20171116-中国银河国际证券-COMPANY___INDUSTRY_NEWS_7页_565kb

Hua Hong and SMIC Q3 2017 Results Summary

Core Content

This summary outlines the key financial results and outlook for Hua Hong and SMIC during Q3 2017, focusing on their performance, guidance, and strategic initiatives. It also includes the analyst's view on market implications and investment opportunities.

Main Points

Hua Hong [1347.HK]

• Q3 2017 Performance:
  • Revenue: US$209.9m, up 6.0% QoQ and 13.3% YoY, reaching an all-time high.
  • Gross margin: 35.2%, higher than previous guidance of 33%, up 2.0ppt QoQ due to improved product mix, high utilization, and higher ASP.
  • Net profit: US$35.3m, up 2.3% QoQ and 18.5% YoY.
• Outlook for Q4 2017:
  • Expected revenue growth of ~3%.
  • Gross margin expected to be in the range of 33% to 34%.
  • Management expects continued ASP improvements in Q4 2017 and 1H 2018.
• Capacity Expansion:
  • Planning to add 2-3k wafer capacity by end of 2017.
  • Focus on profitability over sales growth.
• Strategic Focus:
  • Diversified into smart cards, MCUs, super-junction IGBTs, and power management ICs.
  • Seeking M&A opportunities.
• Valuation:
  • PBV close to the high end of its valuation over the past several years.
  • Analyst suggests viewing recent correction as a revisit opportunity.

SMIC [0981.HK]

• Q3 2017 Performance:
  • Revenue: US$769.7m, up 2.5% QoQ but down 0.7% YoY.
  • Gross margin: 23.0%, below previous guidance of 23–25%, down 2.8ppt QoQ due to lower utilization and product mix shift.
  • Utilization rate: dropped from 85.7% to 83.9%.
  • R&D expenses: decreased by US$4.3m QoQ to US$107m.
  • Net profit: US$25.9m, higher than expected due to lower operating expenses.
• Outlook for Q4 2017:
  • Revenue guidance: 1%–3% QoQ growth.
  • Gross margin expected to range from 18% to 20%.
  • Operating expenses: US$204m–210m.
  • Non-controlling interest: US$48–50m due to R&D sharing charge.
  • Full-year depreciation: US$975m.
• Long-Term Outlook:
  • Expected top-line CAGR of 20% over the next 3–4 years.
  • Margin rebound anticipated in 2018.
  • Strategic focus on profitability, top-line growth, and leading technology revenue ratio.
• Technology Development:
  • 28nm platform in mass production.
  • HKC+ started risk production in Q3 2017.
  • 28nm products expected to account for 10% of top line in Q4 2017.
  • R&D on 22nm, with 14nm FinFET production starting in 2019.
• Capacity and Cost:
  • 12-inch capacity faces more competition, but 8-inch capacity remains tight.
  • Foundry CAPEX guidance for 2017: US$2.3bn.
  • 2018 CAPEX not expected to increase significantly.
  • No issues in securing raw wafer supply.

Key Takeaways

• Market Reaction: SMIC's Q3 2017 results were met with negative market sentiment, which impacted Hong Kong-listed IC-related names.
• Performance Comparison:
  • Hua Hong outperformed SMIC in terms of revenue growth and gross margin.
  • SMIC's guidance for Q4 2017 was below expectations, especially on gross margin.
• Strategic Positioning:
  • Hua Hong is more stable in profitability and has better market positioning.
  • SMIC is focused on advanced node development and long-term growth.
• Valuation: Both companies have PBVs close to the high end of their historical ranges, suggesting potential for re-entry opportunities.
• Investment Recommendation:
  • Analyst suggests investors consider expanding their focus from foundries to IC design, materials, and equipment sectors.
  • Hua Hong is recommended for investors seeking stable performance.
  • SMIC is recommended for those looking for growth through advanced node development.

Summary of Financial Highlights

Hua Hong

• Revenue: Q3 2017: US$209.9m; 2017E: US$809.6m; 2018E: US$918.1m.
• Gross Margin: Q3 2017: 35.2%; 2017E: 33.1%; 2018E: 33.1%.
• Net Margin: Q3 2017: 17.0%; 2017E: 17.7%; 2018E: 17.4%.
• EPS: Q3 2017: US$0.14; 2017E: US$0.14; 2018E: US$0.15.
• PBR: Q3 2017: 1.2x; 2017E: 1.3x; 2018E: 1.1x.
• PER: Q3 2017: 13.6x; 2017E: 13.6x; 2018E: 12.2x.

SMIC

• Revenue: Q3 2017: US$769.7m; 2017E: US$3,105.3m; 2018E: US$3,756.8m.
• Gross Margin: Q3 2017: 23.0%; 2017E: 24.1%; 2018E: 24.8%.
• Net Margin: Q3 2017: 3.4%; 2017E: 5.2%; 2018E: 4.8%.
• EPS: Q3 2017: US$0.04; 2017E: US$0.04; 2018E: US$0.04.
• PBR: Q3 2017: 1.5x; 2017E: 1.5x; 2018E: 1.3x.
• PER: Q3 2017: 42.1x; 2017E: 42.1x; 2018E: 37.8x.

Conclusion

The analyst maintains a constructive outlook on the overall IC industry in China, emphasizing the long-term benefits of import substitution and policy support. While SMIC faces short-term challenges in Q4 2017 and 1H 2018, Hua Hong is expected to outperform due to better market positioning and stable profitability. Investors are advised to consider expanding their focus to IC design, materials, and equipment for growth potential.