On the evening of March 28, SMIC (688981.SH, stock price 44 yuan, market value 349.744 billion yuan) disclosed its 2023 financial report, with revenue of 45.25 billion billion yuan in 2023, down 8.6 percent from the same period last year. Net profit attributable to shareholders of listed companies was about 4.823 billion yuan, down 60.3 percent from the same period last year.

Regarding performance, SMIC stated that in the past year, the semiconductor industry was at the bottom of the cycle, with weak global market demand, high industry inventories, slow destocking, and fierce competition in the industry. As a result, the Group's average capacity utilization rate decreased, the number of wafers sold decreased, and the product mix changed. In addition, the Group is in a period of high investment, with depreciation increasing compared to 2022. Together, the above factors affected the company's financial performance in 2023.

Inventory digestion is still the main theme

In 2023, SMIC's gross margin was 21.9 percent, down 16.4 percentage points from 2022. Regarding the decline in gross profit margin, SMIC stated that it was mainly due to the decline in capacity utilization in 2023, the decrease in the number of wafer sales and changes in product mix. In addition, the Group is in a period of high investment, with depreciation increasing compared to 2022.

In 2023, SMIC's capacity utilization rate was 75%. The number of wafers sold is 5.867 million about 8-inch wafers, and the monthly production capacity is 806000 about 8-inch wafers. According to previous statistics by every reporter, from the first quarter to the fourth quarter of 2023, its capacity utilization rate was 68.1 percent, 78.3 percent, 77.1 percent and 76.8 percent, respectively.

In fact, SMIC's 2023 EBITDA margin was 60.1 per cent, down 2.5 percentage points from the previous year. It is reported that in 2021, 2022 and 2023, SMIC's depreciation and amortization will be 12.099 billion yuan, 15.388 billion yuan and 18.86 billion yuan respectively, and the amount of depreciation and amortization will continue to rise.

Image credit: SMIC 2023 earnings

It is worth noting that SMIC's construction in progress is also increasing. At the end of 2022, construction in progress was $45.762 billion, while at the end of 2023, SMIC's construction in progress was $77.003 billion. Construction in progress needs to be converted to fixed assets after completion, which in turn will result in new depreciation.

SMIC also pointed out that the fluctuation of the macro environment, the change of the prosperity of the integrated circuit industry, the failure of domestic and foreign customer demand to meet expectations, the price fluctuation of main raw materials and equipment, and the high capital expenditure and R & D investment brought by the company's continuous capacity expansion may cause the company to face risks such as sales revenue, gross profit margin and profit fluctuation in a certain period of time.

In the management's discussion and analysis, SMIC stated that in 2023, due to factors such as a weak global economy and sluggish market demand, the semiconductor industry will experience a downward cycle. In the second half of 2023, the demand of the end market showed some signs of recovery, but the overall supply chain inventory is at a high level, the end product sales situation is in the adjustment stage, inventory digestion is still the main theme of the semiconductor industry in 2023.

In the medium and long term, the global semiconductor industry is both cyclical and growing, and the short-term imbalance between supply and demand will not affect the medium and long-term improvement of the industry. Accompanied by home, education, scientific research, commerce, industry, transportation, medical treatment, etc. The rising trend of intelligent demand for application equipment in various fields, the gradual recovery of market vitality, the continuous improvement of the scale of the terminal market, all links of the industrial chain are expected to pick up step by step. Wafer foundry as a key industry at the front end of the industrial chain, capacity utilization is expected to gradually recover, to achieve sustained and steady medium-and long-term growth.

Expected to be "moderate" in 2024

For foundries, another metric of concern for the industry is capital expenditure. SMIC said that capital expenditure during the reporting period (2023) was mainly for capacity expansion.

The Company believes that the Group's actual expenses may differ from planned expenses due to factors such as customer demand, equipment delivery schedules, business plans, market conditions and changes in industrial policies. The Company will pay close attention to the global economy, the semiconductor industry, customer demand, operating cash flow, etc., and adjust the capital expenditure plan with the approval of the Board of Directors when necessary.

SMIC stated that the Group's sources of funds mainly include cash from operations, bank borrowings and issuance of debt or equity, capital injections from minority shareholders and other forms of financing. Due to the highly cyclical and rapidly changing nature of the semiconductor industry, there is considerable uncertainty in the amount of capital required to forecast the Group's growth and development objectives.

Regarding 2024, SMIC said that the company still faces macroeconomic, geopolitical, peer competition and inventory challenges. It is expected that the company's performance will be "moderate", with the semiconductor industry chain to get rid of the downturn, in the gradual improvement of customer inventory and mobile phone and Internet demand continued to pick up under the combined effect of stable and moderate growth. But from the perspective of the whole market, the strength of the demand recovery is not enough to support the overall strong rebound of semiconductors.

Under the premise that there are no significant changes in the external environment, in accordance with IFRS, the company's guidance for 2024 is that the growth in sales revenue is not lower than the average of comparable peers, and the mid-single-digit growth year-on-year. The company plans to continue the 12-inch plant and capacity construction plans announced in recent years in 2024, and expects capital expenditures to be roughly the same as the previous year.

Source of cover image: Visual China-VCG41N970174988