before the market on may 10, SMIC (688981.SH, stock price 42.99 yuan, market value 341.967 billion yuan) held a performance briefing for the first quarter of 2024. Zhao Haijun, co-CEO of SMIC, said that in the first quarter, the integrated circuit industry as a whole was in the recovery stage, and customer inventories gradually improved. Compared with three months ago, the company has seen an increase in the willingness of global customers to stock up, responding to the uncertainty of the market environment with the certainty of inventory.

from the perspective of domestic customers, some have won more market share and need to pull the goods in advance and drop the bags for safety. some have seen others stock the goods and prepared the inventory together to seize the opportunity so as to cope with the rapidly changing market demand. From the perspective of foreign customers, some have raised the inventory to the ideal water level due to geopolitical considerations, so they have also pulled the goods in advance to a certain extent. Combined with the above factors, the company's first quarter revenue and gross margin are better than the guidance.

Tackling price challenges with customers

according to Zhao Haijun's introduction, in terms of application classification, wafer revenue accounts for 31%, 18%, 31%, 13% and 7% of smartphones, computers and tablets, consumer electronics, interconnection and wearables, industry and automobiles respectively. some urgent orders were received in the first quarter, but some production lines of the company were close to full load and could not fully meet all orders, only priority is given to ensuring urgent orders related to market share, that is, consumer electronics, so the company has coordinated with customers to postpone the delivery of standard products such as computers and tablets. Wafer revenue by size, eight-inch and twelve-inch revenue accounted for 24% and 76%, respectively.

from the platform point of view, the company around consumer electronics, car regulations, IoT and other mainstream application scenarios, accelerate the development of technology platform, in each node to establish a diversified platform. In the high-voltage drive HV, image sensor CIS, RF-SOI, special storage NOR/NAND, non-volatile storage Non-Volatile Memory, power management BCD and other platforms focus on layout, to achieve customer products from consumer to industrial, to automotive level of rapid iteration. Display drive, the company to provide customers with large and medium-sized screen all-round multi-node platform, in the holding of large and medium-sized screen market share at the same time, in mobile phones and consumer electronics-related small screen drive continued breakthrough.

In the question session, some analysts were concerned about the product mix and the decline in Wafer (wafer) prices, "How do changes in the mix between products affect ASP (average selling price), and what products and applications have been made? In addition, will the decline in Wafer prices be slower or more intense in the next few quarters?"

Zhao Haijun replied: "(Regarding) ASP, SMIC (12-inch production line) has been fully loaded since December last year. This is not to say that every product portfolio has exceeded our load, but overall based on average capacity, we have been fully loaded."

The decline in prices stems from industry competition. Zhao Haijun said: "many of our strategic customers, if other competitors offer lower prices in the market, they may lose their orders and tens of millions of yuan of orders will disappear. In this case, we will face the market competition with our customers, and we must let the customers (can) guarantee its market share. Therefore, SMIC still has to comply with the market and meet the price challenges with customers when the (12-inch) production capacity has been fully loaded and (in) the order cannot be completed."

Zhao Haijun added: "Since February, our prices have not dropped any more, but in the standard and large product market, there is direct and face-to-face competition. I think the main challenges are standard products, such as display drivers and CIS. Because it is relatively large, but also the standard type. For other products, we have basically stabilized since February. 12 inches is in short supply, and 8 inches is still at a low ebb."

Regarding the future, Zhao Haijun said: "We also see that the same type of products are developing production capacity. Therefore, if there is further price reduction to compete, SMIC will still work with customers to do this kind of competition. In this way, it is not ruled out that the price of standard products will fall further. However, these standard products do not account for 100 per cent of SMIC's share. Therefore, its price reduction will be diluted by other (products) that do not reduce prices."

Explain future performance guidance

Zhao Haijun introduced that in the second quarter of 2024, the company's revenue guidance is 5% to 7% month-on-month growth, and the gross margin guidance is between 9% and 11%.

in this regard, Zhao Haijun made an explanation. He said that the company saw that the demand of some customers for pulling goods in advance was still continuing, and the shipment volume was expected to continue to rise. The average unit price of sales decreased due to changes in product mix and price reduction. Generally speaking, the trend of volume increase and price decrease continued. In addition, the company through the reduction of cost efficiency, offset the impact of price reduction, along with the expansion of production capacity, depreciation increased quarter by quarter, gross margin is expected to decline month-on-month.

For the whole of this year, first, on the annual guidelines. Revenue exceeded guidance in the first quarter and is expected to continue to grow in the second quarter. However, the company is still carefully observing whether the customer's emergency pull in the first half of the year is the demand for overdraft in the second half of the year. I haven't seen it clearly in the second half of the year, but I will continue to work hard. For the full year, provided that there are no significant changes in the external environment, the company's goal is to increase sales revenue by more than the average of comparable peers.

Second, the price. As China's local supply of new capacity continues to open, industry competition is increasingly fierce, bulk product prices follow the market. SMIC practices long-termism, by building a high-quality technology platform that is one or two generations ahead of domestic peers, providing customers with competitive products, and long-term cooperation with strategic customers to face and participate in competition together.

Third, on depreciation pressure. In order to meet the needs of customers in the medium and long term, the company is in the stage of continuous high investment and expansion of 12-inch high-quality production capacity. Along with the release of the Company's new project capacity and the increase in revenue scale, the corresponding upward pressure on depreciation will exist for some time to come. It takes time for new projects to go from loss to economic scale and bring economic benefits, which is the law of the industry. The company will continue to optimize the management mechanism, around the "stable production capacity, cost control, technology leadership, customer first" four grasp to continue to struggle.

Source of cover image: Visual China-VCG211378713200