SMIC 2Q24 revenue and GPM beat guidance by 3% and 3.9ppts respectively, driven by rush orders from smartphone and consumer electronics. Company guides a very bullish 3Q24 with revenue up 13- 15% QoQ and GPM further improved to 18-20%, primarily driven by high UTR, mix shift and ASP hike despite flat QoQ volume growth. We believe SMIC’s recovery is a combination of restocking demand, ease of price war and ASP/yield improvement especially in advanced node, which would sustain into 2025. With SMIC’s unique position as China’s advanced node fabs, we rate SMIC BUY with TP up to HK$23.0 from HK$22.0 based on unchanged 1.1x P/B.
　　Key Factors for Rating
　　2Q24 financials beat: revenue increased by 22% YoY and 9% QoQ to US$1.9bn, with GPM flat at 13.9%. Both revenue and GPM beat previous guidance thanks to rush orders from consumer electronics including smartphone, Bluetooth, WiFi and IoT. NI recorded US$165m, down -59% YoY but improved 129% QoQ.
　　Extraordinary 3Q24 guidance: mgmt. guided 3Q24 revenue growth of c.14% QoQ, beating street estimates of flat QoQ. GPM guidance is c.19%, above consensus by 7ppts. Mgmt. attributes it to 1) robust 12” demand from consumer electronics despite 8” demand trending weaker, 2) growing mix of domestic customer demand, 3) new 12” capacity is able to reach full UTR quickly, 4) blended ASP increase driven by lower mix of 8”, high UTR and end of price war. Meanwhile, we expect the addition of new advanced node capacity in 2H24 and the increase of yield rate in 7nm process should also support SMIC’s strength.
　　4Q24 visibility turns weak upon the end of re-stocking: per mgmt., restocking demand from downstream (e.g. smartphone, TV and home appliance) accounted for 15-20% of wafer shipment in 1H24. The re-stocking will reach an end by late August when channel builds c.80 days of inventory. SMIC affirms our view that the industry recovery momentum YTD is partially driven by re-stocking, instead of a full end demand recovery. In SMIC’s scenario, we think the company is resilient in the near term as 1) SMIC’s advanced node capacity is and will be at seller’s market, we have noted a well group of domestic AI/HPC fabless are undergoing tape-out in SMIC; 2) many mainstream products including PMIC, RF, CMOS, MCU, DDIC, switch, BT and eNVM will find SMIC’s 28/40nm a sweet spot; demand for 28/40nm node will grow structurally.
　　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.