Smic makes TSMC and Samsung nervous with record revenue and double gross margin?

2022-05-10 0 By

Hong Kong shares of SMIC opened higher on Friday morning Beijing time, extending gains to nearly 3 per cent in early trading.The stock was supported by fourth-quarter fiscal 2021 results released the day before.Overall, SMIC’s revenue in the fourth quarter was in line with expectations, profit and gross margin brought many surprises, and more importantly, its main focus on mature wafer capacity further expansion.As the largest and most technologically advanced foundries in mainland China, SMIC’s burden is heavier than ever as domestic companies face constraints and extreme pressure from foreign giants.This excellent financial report, undoubtedly let the market eat a reassuring.However, a closer look at SMIC’s business layout and revenue structure reveals obvious problems: inadequate supply chain control, ongoing brain drain, over-reliance on foreign giants for equipment…In the chip shortage spread, Samsung, TSMC and other giants in the situation of intensified internal entanglements, SMIC’s future is bound to be both opportunities and challenges.To some extent, SMIC has A lot in common with ningde Times, the “king of new shares” in China’s A-share market. In the industry, everyone knows about the leading manufacturer, but people outside the industry only feel “unknown” and do not know much about its business.The Value Institute believes that for those who are not familiar with SMIC, only a few key points need to be remembered.First of all, according to the current market share and performance calculation, SMIC is the first in Mainland China and the world’s top five WAFER foundry enterprises, accounting for more than 5% of the global market.Secondly, the wafer foundry business of communication equipment and consumer electronics is the main revenue pillar of SMIC. Its products are widely used in logic chips, mixed signal/radio frequency chips, high voltage resistant chips and system chips.As a foundry with the strongest comprehensive strength in mainland China, SMIC’s customers are all over the smart phone, smart home, automobile and other industries, and Huawei Hesi is its important customer.It’s no secret that the past year has been a bonanza for head semiconductor companies, as supply chains tighten and chip shortages spread around the world.From the data disclosed in the financial report, SMIC in the revenue, gross profit, core business capacity and other key data are good performance, objectively led to the rise in the stock price.On the one hand, SMIC’s overall revenue and gross margin both exceeded market expectations, enjoying waves of dividends against the backdrop of growing semiconductor demand.According to the data, SMIC’s sales revenue in the fourth quarter was us $1.58 billion, up 11.6% from US $1.415 billion in the third quarter and up 61.1% from US $981 million in the fourth quarter of 2020.Gross margin was even more surprising, at 35%, almost double the 18% recorded in the same period last year.According to The Value Institute, the increase in gross margin can be attributed mainly to the surge in price increases caused by the shortage of chip capacity.A review of the records shows that starting from the second quarter of last year, leading foundry companies including SMIC, TSMC, Samsung and UMC have all decided to raise prices one after another.Smic announced the price increase in April last year, the online orders remain unchanged, orders already placed will be traded at the new price.Based on the price increase, the majority of SMIC orders in the second half of last year have been executed according to the new price, objectively pushing up the gross margin.According to the data, SMIC’s gross wafer profit in the fourth quarter was $321, up $49 from the previous quarter, while its wafer revenue increased $94 from the third quarter.On the other hand, smIC’s continuous capacity expansion and increased capacity utilization indicate that smIC still enjoys the trust of customers and price increases will not negatively affect its performance in the short term.Data show that SMIC capacity utilization rate of 99.4% in the fourth quarter, although failed to achieve three consecutive quarters of 100, also maintained at a very high level.In terms of shipping volume, the equivalent 8-inch wafers reached 1723 thousand wafers, a significant improvement over the same period in 2020.In addition to 8-inch, SMIC’s 12-inch wafer capacity continues to expand.It should be noted that SMIC is currently the largest enterprise in the mass production of 12-inch wafers in mainland China.As UMC follows the lead of TSMC and Samsung and starts to focus on advanced technologies, as well as the trend of localised substitution, there may be more supply gaps of 12 – and 8-inch wafers in the market, which also presents opportunities for SMIC.Notably, SMIC has spent nearly $4 billion over the past year to expand its 12-inch and 8-inch wafer production lines.In addition, SMIC has stepped up the development of FinFTE multi-platform considering the impact of entity list sanctions.Driven by many factors such as lack of core, price rise and expansion, SMIC’s revenue, profit and gross margin have achieved substantial growth, which is certainly worth celebrating.But at the same time, we still have to face up to its and the