In the heart of the semiconductor industry, Semiconductor Manufacturing International Corporation (SMIC), listed on the Hong Kong Stock Exchange under the ticker code 00981.HK, has recently reported notable achievements in its financial performanceAs we delve into the nuances of their fourth-quarter results for 2024, it becomes apparent that the company has experienced substantial growth, marking consecutive increases over the last seven quartersThe fourth quarter saw revenues soar to an impressive $2.207 billion, reflecting a year-on-year growth of 31.52% and a quarter-on-quarter rise of 1.66%.
At the forefront of the company's operations is Co-CEO Zhao Haijun, who has articulated a positive outlook for the semiconductor market in 2024. He noted an overall recovery within the sector, citing a significant return to healthier inventory levels among design firms and a swift transition of major industries to the Chinese supply chainAs an integral part of the strategy for 2024, SMIC has not only ramped up its production capacity but also enhanced the integrity of its platform to meet the surging demands from clientsThis prepared approach, according to Zhao, has resulted in increasing revenues in each quarter of 2024, exceeding initial projections.
Analyzing the specifics of the fourth quarter, the company reported an increase in monthly production capacity to 947,600 eight-inch wafer equivalents, up from 884,300 in the preceding quarterThe total wafer shipments saw an annual increase of 18.91%, reaching 1.9918 million wafersThe capacity utilization rate climbed to 85.5%, an improvement from 76.8% during the same period last year, although it fell short of the previous quarter’s high of 90.4%.
Moreover, Zhao pointed out that the average selling price (ASP) of SMIC's products has risen by 6% sequentiallyUnderstanding the subtleties behind this increase helps illuminate the dynamics of seasonal demand and product differentiation in the semiconductor landscape
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Typically, the fourth quarter is characterized as a slow season, with fewer orders compared to other periodsInterestingly, during this quiet period, there was a notable increase in the production of 12-inch wafers, countering a downturn in eight-inch productsThe reality is that 12-inch products, with their more complex layering, command a higher market price compared to their eight-inch counterparts.
In the context of inventory management, it’s pivotal to recognize how the slow season often sees a reduction in lower-priced products, as companies make adjustments based on their stock levelsTherefore, the remaining shipments typically comprise more specialized products, which tend to be priced higherThese strategic pricing dynamics have evidently played a role in bolstering SMIC’s average selling price.
Additionally, there was a commendable improvement in SMIC's gross margin during the fourth quarter, which increased from 16.38% in Q4 2023 and 20.46% in Q3 2024 to 22.61% in Q4 2024. Zhao explained that traditionally, clients exhibit lower purchase willingness during this season, yet SMIC’s ability to add 28,000 wafers of new capacity, coupled with an optimized product mix, also contributed significantly to this margin improvementThe marginal rise in the average selling price largely offset declines in shipments and the impacts of increased depreciation.
When dissecting revenue sources, numbers reveal a diverse geographical reach, with contributions to revenue coming predominantly from China (89.1%), followed by the United States (8.9%) and Eurasia (2.0%). The growth from Chinese clients has been particularly pronounced, driven by localized demand and the restructuring of supply chains.
Examining the revenue by wafer size, both 12-inch and 8-inch wafers have performed well, comprising 80.6% and 19.4% of the total revenue, respectivelyThe significant gains in 12-inch wafer revenues can be attributed largely to increased production capacity and the rapid validation of new capacities leading to swift operational readiness.
Applications primarily concerned with consumer electronics, such as smartphones, computers, and tablets, dominate the revenue streams, accounting for 24.2%, 19.1%, and 40.2% respectively
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These figures are symptomatic of broader trends in consumer electronics, where various governmental consumption incentives have fostered growth in the smartphone market.
Looking at the entirety of 2024, SMIC's sales revenue peaked at $8.03 billion, marking a historic increase of 27.02%. The gross margin settled at 18%, reflecting a slight decrease of 1.3 percentage points year on year, primarily due to rising depreciation.
The company also disclosed capital expenditures for 2024 totaling $7.33 billionAnticipating the first quarter of 2025, management shared projections of a quarter-on-quarter revenue growth of 6% to 8%, with expected gross margins in the range of 19% to 21%. Furthermore, they foresee an increase in 2025 revenue growth relative to industry peers, with capital expenditures remaining largely aligned with 2024 levels.
Despite the positive forecast, there are concerns regarding future profit margins potentially being constrained by depreciation costsZhao conveyed a cautiously optimistic sentiment regarding SMIC's outlook, noting that client inventory levels appear stableThrough ongoing discussions with supply chain partners, there is a consensus that alongside the rapid expansion of AI applications, demand across other sectors may stabilize or grow modestly through 2025.
Highlighting key observations, Zhao noted two significant trends: firstly, the progress of industries like automotive transitioning to domestic supply chains has moved from testing to substantial production stage; and secondly, with governmental policies stimulating consumption, there is a heightened desire among clients to replenish inventories, especially in consumer electronics.
Challenges remain, however, including potential inventory shortages in the latter half of the year due to heavy ordering in the first half and increasing competitive pricing pressuresZhao indicated that while they expect strong demand, they foresee the need to navigate carefully as additional capacity is introduced and price competition intensifies.
In navigating these challenges, SMIC’s management team has articulated a strategy focusing on three key areas: expediting technological updates and optimizing performance, ensuring strategic alignment with clients, and enhancing the integrity of the platform alongside capacity expansion.
In conclusion, as SMIC strides forward, the company finds itself at a pivotal moment characterized by robust growth and complex challenges
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