Analyst Note| Phelix Lee |
We adjust our fair value estimate on Semiconductor Manufacturing International, or SMIC, to HKD 19.20 per H-share, equating to 1.2 times 2021 price/book to account for higher 2021 and 2022 gross margin forecasts, driven by higher average selling price and lower depreciation expense assumptions. Still, we are concerned about potential oversupply in 2023, and thus left our 2024 and 2025 forecasts largely unchanged. SMIC still looks overvalued as the market assumes no further restriction from the U.S. and underestimates depreciation headwinds once new capacity starts production. On top of new industry capacity and Korea’s initiative that we outlined in our last note, new expansion plans by Intel and Globalfoundries, or GF, add to our worries of excess plants in the long term. While Intel and GF’s plans may do little harm to TSMC, SMIC and UMC are the first to feel the impact with most of their revenues centering around the 14nm to 55nm process nodes. In the near term, China’s clampdown on automotive chip hoarding may subdue price adjustments.