Advanced node national champion set to benefit from stimulus
　　SMIC delivered in-line 3Q24 revenue with GPM of 20.5% beating high- end guidance, primarily driven by robust consumer electronics orders (revenue +39% QoQ). Company guides flattish 4Q24 and uninspiring 2025 in light of persisting overcapacity risk though partially offset by a positive mainstream semi sales recovery and domestic substitution demand. We believe with the unique advanced node process and accelerating domestic substitution momentum, SMIC remains attractive to investors who are looking for key beneficiaries of China’s stimulus plan and relatively more tolerant to weak short-term fundamentals. Maintain BUY and increase TP from HK$23.0 to HK$31.5 based on 1.5x P/B (was 1.1x).
　　Key Factors for Rating
　　3Q24 results beat: Revenue grew 14% QoQ to US$2.2bn. GPM increased 6.5ppts QoQ to 20.5%, beating previous guidance on robust 12-inch wafer shipment driven by consumer electronics demand recovery. NI recorded US$149m, declining 10% QoQ, mainly due to lower government subsidies and increase in minority interests.
　　4Q24 guidance mixed: Mgmt. guided 4Q24 revenue growth of c.1% QoQ, slightly beating street estimate of -2% QoQ. GPM guidance is c.19%, in line with consensus. Mgmt. expects: 1) shipment and UTR to decline due to slow season, addition of new 12” capacity and weak 8” demand; 2) ASP to improve QoQ from enhanced product mix and certain rush orders for 12” wafers now at full UTR.
　　Mild mainstream demand recovery will not offset 2025 overcapacity. While AI chip is on a totally different story, SMIC’s mainstream semi business will only benefit moderately from the industry’s single-digit sales growth in 2025 and management expects both overcapacity and pricing pressure to persist for a while. However, we expect SMIC's unique position in advanced nodes and growing 28/40nm domestic substitution demand will remain a key long-term growth driver.
　　Power semis as a new business driver offers optionality. SMIC is strategically expanding capacity as scheduled while pivoting certain new capacity towards power semiconductors to capitalise on power semis growth for edge-AI and automotive. Mgmt. sees a trend that domestic end-customers are increasingly demanding for power chips (which are still mostly sourced from overseas) to be manufactured in China in order to better meet the rapidly changing market dynamics.
　　Key Risks for Rating
　　Sino-US relationship and supply risk; intensifying price competition in mature node; slow advanced node breakthrough; macro and end demand risks.
　　Valuation
　　We cut 2024E/25E/26E EPS estimates by 3%/2%/6% to factor in overcapacity led pricing pressure. We rate SMIC BUY with new TP of HK$31.5 (was HK$23.0) based on 1.5x P/B (was 1.1x), above 1.5sd of its five year average multiple given the current trade is more about China stimulus plan. Our target price represents 61x/42x/29x 2024E/25E/26E EPS.