trade war with China, which shows that the US government is subsidizing GM; and Tesla, the latest high-tech enterprise, according to a report by goodjobs first, a US non-profit organization, pointed out that between 2007 and 2018, Tesla had won a total of As much as $3.5 billion in government subsidies, and in the same period, Googles parent company alphabet and apple received hundreds of millions of dollars in government subsidies. There are ASML lithography because the United States blocked the delay in delivery, and so on, countless.

Moreover, if there are no domestic semiconductor companies, they will have no ability to fight back in the face of the United States strangulation and blockade of Chinese high-tech enterprises. Huawei may fall down in the first wave of sanctions. I still remember that the relevant market researchers were pessimistic, and sang down the relevant domestic industrial chain enterprises. As a result, Huaweis business was not affected at all except for its consumer business This led to the U.S. government to intensify its efforts.

(source: the last two tables are from Everbright Securities: how do the United States and Europe engage in industrial subsidies? - Industrial Policy Series (Zhang Wenlang / Huang Wenjing)

SMIC international in addition to government subsidies, the deduction of non net profit in history is also good.

(source: wind)

In addition, SMICs presence also plays a supporting and driving role in the development of domestic chain enterprises, such as semiconductor raw material manufacturers, equipment manufacturers, downstream chip application enterprises, etc., which have achieved good driving effect, especially after Huaweis suppliers are restricted to use American equipment or American technology to supply to China.

Here, SMIC announced on July 31, 2020 that: the company and the Management Committee of Beijing Economic and Technological Development Zone have signed a cooperation framework agreement to jointly establish a joint venture on the development and operation of Beijings 12 inch wafer production line project; the joint venture will focus on the production of 28nm and above integrated circuits, and the project will be developed in two phases, with the goal of the first phase of the project reaching about 100 per month , 000 12 inch wafers. The second phase of the project will be launched timely based on customer and market demand. The first phase of the project is planned to invest 7.6 billion US dollars, and the registered capital is planned to be 5 billion US dollars. Among them, the company intends to contribute 51% of the total investment and will be responsible for the operation and management of the joint venture. I believe this will be a very good opportunity for domestic suppliers.

3. Can SMIC catch up with CSMC?

The conclusion is difficult, but there is definitely an opportunity to reach the same level as TSMC. The main basis is the law of technology development. The development trend of a certain technology basically conforms to the S-shaped curve trend. When it develops to a certain stage, the more it rises, the more gentle it will be. After a certain stage, it will basically be in a straight line state. Therefore, as long as we work hard and dont give up, we will be able to reach the same level with it, or even surpass it.

1) Due to the obstruction of the United States, EUV lithography machine cannot be delivered;

But the biggest difficulty should be the first.

4. Can China rebuild a SMIC international?

Semiconductor manufacturing industry is an industry that needs huge capital investment, and also needs enough core technical talents and core patent technology accumulation support. At present, in addition to SMIC international, Shanghai Huali can meet the requirements of advanced logic process manufacturing technology in China, but the most advanced process of mass production is 28 / 22nm. It is expected to be very difficult and not desirable to build a SMIC international in addition to the two. The first is:

1) Huge amount of capital investment is needed: refer to the current annual capital expenditure of SMIC or TSMC to know how much financial support is needed. In addition, according to the Industrial Securities Research Report, the investment scale of production line per 50000 tablets / month will increase by about 30% with the reduction of the manufacturing process. In the later stage, the smaller the process, the larger the investment scale. For example, the investment scale of 14nm is about US $6.5bn, the investment scale of 10nm is close to US $8.5bn, while the investment scale of 7Nm is nearly doubled compared with that of 14nm, and the investment scale of 5nm and 3nm is even more Huge.

(source: Industrial Securities)

Moreover, it is easy to find that the smaller the process is, the more concentrated the semiconductor manufacturing enterprises are. At present, there are only 6 players in the 14 nm global market, and only 3 in the 10 nm and below manufacturing processes after liandian and Grosvenor give up investment one after another. This is a burning money game, without enough funds to support production line construction and continuous research and development, your game is basically over!

Taking SMIC international as an example, its 12 inch SN1 project has a planned monthly production capacity of 35000 pieces, process technology level of 14nm and below, with a total investment scale of 9.059 billion US dollars, of which the purchase and installation cost of production equipment alone is as high as 7.33 billion US dollars.

In addition, the company has to invest huge R & D expenses every year. It is estimated that with the reduction of the manufacturing process, the R & D investment will be even greater. For example, in 2018, the companys annual R & D expenditure will be 558 million US dollars, in 2019, the companys annual R & D expenditure will be $687 million, and in the first half of 2020, it will be $324 million.

(source: wind)

2) Shortage of core technical talents: domestic relevant technical talents are scarce. SMIC international has spent 4 years from 28nm to 14nm mass production, among which the core driving factor is the introduction of Mr. Liang Mengsong, the former TSMC senior expert.

Whats more surprising is that the company spent a lot of money to buy a new lithography machine from ASML. Before it was used, it directly mortgaged to the bank in exchange for a loan of 580 million yuan. According to the investigation, the model of this lithography machine is 1980di, and the theoretical minimum can support chip process within 10 nm (7 nm and 5 nm process are ASML NXT:2000D uff09u3002 In addition, the company was also reported to be in arrears with the construction contractors project payment, which resulted in the companys partial assets being frozen. In addition, the company originally planned to purchase 3560 sets of equipment. At present, only 300 sets of equipment are in the stage of ordering and entering the factory, with a huge gap.

(source: enterprise check)

Events like Wuhan Hongxin are everywhere, such as the dekema project in Nanjing and the grofande project in Chengdu, all of which cause a lot of waste of funds and resources. The big work and fast start is not suitable for the semiconductor industry. In the current situation of the scarcity of core talents and resources, we should focus on the advantages, strive to break through the key points, and avoid repeated reconstruction.

Source: Author: straight to the point editor: Liu Fei_ NBJS10390