How far is SMICs road to becoming king?

 How far is SMICs road to becoming king?

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.

Before Sino US trade frictions, SMICs share price was tepid, but since the trade friction, especially after the restrictions on domestic high-tech companies, its share price has soared to HK $44.8/share, a record high, which is more than two times higher than that at the beginning of the year. Even after the companys Science and technology innovation board was put on the market, the stock price performance of SMIC declined, but Hong Kong stock basically remained at about HK $25 / share, compared with that in 2019 and Before that, it was also a record high; although the price of a shares dropped compared with the beginning of listing, it is still around 65 yuan / share.

It is expected that in the future, with the support of the new domestic infrastructure policy and the recent announcement that the domestic chip self-sufficiency rate will reach 70% by 2025, the company still has a lot of imagination.

1. Is SMICs performance sustainable?

In terms of quarterly revenue, the companys revenue has continued to grow in the past one and a half years, from 4.5 billion yuan in 19q1 to 6.6 billion yuan in 20q2. According to the companys guidelines, 20q3 is expected to achieve a growth rate of 1% - 3% month on month.

(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)

In terms of service classification, although the proportion of income from mask manufacturing and wafer testing business is small, the proportion continues to expand. In 20q2, the revenue from wafer services accounted for 90.9%, while that from mask manufacturing and wafer testing accounted for 9.1%.

(source: company announcement)

(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.

The company continues to cooperate with domestic and foreign customers on advanced technology and new projects, and its application has been extended to consumer electronics and media related products, such as artificial intelligence, radio frequency, Internet of things and automobile.

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 needs of customers and the capacity utilization rate is close to full load, the company has improved the product portfolio and improved the production efficiency.

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: SMIC Internationals prospectus, note: serial numbers 1 and 3 are American companies, and serial number 2 is Dutch company)

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.

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.

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?

Government subsidies: in the first half of 2020, the company received 1.166 billion yuan of government subsidies, compared with 967 million yuan in the same period last year. In addition, the balance of government subsidies in the companys deferred income is still 6.4 billion yuan.

(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.

The development of semiconductor in the United States is also developed with the strong support of the military and the government, not to mention Japan and South Korea, but also to support the development of the semiconductor industry.

As a latecomer country, China cant survive in asset intensive and technology intensive industries without subsidies, and the industry has no chance.

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 semiconductor industry chain is a large and complete industrial chain. At present, the global cooperation is needed to make the industry develop healthily and perfectly. However, the normal operation of the chain is hindered by the artificial intervention of some countries.

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.

(source: SMIC prospectus)

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.

3) To have a large number of core patent accumulation: refer to the lawsuit between SMIC international and TSMC at the beginning of its establishment, we can see that in order to gain a firm foothold in this industry, in addition to a large amount of capital and core technical personnel, we should also have enough core patent accumulation, or we will wait for the result of lawsuit before we open.

In addition, the recent outbreak of Wuhan Hongxin incident can be seen. Wuhan Hongxin was founded in November 2017. At the beginning of its establishment, Wuhan Hongxin has attracted Dr. Jiang Shangyi, a legendary figure in the semiconductor industry and former TSMC operator, as CEO; invested 128 billion yuan to directly lay out 14 nm and 7 nm process production lines, with a planned capacity of 30000 pieces / month. Moreover, Wuhan Hongxin was listed as a major special project by Hubei Province in 2018 and 2019. However, such a star company was clearly pointed out by the Wuhan West Lake District government on July 30 that there is a large fund gap, and the project will be faced with the risk of project stagnation caused by the rupture of the capital chain at any time. At the same time, the Xihu District government also pointed out that the land adjustment and transfer of Hongxin phase II land has not been completed, and the project lacks supporting materials such as land and environmental impact assessment, which can not be reported to the national development and Reform Commission for window guidance, resulting in the National Semiconductor fund and other equity funds unable to import.

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