China/Asia TMT

Shawn Yang

China growth and global non-US Internet equities

Blue Lotus Research Institute

Blue Lotus Research is a Hong Kong Type 4 Licensed investment advisory firm focusing on Chinese growth equities and global non-US Internet equities

Equity Bottom-Up

Semiconductor Manufacturing International Corp (SMIC) / Equity Bottom-Up

Semiconductor Manufacturing International Corp (SMIC)

<ul>
<li>SMIC reported C2Q23 top-line, EBIT, and non-IFRS net profit in-line, (10%), and (20%) vs. our est., and in-line, (35%), and (8%) vs. cons., respectively.</li>
<li>SMIC guided 3Q revenues up 3-5% QoQ, but gross profit flattish QoQ. This suggests SMIC is shipping 8” wafers with low, or negative profit per wafer.</li>
<li>We maintain BUY on Huawei exposure but cut our TP to HK$ 24 to reflect the low profitability of 8” wafer orders that could persist given weak demand.</li>
</ul>


SMIC reported C2Q23 top-line, EBIT, and non-IFRS net profit in-line, (10%), and (20%) vs. our est., and in-line, (35%), and (8%) vs. cons., respectively.
SMIC guided 3Q revenues up 3-5% QoQ, but gross profit flattish QoQ. This suggests SMIC is shipping 8” wafers with low, or negative profit per wafer.
We maintain BUY on Huawei exposure but cut our TP to HK$ 24 to reflect the low profitability of 8” wafer orders that could persist given weak demand.


[SMIC (981 HK, BUY, TP HK$24) TP Change]: Margins Will Decline on No-Profit 8” Wafers Orders

<ul>
<li>We expect SMIC to report C1Q23 top-line and non-IFRS net income 2% and 16% vs. consensus, respectively.</li>
<li>We suggest SMIC’s ability to supply sanctioned firms with 14/7nm nodes provides it with significant pricing power. We expect the decline in SMIC’s wafer ASP to slow.</li>
<li>We expect overall 2H demand to improve due to (1) normalizing fabless inventory levels, and (2) stabilized smartphone demand. We maintain BUY rating and raise our TP to HK$ 26.</li>
</ul>


We expect SMIC to report C1Q23 top-line and non-IFRS net income 2% and 16% vs. consensus, respectively.
We suggest SMIC’s ability to supply sanctioned firms with 14/7nm nodes provides it with significant pricing power. We expect the decline in SMIC’s wafer ASP to slow.
We expect overall 2H demand to improve due to (1) normalizing fabless inventory levels, and (2) stabilized smartphone demand. We maintain BUY rating and raise our TP to HK$ 26.


[SMIC (0981 HK, BUY, TP HK$26) Target Price Change]: Pricing Power Courtesy of Export Restrictions

China New Economy Equity Analyst, Blue Lotus Research Institute

Robert McKay

China New Economy Equity Analyst

Thematic (Sector/Industry)

<ul>
<li>In the past four quarters, Chinese companies bought 65+ ArF (Argon Fluoride) Immersion lithography machines, some capable of overlay precision as fine as 1.5nm overlay for Self-Aligned Double/Quadruple/Octuple Patterning (SAD/Q/OP);</li>
<li>The race is between Chinese foundries to put these lithography machines to meet the raging demand of AI, which looks optimistic in the medium term, despite short-term challenges;</li>
<li>The race is also among the global semiconductor industry to meet the demand for testing the limit of AI's scaling law. So far the balance tips in <strong>disfavor</strong> of China. </li>
</ul>


In the past four quarters, Chinese companies bought 65+ ArF (Argon Fluoride) Immersion lithography machines, some capable of overlay precision as fine as 1.5nm overlay for Self-Aligned Double/Quadruple/Octuple Patterning (SAD/Q/OP);
The race is between Chinese foundries to put these lithography machines to meet the raging demand of AI, which looks optimistic in the medium term, despite short-term challenges;
The race is also among the global semiconductor industry to meet the demand for testing the limit of AI's scaling law. So far the balance tips in disfavor of China. 


China's Near-Term Semiconductor Bottleneck Isn't ASML

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

China Nonferrous Mining Corp / Event-Driven

<ul>
<li>A shares were down on the week, not maintaining the month-end bounce after the long weekend. H-shares were mixed. HSCEI was slightly up. </li>
<li>Net SOUTHBOUND buying was +HK23bn. SOUTHBOUND ended its consecutive post-CNY daily net buy streak on 25 March, then started a new one. No net sell days since.</li>
<li>This week saw a LOT of news. State Council Nine Points. CSRC draft regs and legislative work plan. Ratings agency action. Lots of movement. None of it hugely positive.</li>
</ul>


A shares were down on the week, not maintaining the month-end bounce after the long weekend. H-shares were mixed. HSCEI was slightly up. 
Net SOUTHBOUND buying was +HK23bn. SOUTHBOUND ended its consecutive post-CNY daily net buy streak on 25 March, then started a new one. No net sell days since.
This week saw a LOT of news. State Council Nine Points. CSRC draft regs and legislative work plan. Ratings agency action. Lots of movement. None of it hugely positive.