first echelon of three wafer foundry giants gap.According to IC Insights’ report, SMIC has dominated the pure FOUNDRY foundry market by sales in Mainland China for the past few years and remains in the top five globally, matching UMC but significantly behind TSMC, Samsung and Grofonde.Return to the past these years of development course, what is restricting the SMIC further?Is it technology, talent or money?How far is SMIC, the foundry leader in Mainland China, from TSMC and Samsung?That may be the question on many people’s minds.Growing pains: Talent, technology and supply chain Can be traced back to the CORPORATE Social Responsibility report released by SMIC before its listing. There is a set of data worth our attention: the turnover rate of employees under 30 years old is serious, accounting for nearly 80% of all employees who quit.The value Institute said in the semiconductor industry’s year-end forecast for 2022 that the competition for high-end talent in the industry will be fierce in the coming year, as FOUNDRY giants such as TSMC, UMC and Samsung are attracting talent with high salaries.At this time, SMIC international talent loss rate serious, lack of attraction to high-end talent and other problems have been further amplified.There are many reasons for this phenomenon.On the one hand, SMIC’s wage expenditure level is not outstanding in the industry. Compared with its competitors in the same tier, smIC’s wage expenditure has not much advantage to speak of, and has even shown a downward trend in the past few quarters.In particular, in the second quarter of last year, SMIC had 1,785 r&d employees, with total compensation expenses of 230 million yuan and average compensation of 129,000 yuan, down from 2,419, 326 million and 135,000 in the same period of 2020.TSMC, by contrast, launched a massive structural pay hike in January last year, with most of its core technical staff receiving at least a 20 per cent pay rise.The situation did not improve much in the second half of the year.Smic’s research and development expenses were $172 million in the fourth quarter, up 2.8% from the third quarter and down 11.5% from the fourth quarter of 2020.Judging from the change trend of r&d team size and R&D expense ratio, SMIC’s R&D investment has not made much progress after listing.On the other hand, in addition to the lack of money, SMIC also seems to have shortcomings in management and corporate culture.InfoQ previously reported that people familiar with the matter said the issue became more acute after the dual CEO system was implemented in 2017, with Zhao Haijun and Liang Mengsong sharing the helm.By the first half of last year, SMIC’s turnover rate was about 1.3 times that of its peers, and the proportion of research and development staff has fallen from nearly 18% before its ipo in 2019 to less than 14% today, according to Data compiled by China Times.Notably, last July SMIC announced the departure of Wu Jingang, its vice-president of technology research and development, less than two weeks after he was granted 160,000 restricted stock shares at an extraordinary shareholders’ meeting.According to The Huaxia Times, Wu was ready to resign after the dual CEO system was implemented in 2017.It can be seen that smIC has some deficiencies in corporate culture and internal management, and cannot provide similar growth space with TSMC and Samsung in terms of technology, in addition to the lower salary and treatment compared with THOSE of TSMC and UMC. All of these are important reasons that reduce its talent attraction.However, smIC’s inability to retain talent is not the only problem that has plagued the company for years: its supply chain is too dependent on foreign giants, and the technology gap with TSMC, Samsung and Grofonder has been holding back its growth.In the supply chain, it has long been an open secret that SMIC’s domestic equipment accounts for a low proportion and key technologies are blocked by foreign giants.In the case of lithography machines, SMIC has complained publicly more than once about the impact of ASML’s delays on its production capacity.On last year’s second-quarter earnings call, CEO Zhao Haijun said SMIC’s 28-nm wafer expansion plans had been delayed because of equipment delivery problems.Although Zhao did not name ASML by name, information reviewed by Value Research Institute shows that ASML said in the second quarter of last year that the delivery time of the DUV lithography machine order signed with SMIC in 2018 would be extended to the end of December 2021.Given this, even if SMIC has enough DUV lithography machines to support existing production lines, ASML’s delayed delivery will undoubtedly have an adverse impact on its capacity expansion plans.In terms of technology, SMIC currently lags behind Samsung and TSMC, which is also the consensus in the industry.Wafer products of different sizes can be divided into mature process and advanced process. The former is the process of 28nm and above, which is mainly used in low-end mobile phones, digital TV, Bluetooth chips, PC, wearable devices and other fields.The latter is mainly applied to high-end products such as AP, baseband, CPU, graphics card GPU and mining machine ASIC.At present, TSMC and Samsung have carried out crazy inner roll in advanced process, bringing the precision of wafer into the 7/5nm era, while SMIC has the