1. Future growth is based on current capital / R & D expenditures: SMIC said its future strategy is to strike a balance between investment and profitability, which Morgan Stanley thinks may be a challenging task, but if SMIC slows down R & D speed, the future may miss the opportunity to become a leading foundry.So, although this year, SMIC's low capacity utilization, but it did not cut R & D funding in terms of capital expenditures, SMIC may slow down the use of advanced technology Joint venture business model, which will help reduce the capital expenditure burden, while ensuring that the technology migration route.The company aims to mass production of 14nm process by 2020.
Among the chip manufacturing capacity of SMIC, 44.795 million in the third quarter of 2017, an increase of 2.2% from the previous quarter. Capacity utilization was 84% in the third quarter of 2017, up from 97.2% in the same period of last year. This may be due to the rapid expansion of production capacity Of the factors in the expansion of production capacity, in addition to the inherent power, such as the strength of their own enterprises, capacity utilization rose, the proportion of customers in China has reached 50% of sales, the external pressure does make SMIC face continuous The need to expand production capacity, especially the need to shorten the gap with the capacity of international manufacturers, taking into account the upward trend of China's semiconductor industry sprint, SMIC must play a leading manufacturer of integrated circuits in China.
2. Through the temporary downturn: the decline in fingerprint business is one of the major reasons for lower capacity utilization this year, but orders are now back to SMIC one after another, is expected to a key fingerprint customers until the next quarter, the continuous growth of Core revenue is helping. NOR Flash is another area of rapid growth this year.
3. Strengthen the 28nm process: SMIC is expected to decline in the fourth quarter, while the revenue contribution of 28nm will increase.According to SMIC, its fourth quarter 28nm revenue ratio will exceed 10%, mainly from PolySION. The company acknowledges that it may be necessary to focus on the 28nm yield upgrade in 2018, though the technology is already meeting the production and performance needs of key customers and SMIC expects to accelerate HKMG production in the second half of 2018.
28nm and 40nm are SMIC's key products, but the company's 28nm HKMG process yield is less than expected, currently around 40%, but market analysts generally believe that the addition of Liang Mengsong will rapidly improve the 28nm process technology, and the company also In developing its own 14nm process technology, Leong Meng-song had a similar history at Samsung or could reverse SMIC's competitiveness.
4. Raise Funds for Mid-Term Growth and Investor Cooperation: On November 29, SMIC announced plans to issue equity and convertible bonds. If Datang and Grand Funds each exercise the right of first refusal, the total funds raised will reach 969 million U.S. dollars. The plan is to capitalize on these benefits for its mid-term business growth and to build a closer partnership with strategic investors such as Siu Yi Innovation, which currently has cash of about $ 1 billion and annual operating cash flow of $ 2 billion. Easy to innovate, large funds and Datang will subscribe together more than 70% of the funds.
At present, the completion of the situation, Siu Yi innovation invested 70 million US dollars to subscribe for shares, the Fund intends to subscribe for a total principal amount of 300 million US dollars of shares; and Datang subscribed the total principal of 200 million US dollars.
5. Dr. Leung Mengsong brought beyond the benefits of technology development: Liang Mengsong brought its expertise in the development of advanced technology, SMIC said it will help the smooth development of the company 14nm At the same time, Leung Meng-song in advanced Foundry experience will also strengthen the operation and management of the fab, improve the overall efficiency of the company.
6. Substitute industry consolidation: SMIC said it may take some time to see the integration of China's foundry industry, before the back-end technology oversupply However, SMIC believes its technology products and customer portfolio better than their Chinese counterparts. Mount's view is consistent, that from now to 2019, 28nm will not be oversupplied situation.
At present, there are 22 12-inch wafer fabs in China, of which 11 are under construction, 18 are fabs with 8-inch fabs and 5 are under construction. Some of these new fabs will enter mass production in 2018, in particular 2018 will be Therefore, it is estimated that the annual growth rate of China's OEM industry output will reach 19% in 2018, and the growth rate will still be maintained at a high growth rate.
7. About NOR Flash Market: SMIC is optimistic about the NOR Flash market next year as it has secured good pricing and irrevocable orders worth more than US $ 100 million. The profit margin is at the corporate average, better than the current 28nm margin.Mama view is NOR Flash prices will remain stable in the first half of next year.
In September, Siu Yi Innovation and SMIC signed about 1.2 billion yuan purchase strategic cooperation agreement. The background is based on the silicon wafer supply this year is very tight, but the demand for NOR Flash chips continued to fall short of demand and toward innovation SMIC and the contract will be able to obtain a stable capacity guarantee, this time the subscription of SMIC shares placed in shares of SMIC, a symbol of cooperation between the two sides further, you can develop multi-level strategic cooperation and become more determined partners.
In addition, cross-border integration in the latter part of the IC packaging and testing, the current foundry manufacturers are required to cross-border to the packaging capabilities to 2.5D-3D integration, and this part of TSMC has been at the forefront, SMIC is even more unwilling to fall behind and has established a long-term science and technology joint venture with SMIC in Jiangyin.
Based on this, Morgan Stanley SMIC gave 13.5 Hong Kong dollars target price, of course, also faces several risks, including China's slowdown in demand; stock correction; serious price competition.