SMIC reported overall in-line 4Q23 results but market was disappointed by its soft 1Q24 GPM guidance of merely 9-11%, casting overcapacity concern in mature node. We believe while 1H24 shall remain challenging for SMIC, the second half recovery should come meaningfully driven by 1) end demand bottom-out, 2) new 14nm and below products for Huawei and other leading fabless. Eyeing on SMIC’s unique long term position in 28nm and below foundry nodes despite near term under-utilisation issue, we rate SMIC BUY but lower TP to HK$22.2 based on 1.1x P/B.
　　Key Factors for Rating
　　4Q23 financials: Revenue increased by 4% YoY and 4% QoQ to US$1.7bn, beating previous guidance thanks to urgent order from consumer electronics. GPM declined by 3.5ppts QoQ to 16.4%, at the lower end of guidance, mainly due to ASP pressure and heavy depreciation. NI recorded US$175m, beating BOCIe and consensus by 3% and 26%.
　　Moderate recovery in 2024: Mgmt. expects a moderate China demand recovery in 2024 driven by smartphone, PC and IoT products which are SMIC’s key segments. End demand of smaller segments such as automotive and industrial may remain sluggish due to high inventory.
　　Company guidance: Market was disappointed by SMIC’s 1Q24 GPM guidance of only 9-11%, a record low in the past decade. Its 2024 revenue outlook of mid-single digit growth is also not inspiring. We maintain our view that 1) global semiconductor demand will bottom out in 2024 and 2) what SMIC faces is a geopolitical led short-term over-capacity issue in China. In the long term, we expect SMIC will remain the key go-to foundry in China for domestic IC fabless and there are enough orders to fulfill the new capacity built.
　　Key Risks for Rating
　　US-Sino relationship and supply risk; intensifying price competition in mature node; slow advanced node breakthrough; macro and end demand risks.
　　Valuation
　　We lower our 2024E/25E revenue and EPS estimates by 7%/8% and 49%/29%, respectively, to factor in on-going ASP pressure in mature node foundry.
　　We cut our target price to HK$22.2 (was HK$28.7) based on 1.1x P/B, roughly in line with its five year average multiple (was 1.4x P/B). We believe with SMIC’s breakthrough in advanced node, a clearer near term roadmap of SMIC’s node migration and the bottoming out of the semiconductor market, the stock should enjoy a re-rate. Our target price represents 60x/30x/23x 2024E/25E/26E EPS.