Semiconductor Manufacturing Intl Corp (981.HK) :Focus on core business throughout transition period

2018-02-13 09:33 港股研报君 阅读 700

机构:中金公司

评级:BUY

目标价:12.5港币

Action 

We believe SMIC will enter a transition period in 2018 due to the faster than expected shift of the semiconductor industry’s growth driver from smartphones to AI, auto and crypto currency. We think SMIC’s new strategy of focusing on leading edge progress migration is the right one to shorten the painful transition period due to technological disadvantages.  

Reasoning 

Growth driver transition hurts SMIC’s short-term profitability: as we saw from TSMC’s recent results announcement, we think the global semiconductor industry’s growth driver is transitioning from smartphones to AI, crypto currency and auto. Regardless of structural growth opportunities in China, SMIC is not immune from this global trend, as most high computing chips use 14nm or above processes. 

Focus on core businesses through transition period: SMIC revealed progress in technological developments, including: 1) 14nm process to start risk production in 1H19, six months ahead of schedule; 2) it licensed mature technologies to a third party company in China to monetize R&D assets; and, 3) CIS/NOR flash revenue increasing 30% YoY in 2017 (SMIC will continue to invest in these two platforms to support customers’ product upgrades). 

Earnings forecast and valuation 

We lower our 2018/19 revenue forecasts by 6%/9% and net profit by 29%/40% to reflect its weaker than expected revenue growth and rising R&D expenses for leading edge process developments. We thus cut our target price by 21.9% to HK$12.50 (1.60x 2018e P/B) and maintain our BUY rating on its strong earnings recovery from 2019. 

Risks 

Weaker than expected smartphone demand. 

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