Recently, SMIC announced its 2017 annual results. During the period, the company achieved sales revenue of 3.101 billion U.S. dollars, up 6.4% year-on-year; EBITDA was 1.12 billion U.S. dollars, up 5.2% year-on-year; profit for the year was 1.26. Billion US dollars, a year-on-year decrease of 60.05%.
In addition, SMIC’s cash generated from operating activities during the year was US$1.08 billion, an increase of 10.6% year-on-year; the net debt-to-equity ratio at the end of the period was 11.8%, still at a low level.
In terms of revenue structure, revenue contributed by wafers with advanced technologies of 45nm and below increased by 30.3% to US$876 million, which represented a percentage of total revenue from 24% in 2016 to 28.8%. It is worth noting that 28nm revenue is particularly noteworthy. The proportion increased from 1.6% in 2016 to 8% in 2017, and revenue increased by 4.4 times. Advanced processes began to release more robust profitability.
CAPEX double-edged sword short-term performance pressure
In 2017, with the increase in the number of shipments of wafers, SMIC achieved a record high, and EBITDA increased by 5.2% year-on-year to US$1.12 billion, which also hit a record high. However, net profit declined sharply. 50%, the main reason lies in its high cost of sales and research and development expenses.
The increase in the cost of sales, in addition to the increase in the volume of shipments of wafers, was the culprit for its huge depreciation expense. SMIC’s depreciation expense for 2017 was US$774 million, an increase of 32.53% over 2016, plus The company’s R&D expenses increased by 34.2% from US$318 million in 2016 to US$427 million, making its gross margin drop from 29.2% in 2016 to 23.9% in 2017.
As we all know, foundry is a technology-intensive and capital-intensive industry, and the leading degree of product process and production scale has largely determined the depth of the company's 'moat' in this industry.
The development of advanced processes depends on money, requires a lot of R&D capital, and continuous expansion of production capacity. However, Capex's investment is a double-edged sword. In the long run, the profitability of a company must be tied to capital and R & D investment, but in the short term, high capital investment is naturally accompanied by a large amount of depreciation expenses, which will erode the company's profits in the short term.
When Taiwan Semiconductor Manufacturing Co., Ltd. took the top spot in the wafer foundry, it took the lead in utilizing advanced process technology to take the lead in gaining high gross margins and high ASP and expanding, and then waiting for the back brothers to catch up. Relying on the advantages of economies of scale to fight price wars, such a cycle, far away from their competitors, to establish their dominance.
Today, TSMC, Samsung, and Intel in the industry’s first echelon have already captured 10nm of advanced process technology, and the second-tier companies such as Glofont, UMC, etc. have also achieved small-scale production on the 14nm process, while the backward leader is 2-3. The generation of SMIC is still at a 28% rise in the yield rate. Therefore, SMIC is still in the catch-up period. The high depreciation expense is also reasonable.
Good policy has long-term benefit from localization of chips
According to the CISA data, in 2017, the demand for integrated circuit products in China reached 1.40 trillion yuan, while domestic supply was only 541.13 billion yuan, and the self-sufficiency rate was only 38.7%. A large number of integrated circuit products rely on imports. In 2017, the import volume of integrated circuit products Reached $260.14 billion, which has replaced crude oil as China's largest import commodity.
The recent Sino-U.S. trade war that has stirred a lot of enthusiasm has made the self-sufficiency of the IC industry more necessary and urgent.
U.S. President Trump signed a memorandum on March 22, which will impose a 25% tariff on some 60 billion U.S. dollars of Chinese imports based on the result of the '301 investigation'. This will include 1300 product categories such as the new generation of information technology and new energy equipment. Affected by tariffs. These areas are precisely the key areas of 'Made in China 2025', and for companies in the integrated circuit field, the future restrictions on intellectual property rights and mergers and acquisitions will be more stringent.
And in early 17th, the U.S. President’s Science and Technology Advisory Committee issued a report titled “Ensuring U.S. Semiconductor Leadership.” It was mentioned in the report that the rise of China’s semiconductors has already constituted a “threat” to the United States. It is suggested that the government impose restrictions on Chinese industries. Three key strategies are proposed, one of which is to suppress the so-called innovation in the Chinese semiconductor industry. The rise of Chinese semiconductors has brought tremendous challenges to the US semiconductor industry and even to the US economy and national defense.
The rapid growth of Chinese semiconductor companies has caused the United States to increasingly feel the threat, and has repeatedly blocked China’s investment in the semiconductor industry’s acquisition path to the United States on the basis of national security risks. China must take a more independent and independent development path, which will also make the chip The industry is expected to enjoy long-term gains.
Following the State Council Premier Li Keqiang’s report on the work of the government at the 13th National People’s Congress, he proposed the “Accelerate the construction of manufacturing powers, promote the development of integrated circuits, fifth-generation mobile communications, aircraft engines, new energy vehicles, and new materials industries”. After the first time integrated circuits were placed first in the manufacturing powerhouse construction, on March 30th, the Ministry of Finance and the State Administration of Taxation, the National Development and Reform Commission, and the Ministry of Industry and Information Technology issued the “Circular on Issues Concerning Corporate Income Tax Policies on Integrated Circuit Manufacturing Enterprises”, offering preferential policies. Including: Qualified enterprises will be exempted from income tax at a statutory tax rate of 25% after a certain period of time, and will enjoy further benefits of '5 exemptions, 40% reductions' on the basis of 'two exemptions and three and a half' in the past. 2018 After January 1, newly-built integrated circuit manufacturing companies or projects with a line width of less than 130 nanometers and an operating period of more than 10 years are exempt from corporate income tax from the first year to the second year. The third to fifth years Acquire corporate income tax at half of the statutory tax rate of 25%, and enjoy until expiration.
In addition to the taxation support for integrated circuit advanced manufacturing processes, the “Several Opinions on Launching Pilot Projects for Issuing Domestic Shares or Depositary Receipts within the Innovative Enterprise” of the China Securities Regulatory Commission was recently approved by the State Council. The target of the trial includes strategic industries including the integrated circuit industry. The emerging industries further supported the financing channels of the integrated circuit industry and once again demonstrated the country’s determination to boost the development of the integrated circuit industry.
Conclusion
Looking ahead to 2018, SMIC expects to further develop its production capacity and advanced processes in 2018. Looking at the industry as a whole, in the long term, the development of artificial intelligence and the Internet of Things will bring about a burst of chip demand, and domestic import substitution. It will also enable domestic foundry leaders to have huge room for growth. However, in the short term, the growth of the industry is mainly driven by the slowdown in smartphone growth, the increasingly fierce competition in mature processes, and the drastic decline in digital currencies, which also makes the chip market grow. Under pressure, SMIC is still struggling with 14nm technology and 28nm yield, and its performance is temporarily outbreak.
The future will be bright, and the road ahead is not easy. 2018 is a year when SMIC is poised. Today, the 35-fold P/E has reflected the expectations of Liang Mengsong and others after joining the company. Performance expectations The next inflection point lies in the progress of the 14nm advanced process. Whether the future will be able to successfully sail to the sea of stars under the will of the country will still need to wait and see.