Event: The company will release 4Q24 results after market hours on February 11, 2025, and hold a results meeting on the morning of February 12, after the company guided 4Q24 revenue from 0% to +2% in the 3Q24 financial report, and the gross margin is expected to be between 18% and 20%.

We expect strong AI demand to lead to better than market expectations, while offsetting some of the off-season effect in 1Q25.

Advanced manufacturing processes are expected to continue to outstrip supply: Global data center capital expenditure is expected to continue to increase significantly in 2025: 1) Google's 25-year capital expenditure is expected to be $75 billion (YoY +43%); 2) Amazon expects $100 billion (YoY +26%); 3) Meta expects $600-65 billion (YoY+53%~66%); 4) Microsoft expects to invest $80 billion in FY25; 5) The Stargate Project plans to invest $500 billion over the next four years. As one of the few enterprises in mainland China that can mass-produce advanced processes, we expect that the company will have high bargaining power in mainland advanced processes, and advanced processes are expected to fully benefit from the local AI wave and continue to be in short supply.

Mature processes benefit from end-to-end AI: Since the release of the domestic large-scale model Deepseek-R1, the market feedback has been positive, and the characteristics of strong capabilities and low cost are expected to accelerate the popularization of domestic AI applications, and AI terminals are expected to be fully expanded, with consumer electronics accounting for 42.6% of SMIC's 3Q24 revenue and 8.2% of interconnection and wearables.

After the new U.S. semiconductor policy on China, the transfer effect is expected to benefit the company, and it is expected that it will gradually be reflected in 2Q25.

On January 15, 2025, the U.S. BIS issued the latest ban on semiconductors in China. The new ban has changed from restricting specific companies to restricting the number of processes and transistors in a certain range (for example, semiconductor design companies that are not authorized by the US government need to apply for a license to use processes below 16/14nm, unless they meet the exemption conditions), and publish a whitelist for IC design, packaging and testing. We believe that external geopolitics have brought great uncertainty to the semiconductor supply chain, and the use of local production is expected to reduce supply chain risks.

Investment Advice:

Based on three logics, we are optimistic about the company's development in the AI era: 1) AI drives the semiconductor cycle upward, and the company fully benefits; 2) The demand for advanced process foundry has benefited from the rapid growth of local AI demand; 3) Domestic production of mature processes benefits from the recovery of consumption, and domestic substitution is also expected to accelerate. It is estimated that the company's revenue in 24/25/26 will reach 567/657/73.5 billion yuan, and the net profit attributable to the parent company will reach 40.17/59.62/7.295 billion yuan, maintaining the target price of SMIC's A-shares in 2025 at 133.59 yuan, and maintaining a "buy" rating.

Risk Warning: The uncontrollable impact of U.S. restrictions on China's technology; overcapacity of mature processes; intensified competition in the market; Downstream demand is less than expected