• SMIC’s Q3 2024 revenue grew 14% QoQ to $2.17 billion, supported by increased 12” wafer shipments and stronger ASPs due to a better product mix.
• SMIC has guided slightly better Q4 2024, driven by demand recovery in consumer electronics and China’s localization policy. While the 12” capacity is near full utilization, the 8” utilization remains sluggish.
• The pace of China’s semiconductor localization is expected to decelerate in 2025, as domestic Chinese fabless companies have already captured significant market share in most consumer electronics sectors over the past few years.
• Oversupply in mature nodes will remain a key risk from 2025 onwards. Maintaining close relationships and engagement with customers will be crucial for sustaining competitiveness for mature node foundries.

SMIC reported in-line Q3 2024 results and a modestly optimistic outlook for Q4 2024, driven by a partial rebound in consumer electronics demand and improving 12-inch capacity utilization. However, looking ahead to 2025, end-market demand recovery is expected to be in low single-digit % YoY, while the automotive and industrial segments’ recovery remains uncertain. Besides, pricing pressure looms due to an oversupply in the mature 12-inch segment, exacerbated by capacity expansions over the past several years that are expected to come online starting in 2025.

Outlook on semiconductor cycle in 2025

CEO (Zhao Haijun): “In terms of revenue in USD or chip volume calculated by silicon content, there is growth compared to 2024. The AI sector shows growth of over 10% YoY, while excluding AI, the current YoY growth of HPC application is approximately 4-9%. Among the company's five major business areas — smartphone, computer and tablet, consumer electronics, IoT, and automotive and industrial — all except the auto and industrial show single-digit growth at roughly the same rate.”

Analyst takeaways: SMIC will continue to benefit from China’s semiconductor localization policies, although this trend is starting to slow down due to the company’s increasing penetration of China’s fabless customers. As a result, the utilization rate (UTR) for SMIC will gradually improve in 2025 given high revenue exposure to smartphone and consumer electronics. As for the auto and industrial segment, we observe that the inventory levels and days for the supply chains remain high and have slightly increased over recent quarters. This indicates ongoing challenges in inventory corrections.

Oversupply risks and pricing pressure in mature nodes

CEO (Zhao Haijun): “The global macroeconomic environment is still challenging, especially in Europe, so oversupply in capacity is quite normal at this stage. Recovery might only be considered when the utilization rate (UTR) exceeds 85%. Currently, the global mature node peers’ UTRs are about 70%, indicating ongoing overcapacity. This situation is unlikely to see significant improvement next year, so it’s crucial to work closely with customers and end clients. Another reason for the continued oversupply is due to new capacity comes online, leading to pricing pressure. Therefore, while wafer shipments may see double-digit growth next year, revenue growth is likely to remain in the single digits for SMIC.”

Analyst takeaways: The management’s views align with our perspective on intensified competition and pricing pressure in the mature node foundry industry, which is a negative for Taiwan’s mature node foundries, particularly PSMC and Vanguard, due to their higher revenue exposure to 8-inch process nodes. We believe UMC will be less impacted, as its leading position in specialized high-voltage (HV) technologies in 22/28nm and 40/45nm can help the company mitigate the competition risk amid industry oversupplies.

SMIC’s opportunities in AI applications

CEO (Zhao Haijun): “AI is a boon for the semiconductor industry. With its emergence, everyone, whether directly or indirectly, such as through capacity shortages leading to spillover demand, stands to benefit. The company has profited from this, including in areas like BCD, analog, and packaging and testing. Due to technological restrictions, China is unable to produce GPUs, but there is significant opportunity in the domestic AIoT market. This area is where SMIC can showcase its strengths, rather than being dominated by leading global companies.”

Analyst takeaways: In addition to the AIoT market, we believe SMIC will continue to benefit from the trend of Chinese CSPs, such as Alibaba and Baidu, developing in-house AI ASICs, produced using SMIC’s advanced process nodes. Due to the continuing restrictions on GPU and AI chips imposed by the US government on China, we believe SMIC will be the major beneficiary of local AI demand in China.

Q3 2024 results summary

• Financial highlights:
  • Revenue: $2.17 billion (+14% QoQ, +34% YoY)
  • Gross margin: 20.5% (+6.6 percentage points QoQ)
  • Net income: $149 million (-10% QoQ, +19% YoY)
• Key drivers:
  • 12-inch wafer shipments offset declines in 8-inch, maintaining stable overall shipments.
  • Demand recovery in consumer electronics drove the utilization of 28nm, 40nm and 65nm.
  • Strong 12-inch pricing and product mix improvements drove higher ASP.
  • Domestic demand and accelerated localization boosted customers’ market share.
• Capacity and utilization:
  • Added 21,000 wafers-per-month 12-inch capacity, with UTR rising to 90.4% (+5.2 points QoQ).
• Revenue breakdown:
  • By application: Consumer electronics 42.6%, smartphones 24.9%, PCs/tablets 16.4%, IoT/wearables 8.2% and industrial/auto 7.9%.

Q4 2024 guidance

• Outlook:
  • Revenue growth is expected to be 0-2% QoQ, with the gross margin being 18-20%.
  • Seasonal weakness is expected but will be mitigated by added capacity and product mix improvements.
  • Full-year revenue forecast: $8 billion (+27% YoY), gross margin ~17%
  • Year-end capacity is projected to exceed 900,000 WPM, with a focus on power products for automotive and industrial growth.