Valuation of SMIC
From a PE perspective, SMIC's valuation is definitely not cheap. However, for a company in a massive investment catch-up phase, with significant equipment depreciation and research and development expenses reducing profits, it is more appropriate to value using PB/PS ratios.
In the current situation of technological blockade, SMIC is the TSMC of the mainland, and for a long time, it is the only one. It is understandable to compare the valuation of A-shares to TSMC; in the context of the mainland dominated trend in the Hong Kong stock market, it is also reasonable to approach the valuation towards TSMC.
TSMC's reasonable valuation range over the past 10 years is approximately PS 7-13, and PB is roughly 4-8 times.
In 2024, the overall semiconductor market started to improve, with SMIC's growth rate in 2024 likely to be around 25%, generating approximately $7.5 billion in revenue; in 2025, growth could accelerate by another 25% to $10 billion, considering the intensity of SMIC's previous capacity expansion, it may be even higher.
Based on the 2025 revenue of 10 billion US dollars, the reasonable valuation range for Taiwan Semiconductor is 70-130 billion US dollars, with a P/S ratio of 7-13 times. The reasonable valuation for A shares is in the range of 500 billion to 1 trillion RMB. In a bullish market, the basic valuation could exceed 1 trillion RMB, while the market cap of Hong Kong stocks could exceed 600 billion Hong Kong dollars.
Regarding the impact of geopolitical factors, the US technology blockade sanctions have basically taken effect on Taiwan Semiconductor, and the tactics that can be used have basically no practical impact on Taiwan Semiconductor; the domestic semiconductor equipment and materials sector are advancing by leaps and bounds, intensifying public relations from 2019-2020, after 5 years of research and development, 2024-2028 is a period of gradual breakthroughs for various products, any breakthrough is bullish for Taiwan Semiconductor.
The semiconductor industry chain is a very complex and comprehensive chain, with Taiwan Semiconductor and SMIC being the core of the industry chain. Under the basic framework of major countries' technological breakthroughs, SMIC plays a central role as the key to revitalizing the entire industry, and is the core player in the bullish market of major country technology! As long as the key player remains strong, major country technology will flourish!
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