“Science and Technology Innovation Board Daily”, November 8 (Reporter Guo Hui) “Consistent with previous observations, in the first half of the year, domestic customers built inventory in order to gain market share and prepare goods. Foreign customers hedged market risks due to geopolitical considerations and pulled goods that should have been shipped in the third quarter to the second quarter. In the third quarter, the net increase in 12-inch shipments made up for the decrease in 8-inch shipments, leaving quarterly shipments basically flat from month to month. In terms of price, along with the accelerated increase in localization demand, the price of some 12-inch nodes was relatively good, and the product portfolio was optimized and adjusted, which led to a month-on-month increase in the company's average sales unit price in the third quarter.” At the SMIC results conference held today (November 8), the company's co-CEO Zhao Haijun reviewed the business situation in the third quarter of this year.

Combining these two factors, SMIC's third-quarter revenue rose 14% month-on-month to $2.17 billion. This is also the first time that SMIC's quarterly revenue has surpassed $2 billion and reached a record high. At the same time, the consolidated gross margin increased to 20.5% in the third quarter, up 6.6 percentage points from month to month.

Domestic customers entering the high-end product market are expected to have stable Q1 revenue next year

Looking at sales revenue by region, China, the US, and Eurasia accounted for 86%, 11%, and 3%, respectively. Looking at the second quarter compared to the second quarter, China's share of revenue increased by 6.1 percentage points, while the share of revenue in the US and Eurasia declined month-on-month.

Zhao Haijun interpreted this as saying that due to geopolitical considerations and responding to the needs of the Chinese market, some overseas customers collected goods to a certain extent in the second quarter, while Chinese customers gradually entered the middle and high-end product market with accelerated local demand and overall good export demand, and their share of revenue increased month-on-month.

However, Zhao Haijun stressed that the absolute value of SMIC's actual sales revenue to overseas customers such as Europe and the US has not declined.

Take the European market as an example. Despite its overall economic downturn and high market inventory, SMIC's share of long-term agreements with customers is not large, and most of these corporate customers are growth companies, so there are no big ups and downs in picking up goods. It is expected that SMIC's overall turnover will also be relatively stable in the first quarter of next year.

In terms of final application categories, smartphones, computers and tablets, consumer electronics, connectivity and wearables, industry and automobiles accounted for 25%, 16%, 13%, 8%, and 8%, respectively. Zhao Haijun said that market demand for major consumer categories is gradually recovering, and functional upgrades and exports of consumer products have maintained good demand.

At the same time, Zhao Haijun said that the industry has not bottomed out until now, and the weakest links are concentrated in the industrial and automotive sectors. As the inventories of major automotive suppliers in Northern Europe and Chinese PV and battery customers are further depleted, it is expected that next year there will be a good revenue boost for SMIC and other peers.

Looking ahead to next year, as far as SMIC is concerned, apart from the fact that industry and automobiles have yet to clearly grow by application classification, the other four application fields (smartphones, computers and tablets, consumer electronics, connectivity and wearables) are currently experiencing growth (expected next year), but prices are expected to loosen somewhat.

In terms of revenue by size, the share of 8 inches in Q3 revenue fell to 21.5% due to the advance of shipments to the second quarter. Due to good demand and orders for BCD process platforms, the utilization rate of 8-inch production capacity has increased. The 12-inch overall load is close to full load. The newly released production capacity was quickly verified and put into production, and the revenue share increased to 78.5%.

Zhao Haijun said that usually the fourth quarter is a low season for the foundry industry. Customers will review sales plans at the beginning of the year in the fourth quarter, and they are not very willing to stock up and receive goods. However, after negotiations with customers, SMIC's fourth-quarter shipments were not greatly affected.

SMIC expects to release an additional 12 inch monthly production capacity of 0.03 million sheets in the fourth quarter, but verification of the new production capacity will take time, so capacity utilization and shipments are expected to decline in the fourth quarter. Zhao Haijun said he hopes to increase the average sales unit price through product portfolio optimization to ensure that revenue in the fourth quarter will not be affected, achieve a flat to slight increase from month to month, and make gross margin relatively stable.

According to the results for the first three quarters and the median guide for the fourth quarter, SMIC's annual revenue is expected to be around 8 billion US dollars, with an annual revenue growth rate of about 27%, which is better than the average of comparable peers. The annual gross margin is expected to be around 17%, and the monthly production capacity is expected to reach about 0.9 million 8-inch tablets by the end of the year.

There is an oversupply of power devices in the industry as a whole, which will be a new opportunity

At today's (November 8) results conference, with regard to short-term industry changes in the future, Zhao Haijun talked about three main trends: first, the rate of localized substitution will decline. This is because domestic automobile, mobile phone and other terminal manufacturers want to establish relationships with multiple suppliers, and when they reach about one-third of the supply, the remaining demand will not change much; second, the wafer foundry industry is declining in addition to previously announced projects; third, this year's order increase is at a peak, and there will still be an increase next year, but there will be less increase than this year.

Zhao Haijun believes that due to macroeconomic and geopolitical influences, the industry as a whole has obvious overcapacity at this stage. He said that the overall foundry industry's capacity utilization rate must reach 85% or higher before it can be called a recovery, but SMIC's comparable average capacity utilization rate is only about 70% this year, indicating that there is a lot of overcapacity overall, and it is not expected that the situation will improve much in the coming year.

Zhao Haijun said that at this time, it is necessary to fully communicate with end customers to develop new products to cope with market changes by improving product technical specifications and quality.

Zhao Haijun revealed at the performance conference that in order to meet customer needs, the deployment of power device production capacity will be accelerated to fully support the development of the automobile industry and the new energy market.

Zhao Haijun said that there is an oversupply of power devices and discrete devices from a global perspective, and the reason it decided to increase power device production capacity is because SMIC has noticed that the current production capacity of power products in the industry is mainly production capacity built before 2000 or eliminated for logic or storage products. However, it is difficult for these production capacities to meet the new needs of customers, whether in terms of product quality or industrial control capabilities.

“SMIC will not increase the scale of production capacity or investment by increasing the production of power devices. Instead, it will transfer part of it to make power devices based on the logic circuit production capacity announced earlier. The company will migrate existing process capabilities such as backside processing, bonding, and logic circuits to power products, which is the direction of future cooperation with customers.” Zhao Haijun said.

Zhao Haijun said that SMIC has been laying out BCD products for decades, including cooperation with leading companies in the industry. The accumulation of quality, platforms, and products is very complete, not inferior to any company in the industry. With the further development of process nodes, the system is becoming more complex. Coupled with the application of AI, requirements for energy management, voltage management, and quality management have reached a new level in AIoT, data centers, etc., and demand is expected to double. I believe BCD will develop very well.