HK Connect SOUTHBOUND Flows (To 12 Apr 2024); Strong Net Buying. New State Council and CSRC Plans

Taiwan Tech Focused Senior Analyst

Patrick Liao

United Microelectronics Corp / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/united-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:6450:1" rel="noopener">United Microelectronics Corp (2303 TT)</a>'s 2Q24F outlook is experiencing a slight upward now, possibly indicating a positive QoQ.  </li>
<li>UMC's notable contributors are showing a mixed outlook, and <a href="https://www.smartkarma.com/entities/novatek-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:10904:1" rel="noopener">Novatek Microelectronics Corp (3034 TT)</a> could be the most influencer.</li>
<li>Attention should be paid to the 3Q24F outlook for any potential changes and a shift from a bearish view could positively impact the outlook, potentially signaling the end of downturn.  </li>
</ul>



United Microelectronics Corp (2303 TT)'s 2Q24F outlook is experiencing a slight upward now, possibly indicating a positive QoQ.  
UMC's notable contributors are showing a mixed outlook, and Novatek Microelectronics Corp (3034 TT) could be the most influencer.
Attention should be paid to the 3Q24F outlook for any potential changes and a shift from a bearish view could positively impact the outlook, potentially signaling the end of downturn.  


UMC (2303.TT; UMC.US): Some Rush Orders Coming in and 2Q24F Could Post Positive QoQ.

China

Semiconductor Manufacturing International Corporation operates a semiconductor foundry. The Company provides integrated circuit foundry and technology services including the testing, development, design, manufacturing, packaging, and sale of integrated circuits. Semiconductor Manufacturing International offers its products and services around the world.

Semiconductor Manufacturing International Corp (SMIC) (981 HK)

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Semiconductor Manufacturing International Corp (SMIC) (981 HK)

[SMIC (981 HK, BUY, TP HK$24) TP Change]: Margins Will Decline on No-Profit 8” Wafers Orders

We maintain BUY on Huawei exposure but cut our TP to HK$ 24 to reflect the low profitability of 8” wafer orders that could persist given weak demand.

Blue Lotus Research Institute

[SMIC (0981 HK, BUY, TP HK$26) Target Price Change]: Pricing Power Courtesy of Export Restrictions

We expect overall 2H demand to improve due to (1) normalizing fabless inventory levels, and (2) stabilized smartphone demand, per peer guidance. We...

Blue Lotus Research Institute

China's Near-Term Semiconductor Bottleneck Isn't ASML

China's semiconductor bottleneck isn't lithography tools in the near term, it is etchers. We see ST pressure, MT opportunity and LT challenge from...

Blue Lotus Research Institute

HK Connect SOUTHBOUND Flows (To 12 Apr 2024); Strong Net Buying. New State Council and CSRC Plans

Strong SOUTHBOUND Connect flows continue. Only one net sell day since the end of Chinese New Year. H-shares were flat to up while A-shares were...

Travis Lundy

UMC (2303.TT; UMC.US): Some Rush Orders Coming in and 2Q24F Could Post Positive QoQ.

UMC's 2Q24F outlook is slightly improving, with Novatek Microelectronics Corp potentially being a key influencer. Keep an eye on the 3Q24F outlook...

Patrick Liao

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

[SMIC (981 HK, BUY, TP HK$24) TP Change]: Margins Will Decline on No-Profit 8” Wafers Orders

We maintain BUY on Huawei exposure but cut our TP to HK$ 24 to reflect the low profitability of 8” wafer orders that could persist given weak demand.

Blue Lotus Research Institute

[SMIC (0981 HK, BUY, TP HK$26) Target Price Change]: Pricing Power Courtesy of Export Restrictions

We expect overall 2H demand to improve due to (1) normalizing fabless inventory levels, and (2) stabilized smartphone demand, per peer guidance. We...

Blue Lotus Research Institute

China's Near-Term Semiconductor Bottleneck Isn't ASML

China's semiconductor bottleneck isn't lithography tools in the near term, it is etchers. We see ST pressure, MT opportunity and LT challenge from...

Blue Lotus Research Institute

HK Connect SOUTHBOUND Flows (To 12 Apr 2024); Strong Net Buying. New State Council and CSRC Plans

Strong SOUTHBOUND Connect flows continue. Only one net sell day since the end of Chinese New Year. H-shares were flat to up while A-shares were...

Travis Lundy

UMC (2303.TT; UMC.US): Some Rush Orders Coming in and 2Q24F Could Post Positive QoQ.

​UMC's 2Q24F outlook is slightly improving, with Novatek Microelectronics Corp potentially being a key influencer. Keep an eye on the 3Q24F outlook...

Patrick Liao

UMC's 2Q24F outlook is slightly improving, with Novatek Microelectronics Corp potentially being a key influencer. Keep an eye on the 3Q24F outlook...