Valuation of SMIC
From a PE perspective, SMIC's valuation is definitely not cheap. However, for a company in a large-scale investment catch-up period, with a large amount of equipment depreciation and R&D expenses reducing profits, it is more appropriate to use PB/PS for valuation.
In the current situation of technology blockade, SMIC is the Taiwan Semiconductor of the mainland, and for a long time, the only one. Valuing SMIC against Taiwan Semiconductor in the A-share market is understandable; and in the Hong Kong stock market dominated by domestic funds, it is also understandable to align the valuation with Taiwan Semiconductor.
Taiwan Semiconductor's reasonable valuation range over the past 10 years is approximately PS 7-13, and PB is about 4-8 times.
Semiconductors as a whole will start an upward trend in 2024, with SMIC's growth rate in 2024 likely to be around 25%, generating approximately $7.5 billion in revenue; in 2025, the growth rate may again be 25% to $10 billion, considering the intensity of SMIC's previous 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 geopolitics, the US technology blockade sanctions have basically taken effect on taiwan semiconductor, and any tricks that can be used have basically no practical impact on taiwan semiconductor; the domestic semiconductor equipment and materials sector has made great progress, with increased public relations from 2019 to 2020, after 5 years of research and development, 2024-2028 will be a period of gradual breakthroughs in various products, and any breakthrough is bullish for taiwan semiconductor.
The semiconductor industry chain is a very complex and comprehensive chain, with Taiwan Semiconductor and SMIC at the core of the industry chain. Under the basic framework of major countries' technological breakthroughs, SMIC plays a central role, it is the key to revitalizing the entire industry, and it is the essential player in the bullish market of technology for major countries! As long as the key player is strong, the technology industry of major countries will flourish!
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