The listing committee of China's Sci-Tech innovation board (STAR Market) on Friday approved the IPO application of Semiconductor Manufacturing International Corporation (SMIC), the biggest chipmaker on the Chinese mainland.
SMIC announced listing plans on the STAR Market on May 5 this year, with the aim of issuing 1.686 billion shares.
Guoxin Securities has answered ten questions about SMIC in its latest report.
1, Can government subsidy make SMIC stronger?
There are successful cases of government-led investment in the semiconductor industry, with Japan and Korea both having government-led investments in semiconductor manufacturing.
From 1983 to 1987, Korea implemented the "Semiconductor Industry Promotion Plan" and the Korean government promoted the "government + conglomerate" model of economic development.
From 1970 to 1985, Japan implemented the "national system" to promote the "ultra-large scale integrated circuit technology research portfolio," which laid the foundation for Japan's semiconductor industry.
2, Why is the semiconductor industrial chain different from other industries?
Because the semiconductor industry is a process manufacturing technology-driven industrial development, other industries are design, brand influence-driven industrial development.
3, Now SMIC's 14nm can meet 95% of the chip foundry needs, will they move to 7nm, 5nm?
IC design costs for advanced processes are getting too high for design houses to afford and will not migrate from both a cost and revenue perspective.
For example, 7nm chip design costs more than $300 million, 3nm GPU development costs up to $1.5 billion, the 7nm process can be used in very few products and companies.
Therefore, there will not be many chip design companies migrating to 7nm/5nm, nor will there be foundries doing 7nm/5nm again. For example, GlobalFoundries and UMC have abandoned 7nm development.
4, Assuming it loses 14nm orders from major customers, is there any other demand?
SMIC is not lacking in demand, but in capacity, and it is rapidly expanding its 14nm capacity.
Even if it loses 14nm orders from large customers, other Chinese companies will make up the demand, such as UNISOC, Bitmain.
5, Can SMIC make money?
SMIC is number one in Chinese mainland, and it is the U.S. that restricts the growth of Chinese semiconductors to promote SMIC's growth, and it is the U.S. that restricts the global leader from competing with SMIC.
So this is equivalent to SMIC developing independently of the global market.
SMIC is going to make money as the number one semiconductor foundry in Chinese mainland.
The technical difficulty of semiconductor manufacturing, competition barriers are much higher than the panel, SMIC's first market position in China is very stable.
In particular, advanced technology is not price war, while the panel is global competition, prone to price war.
6, SMIC's leading position in Chinese mainland to maintain how long?
The double barrier of "capital + technology" is the guarantee of SMIC's leading position.
Not every company can maintain a capital expenditure of $4 billion.
Even if there is enough capital, if there are no core people and core technology, it is impossible to do advanced process, and SMIC has already conquered 14nm.
In terms of advanced process, it is enough for Chinese mainland to support SMIC alone, and there is no need or ability to create another SMIC.
In the foreseeable future, SMIC's leading position in Chinese mainland is unshakable.
7, Without EUV lithography, what will SMIC do in the future?
14nm process does not need EUV, currently 7nm can also be produced without EUV.
U.S. restrictions on equipment imports will not be long-term, with a breakthrough in domestically produced lithography, restrictions will be lifted.
EDA software has such a case, the 1993 localized EDA software Panda came out. In 1994, the international embargo on China's EDA was lifted.
8, How can we closely track the performance of SMIC?
When it releases its quarterly report each quarter, it has guidelines for the next quarter's revenue and gross margin, and the guidelines are generally accurate.
As long as you have a deep understanding of the semiconductor industry, you can avoid frequent research, maintain communication with IR, and look at the company's financial report enough to make a good investment in SMIC.
9, how to price SMICs in the short term?
The first stage is to refer to the global semiconductor foundry valuation.
According to the industry valuation logic, the higher the gross margin, the higher the PB, the current gross margin of 26% corresponds to PB valuation at 2.6 times.
In the second stage, after SMIC on the board, we can refer to China Resources Microelectronics (semiconductor foundry) PB of 5 times.
The third stage, A/H valuation convergence, Hong Kong SMIC valuation to the board to see aligned.
10, How much money can SMIC earn in the long run?
Assuming only the 14nm advanced process is considered, the company plans to build two 12" fabs in the future with a monthly capacity of 35,000 wafers.
Wafer ASP at $4,000, net profit margin reference assumption can be 30% (TSMC 2020Q1 net profit margin 37%).
Then only the future 2 new factories contribute to the net profit of $1 billion = 3.5 * 12 * 2 * 4000 * 30%, about RMB 7 billion.
A-share semiconductor company average P/E calculation of 93 times, the future market capitalization can be up to 650 billion yuan.
We raise the valuation and target price of SMIC Hong Kong shares, the company's reasonable PB valuation range of 5-6 times (original 2.5-2.6). Corresponds to HKD46~48 (original HKD23~24), maintain performance forecast and "buy" rating.
