SMIC released in-line 4Q24 results with GPM of 22.6% beating high-end guidance, primarily driven by rush order from consumer electronics that benefits from consumption subsidies. Company expects the momentum to last in 1Q25 but warns 2H25 pressure due to demand front-loaded effect and more crowded capacity supply. SMIC share price has rallied 236.7% over the last 12 months and P/B ratio has reached historical peak level at 2.3x. We downgrade the stock from BUY to HOLD due to less attractive risk-reward in the near term and await a better entry point. Our new TP of HK$50.4 was based on 2.4x P/B (was 1.5x).
　　Key Factors for Rating
4Q24 results in line: Revenue grew 2% QoQ to US$2,207m. GPM increased by 2.2ppts QoQ to 22.6%, above the high end of guidance, mainly due to robust 12-inch wafer shipment driven by rush order from consumer electronics. NI recorded US$108m, missing BOCIe and consensus by 26% and 47% mainly due to increase in minorities.
Subsidy momentum to last in 1Q25: Mgmt. guided 1Q25 revenue growth of c.7% QoQ and GPM of c.20%, beating street estimates of -3% QoQ and 17% respectively. Mgmt. sees the national consumption subsidy to bring extra c.20% demand overall in 1H25.
2H25 may face pressure from overcapacity and demand overdraft: Mgmt. expects orders from global localisation ahead of potential tariffs and consumption subsidy may not last into 2H25, thus facing increasing pressure especially upon an incoming sizeable new foundry capacity from both SMIC and its domestic peers. SMIC expects D&A expenses to increase 20% in 2025. SMIC plans to navigate through via its richer product offerings (such as power semis for automotive platform), price, scale and technology leadership (such as 28nm migration).
　　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 increase 2025E EPS estimates by 20% to factor in the national consumption subsidy impact and the foundry production localisation demand. However, we expect overcapacity risk likely to weigh on ASP and GPM over 2025-26. We downgrade the stock from BUY to HOLD, awaiting a better entry point.