On the evening of May 9th, SMIC (0981. HK) released its Q1 2024 report. According to the company’s Hong Kong stock financial report, the operating income in the first quarter of 2024 was 1.75 billion US dollars, an increase of 19.7% year-on-year and 4.3% month on month compared to the fourth quarter of previous years. The company’s gross profit margin is 13.7%.
This manifestation exceeded the speculation previously given by the company. According to the original track record, the company estimates that the quarter on quarter expenditure for the first quarter of this year will increase by 0% to 2%, and the gross profit margin is estimated to be between 9% and 11%.
The domestic management of SMIC believes that the main reason for the unexpected increase in the first quarter is that the stocking willingness of global customers has decreased.
In 2023, the semiconductor industry was at the bottom of the cycle, with weak demand in global shopping malls, oversupply, and generally high customer inventories in the consumer electronics industry. Therefore, in previous years, the center of the semiconductor industry throughout the year was “depreciation increase inventory”.
The increase in product prices and inventory accumulation have also led to a significant reduction in costs for semiconductor companies. The latest financial report shows that the company’s net cost for the first quarter was $71.8 million, a year-on-year decrease of 68.9%. In previous years, the company’s net costs have been halved, an increase of 50.4% compared to the previous year. According to SMIC’s domestic explanation, the significant decline in net costs is mainly due to changes in product acquisition, increased depreciation, and increased investment income.
As the industry gradually joins the awakening route in 2024, a year long inventory has been seen to be effective, and the inventory consumption of major customers has reached a healthy level. Therefore, at the beginning of this year, customers of consumer electronics products such as smartphones and smart homes were willing to delay placing orders and stocking up, testing to increase inventory.
According to Zhao Haijun, the joint CEO of SMIC in China, who revealed at the financial report Deloitte Meeting, some slow orders from customers such as smartphones and computers have been sent in the first quarter of this year. Currently, the company’s 12 nanometer production line is approaching full capacity, and there are also departments with lower priority orders from customers who are currently satisfied and are harmoniously queuing up for rescheduling.
For the second quarter of this year, the domestic management of SMIC has given no new direction, and the company’s expenses will continue to increase by 5% to 7% on the basis of the first quarter.
Previously, the domestic management of SMIC estimated that the company’s sales expenses did not increase in single digits year-on-year in 2024. According to Zhao Haijun, the domestic CEO of SMIC, who introduced this specific figure at the Financial Daily’s Deloitte Meeting, it is 8%.
Under such conditions, the company’s goal this year is to ensure that the increase in sales expenses is higher than the average level of its peers, without significant changes in external circumstances. This is more optimistic than the “no lower than the average level of its peers” proposed in April this year.
In the past year, domestic semiconductor manufacturers led by SMIC have also been simultaneously building and expanding production. In the first quarter of 2024, SMIC had a total of 1.79 million units out of stock domestically, compared to only 1.252 million units in the first quarter of 2023, a year-on-year increase of 43.4%. In the fourth quarter of the year, it was 1.675 million units, a 7% increase compared to the previous quarter; The newly added production capacity during this period is mainly advanced 12 inch crystal square production capacity.
Maintaining production expansion and capacity utilization is currently one of the most important goals for the healthy growth of semiconductor companies in the industry’s upward cycle of sluggish demand and inventory accumulation. In the first quarter of 2024, the domestic capacity utilization rate of SMIC was 80.8%, compared to 68.1% in the first quarter of previous years. In the fourth quarter, the capacity utilization rate was 76.9%, which is slowly increasing.
The utilization rate of production capacity can be reflected in the supply and demand relationship in the cyclical changes of shopping malls, directly determining whether the industry can benefit in the future. Zhao Haijun also politely stated in an interview this year that the capacity utilization rate of the chip foundry industry is unlikely to return to the high level of over 90% in the past few years in the short term.
According to its judgment, in the process of the mall returning to supply-demand balance, it is expected to steadily maintain growth in the first half of the year, and it is necessary to continue inspection in the second half. The company still holds a cautious and optimistic outlook for this year’s comprehensive recovery.
The financial report of Huahong Semiconductor (1347. HK), another domestically produced foundry, also confirms this point. Huahong Semiconductor’s expenses in the first quarter were 460 million US dollars, with a net cost of 31.8 million US dollars, a decrease of 27.1% and 79.1% respectively compared to the same period in previous years. Tang Junye, CEO of Huahong Semiconductor, stated that the semiconductor industry has yet to break free from the downturn cycle.
But in that quarter, the company’s latest capacity utilization rate improved further to 91.7% compared to the end of previous years, with sales expenses and gross profit margin both increasing month on month, exceeding external expectations. After the financial report was released, UBS also gave Huahong Semiconductor a “neutral” rating, stating that although the company’s cost rate had limited room for decline, the “worst-case scenario has passed”.
Under the influence of the Mongolian financial report, the domestic Hong Kong stock price of SMIC rose 1.5%, and Huahong Semiconductor rose 5.7%.