best hands or 14nm and 28nm process wafer.But looking at its strategy over the past year, SMIC appears to be shifting its focus away from advanced processes and instead refocusing its efforts and resources on capacity expansion in mature processes.The semiconductor industry, with its high technical barriers and clear future trends, does not have the opportunity to overtake on a curve at first sight.But for SMIC, playing to its strengths and avoiding its weaknesses, avoiding the sharp edges of Samsung and TSMC may also be a strategy worth looking forward to.Data showed that SMIC’s capacity share of 28nm and below wafers rose to 18.6% in the fourth quarter, showing impressive growth momentum.Overall, however, 12-inch wafers (for sizes of 90nm and below), which represent mature processes, still accounted for the largest share at more than 60 percent. Revenue also reached $894 million, up 78.6 percent year on year.From the breakdown size, 150/180nm process wafer revenue accounted for the highest, 28.6%;55/65nm and 40/45nm wafer revenues also accounted for 26.8% and 15.3%, respectively.According to The Value Institute, 28nm and below wafers are the future focus of competition among foundry giants, and Samsung and TSMC have also shifted their efforts to this battlefield early.However, from a demand point of view, mature processes still occupy more than 50% of the market share, its importance cannot be ignored.As mentioned above, the application fields of advanced process wafers are mainly high-end mobile PHONE AP, baseband, CPU and mining machine ASIC.However, in the downstream of the mature process, there is no lack of demand side of the Internet of Things, automotive MCU, bluetooth chips for middle and low-end mobile phones, wearable devices, base stations and portable electronic devices, which have the same rapid growth momentum in recent years. The growth potential is definitely worth looking forward to.In fact, in addition to Samsung and TSMC, the second tier of companies such as UmC, Grofonde and Huahong Semiconductor are still the mainstay of their revenue in recent years, and they are also making a lot of money.Umc, smIC’s closest competitor, for example, made most of its revenue from mature 12-inch wafers in the first three quarters of last year.The revenue share of 40/65nm and 65/90nm process wafers increased further, and the capacity of mature 12-inch process wafers rose nearly 6% quarter-on-quarter, and has recorded quarter-on-quarter growth for 10 consecutive quarters.For SMIC, it may be a matter of learning from the past and making up for its lack of talent retention and supply chain management.In fact, smIC has made a lot of efforts to address these two shortcomings in the past year.For example, in the supply chain, SMIC enriches its supply chain team by investing in more upstream and downstream enterprises and adjusting its procurement strategy.In October, Zhang Xin, SMIC vice-president, said the company had formally shifted its sourcing strategy from low prices and 30 per cent price cuts to supporting strategic suppliers through bulk purchases.In addition, SMIC will also cooperate with domestic universities and research institutes to establish a production, teaching and research personnel training base, in order to improve the replacement rate of domestic equipment, relieve the dilemma of being stuck by foreign giants such as ASML.Of course, SMIC will not give up the fight for advanced manufacturing process.Last September, SMIC announced that it would build a second fab in Lingang, Shanghai, that would churn out 100,000 12-inch wafers a month — its third expansion in the past year.Around the same time, TSMC and umc also announced expansion of wafer capacity below 28nm.According to media reports, TSMC has challenged the 3nm process by deploying a more mature FinFET architecture last year to achieve more accurate cross-channel current control.If all goes well, TSMC could mass-produce 3nm wafers by the end of this year, with Apple as its first customer.The battle for advanced processes among the foundry giants may just be reaching its climax.Written in the memory of the Value Research Institute, the grand scene when SMIC landed on the science and technology Innovation Board is still vividly remembered: planned to raise 20 billion yuan, but because the investors are too hot to purchase finally completed 53 billion yuan of excess capital, four times the second place of China Communication board;Smic’s super IPO also triggered a collective carnival of domestic semiconductor enterprises, Shanghai Xinyang, Zhongwei Company, Weil Shares, Huiding Technology, Semi Semiconductor are participating in this event through pre-IPO…For SMIC, the listing glory does not represent a long-term success, and its development is not plain sailing.Along the way, it carries a lot of praise, was questioned as much as the vast majority of peers.However, one thing is undeniable: SMIC’s potential, ceiling, is absolutely the most worthy of expectation among many chip semiconductor enterprises in China.At present, SMIC and TSMC, Samsung and other top giants, there is undoubtedly a big gap.Smic has also gone through several strategic adjustments and is still trying to adapt to changes in the market.However, given the broad prospects of the chip semiconductor industry, we believe smIC’s future has endless possibilities.