The first echelon of global foundry, the only advanced process fab in China. SMIC is one of the world's leading integrated circuit wafer foundries, providing 8-inch and 12-inch wafer foundries for various technology nodes of 0.35 μm-14nm FinFET. According to the global pure wafer foundry company sales ranking in 2022, SMIC ranked fourth in the world and ranked first among Chinese mainland companies. The company has no actual controller, China Xinke as the company's largest shareholder holding a total of 14.97. Affected by weak demand in downstream industries, the company achieved revenue of 33.098 billion yuan, YoY -12.35%, net profit of 3.675 billion yuan and YoY -60.86% in the first three quarters of 2023. With the gradual recovery of consumer electronics demand, the turning point of the semiconductor industry cycle is approaching. It is expected that the company's capacity utilization rate is expected to bottom out in the future and usher in the next round of industry growth cycle.

The rapid development of the foundry industry, mainland China actively layout production capacity. With the shift of the center of gravity of the global integrated circuit industry chain, the wafer foundry in mainland China has ushered in rapid development in recent years. According to IC Insights statistics, the sales of the wafer foundry market in mainland China have increased from 32.7 billion yuan in 2016 to 77.1 billion yuan in 2022. The compound annual growth rate is 15.71, and it is expected to reach 90.3 billion yuan in 2023. In addition, mainland China is actively laying out wafer foundry capacity. According to SEMI statistics, the total number of wafer fabs put into operation in the world from 2021 to 2023 is expected to reach 84, with an investment of more than US $500 billion. Among them, mainland China will build 20 new mature process factories, with the largest number of new wafer fabs in the world. IC Insights expects mainland China's wafer production capacity to rise to 25% of the world's total in 2026 from 15.3 in 20 years, and 12-inch fabs to 2.4 million.

advanced process long-term leading, mature process continued to rapidly expand production. SMIC is the first wafer fab in mainland China to achieve mass production of 14nm FinFET, representing the leading level of independent research and development of integrated circuit manufacturing technology in mainland China. As the demand for chips in the AI field continues to grow rapidly, SMIC's investment value is highlighted as the only advanced process wafer fab in China. In terms of production capacity, SMIC has three 8-inch fabs and four 12-inch fabs in Shanghai, Beijing, Tianjin and Shenzhen, and one 12-inch fab in Shanghai, Beijing and Tianjin is under construction. In the next five to seven years, SMIC will have a total of four new projects. After the completion of the expansion project, it will add 340000 pieces/month of 12-inch wafer production capacity. As of the third quarter of 2023, the company's capital expenditure was $5.126 billion, equivalent to 795800 pieces of 8-inch monthly production capacity, and the capacity utilization rate reached 77.1 percent with the gradual release of new capacity.

investment suggestion: considering that SMIC, as a leading company in the domestic wafer foundry industry, is the only wafer foundry in China that has realized mass production of advanced manufacturing processes, and its 12-inch and 8-inch wafer production capacity are the first in China, with the gradual recovery of demand in downstream industries, the company's capacity utilization rate will soon bottom out, and the company's revenue in 23-25 is expected to be 445.64/522.59/62.354 billion yuan respectively, the net profit of the parent company is 48.06/60.23/7.444 billion yuan, the corresponding PE valuation is 70/56/45 times, and the PB valuation is 2.4/2.3/2.2 times. We are optimistic about the company's long-term development, the first coverage, give a "recommended" rating.

Risk Warning: R & D and technology upgrade iteration risk; fluctuations in overseas situations may affect the industrial chain; downstream demand is less than expected.