Daily Brief Equity Bottom-Up: SMIC (SEHK: 00981; SSE Star Market: 688981): Back to Reality and more

• Reports emphasizing that SMIC fell short of 3Q expectations don’t make much sense. The real test starts this quarter with 7nm smart phone processors for Huawei in mass production.
• Profits are under pressure from low capacity utilization, rising depreciation and continued high investment. Cash flow is adequate. The balance sheet is sound.
• The share price dropped 6.8% on Friday after rising 44% from late August to early November. 4Q guidance points to near-zero operating and net profit. Recovery will take time.

• In 3Q23, Celltrion Inc (068270 KS) reported revenue and operating profit of KRW672B (+4% YoY) and KRW268B (+25% YoY), respectively, driven by broad-based growth across biosimilar portfolio and CMO revenue.
• Operating profit margin is approaching 40% level, highest level in last two years, driven primarily by sales growth around high margin products. Net profit jumped 33% YoY to KRW221B.
• In Oct’23, Celltrion received FDA approval for Zympentra, which is Celltrion’s first product approved as a new drug in the U.S., and is expected to receive patent protection until 2040.

• More y/y improvement (or decline deceleration) for PC/server, power management IC (PMIC), CMOS sensor/touch controller, GaAs RF/VCSEL, gaming GPU card, memory, and foundry vendors
• GaAs RF/VCSEL and gaming GPU card vendors saw very impressive sales growth, driven by new phones introduction and rush orders to use NVIDIA RTX 4090 gaming card for AI training.
• Stronger than expected Oct for TSMC and Gigabyte might drive 4Q sales and near term share price upside; Visera, Andes Tech, and AP Memory might see sales and price downside.

• Results of 9th national VBP was released. The average price reduction was 58% and the maximum price reduction was over 90%. Hengrui (600276 CH)‘s challenge in VBP has just begun.
• The whole CXO sector is more like a cyclical industry than a high-barrier industry. There’re still some pressures/risks have not been fully released. Its future may be darker than before.
• Asymchem’s stock price performance follows the entire CXO sector. Whether Asymchem can obtain large Tirzepatide orders and provide investors with high certainty of outlook is the key for valuation reversal.

SIGA recapped several key developments in its Q3 update, signalling strong top-line momentum going into Q423. Most notably, the recent $18m procurement deal with the European Health Emergency Preparedness and Response Authority (HERA) has surprised to the upside, with more value to be unlocked, in our opinion. With upcoming BARDA (oral and IV TPOXX), Department of Defense (DoD) and HERA deliveries, Q423 will likely be a busy quarter for SIGA. We have increased our FY23 product revenue estimates to c $164m ($155m previously) to reflect the HERA orders, although this has been offset by lower R&D revenue estimates ($8.9m vs $20.5m previously) following the receipt of the final payment under the PEP research contract with the DoD (in Q323). Management continues to target the PEP regulatory submission in 2024 (despite undertaking a trial data reanalysis) and we view this as a next significant milestone for SIGA. Incorporating the results and latest net cash figure, our valuation adjusts to $17.24/share ($17.46/share previously).