Profit dropped sharply during the year
Revenue hit a new high, rising from 6.918 billion U.S. dollars in 2016 to 3.101 billion U.S. dollars, an increase of 6.4%, but profit for the year recorded 126 million, down 60.13% from 316 million in 2016, mainly due to the cost of sales, net R&D expenditures. Rising. Cost of sales increased by 14.34% compared to 2016, resulting in a decrease in gross profit from US$850 million to US$7.4 billion, a decrease of 12.94%, plus net R&D spending increased by 34.28% to 427 million in 2016 from US$318 million in 2016, making profit for the year Sharply slide.
Revenue hit a record high mainly because of the increase in the number of wafers shipped. In 2017, SMIC's wafer shipments amounted to 4.31 million 8-inch equivalent wafers, which was 8.9% higher than 2016's 395.77 million. The increase was due to the increase in depreciation expenses and the increase in shipments of wafers. In 2016, depreciation and amortization expenses were US$584 million, and in 2017 it increased by 32.53% to US$774 million, which also led to the SGM’s gross profit margin. 29.2% in 2016 dropped to 23.9% in 2017.
18-year capital expenditure plan
Wafer foundry belongs to the heavy capital industry. The scale of the production line and the advanced manufacturing process are the company's moats. The mastery of the latest process wafer technology will give the company first-mover advantages and price advantages. A large amount of capital investment in R&D will be realized. The expansion of new production capacity will also bring depreciation expenses and pressure the performance of the company. For SMIC, the profit before tax depreciation and amortization was approximately US$1.12 billion in 2017, a year-on-year increase. 5.2%, set a new historical high. However, in order to seize technological heights and market share, the expansion of production capacity and R&D investment will be imperative. Abandoning these two inputs will also give up the future.
In 2018, the company made detailed plans for major capital expenditures. It is estimated that the capital expenditure will be approximately US$1.9 billion. It is mainly used to: 1. Expand Beijing 300mm wafer fab, Beijing 300mm fab, Shanghai 200mm wafer Yuanyuan, Shanghai 300mm fab and Jiangyin bump factory; 2. New project in Tianjin; 3. Most-owned subsidiary will focus on R&D of 14nm FinFET technology. SMIC is expected to have capacity in 2018 and Advanced process development further.
Advanced process chasing
SMIC's 2018 is destined to be a year of transformation. Under the industry environment where the growth rate of smartphones has slowed down, the growth momentum of the industry has shifted to high-performance computing products based on advanced manufacturing processes. The competition in mature manufacturing processes has become increasingly fierce, and the pressure on prices is high. In anticipation, this was also due to the company’s backwardness in advanced process technology. The following shows the gross profit margin for each quarter of 2017. Due to intensified competition within the industry, SMIC’s gross margin has dropped to 18.9% in the fourth quarter. .
Table: Organized in company announcement
There are a large number of foundries, which can be divided into three echelons according to technology. The first echelon: TSMC, Samsung, Intel, mastered the high-end process mass production technology of 10nm; the second echelon is mainly Global Foundries. UMC, etc., have a small-scale mass production at the high-end 14nm, 28nm process is fully matured; the third gradient is mainly SMIC, 28nm mass production has been achieved, but the yield is low, 40nm process is fully mature. When the dominant force in the industry environment changes, SMIC is 2-3 years behind SCM foundry companies.
The expansion of 28nm wafer production is one of the company's major growth drivers in 2017. The proportion of revenue from 28nm has rapidly increased from 5% at the beginning of the year to 11.3% at the end of the year. Among them, the 28nm HKMG (metal gate + high-k gate dielectric) The capacity ramp has been completed in 2017. The improved version of HKC+ is expected to be put into production in 2018. The 14nm FinFET technology is currently in the R&D stage and is expected to be produced in the first half of 2019.
In terms of valuation, as of the close of April 4, PE (TTM) is 35.8 times, which is the highest among the industry in the Hong Kong stock market. Compared with historical valuations, SMIC’s current PE is also at its highest level in 2014, including many investments. Dr. Liang Mengsong is optimistic about the progress of 14nm technology research after joining Dr. Liang Mengsong. However, before narrowing the gap with the industry leading technology, SMIC will still face fierce competition in the existing process, and price pressure will affect the company's performance.
For SMIC, the 2018 is full of challenges. Whether or not the company can “fly and fly” is a matter of looking at the results of the 14nm advanced process.
Author: Yang Shihong