On October 10th, SMIC International (688981.SH), one of the benchmark stocks for this round of the A-share "bull market," experienced a sharp decline, closing down by 10.57%. Is SMIC International collapsing? The author does not think so.

Firstly, as a super large-cap stock with a market value of tens of millions, sharp price fluctuations and frequent limit-ups are extremely rare market phenomena. From September 30th to October 9th, SMIC International had two "20CM" limit-ups in three trading days, with a cumulative increase of 67.81%, and its total market value increased by over ten billion, which is a significant rise. It is inevitable for short-term adjustments to occur.

From an emotional trading perspective, on September 30th, before the National Day holiday, SMIC International had its first 20CM limit-up in this round, with over 6.2 billion yuan in massive funds pouring in that day. During the holiday, while the A-shares were closed, SMIC International's stock in Hong Kong soared by 57.45% in just two trading days on October 4th and October 7th. The wealth effect of SMIC International's stock in Hong Kong during the holiday drove the surge in A-share semiconductors after the holiday. For the hot money that bought SMIC International's A-shares before the holiday, it was not surprising to welcome a "passive profit" after the holiday, with substantial profit-taking, and eventually "dumping" to pocket the gains.

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Currently, the recovery momentum of the semiconductor industry chain has exceeded expectations. This is the fundamental logic behind the significant rise in the semiconductor sector this round, and this fundamental logic has not changed.

Driven by artificial intelligence demand, this round of semiconductor recovery has seen a "global resonance."

To study the prosperity of the semiconductor industry, we can refer to the revenue growth rate of equipment manufacturers.

This is because wafer fabs will choose to expand production based on customer demand, and the majority of capital expenditures during expansion are for equipment. Equipment manufacturers will only confirm revenue after equipment delivery, and the delivery of equipment to wafer fabs' mass production still leads in time. Therefore, the revenue growth rate of equipment manufacturers can serve as a forward-looking indicator of industry prosperity.

Data for the first half of the year shows that the revenue growth rates of foreign companies such as ASML, Lam Research, and Applied Materials are all on the rise, while domestic equipment leaders like North Microelectronics and Sino Micro Company have continued to see high revenue growth. This indicates that the demand for semiconductor equipment is improving both domestically and internationally.

The downstream customers of the equipment end are wafer fabs like TSMC, SMIC International, and Hua Hong Semiconductor. On October 9th, TSMC released optimistic monthly data for September, showing that the company is set to have a "harvest season" in the third quarter (July-September), easily exceeding expectations.Therefore, at present, the fundamental improvement in the semiconductor industry, including the wafer foundry track where SMIC is located, is still in its infancy.

Let's talk about the situation of SMIC as a company.

Firstly, we must acknowledge that there is still a gap between SMIC's technology and TSMC's.

In terms of advanced processes, due to US sanctions and Dutch restrictions on the shipment of advanced DUV lithography machines to China, SMIC's processes are still mainly focused on mature processes of 28nm and above. Therefore, it is difficult for SMIC to increase product prices through advanced processes. It can only improve operational efficiency and achieve economies of scale based on existing processes.

The proportion of R&D expenses to revenue at SMIC has been gradually decreasing in recent years, and it is reasonable to gradually control R&D expenses as it cannot break through to advanced processes. In 2019, SMIC's R&D expenses accounted for 21.55% of its revenue, and from 2021 to 2023, the proportion was only slightly more than 10% and slightly more than 11%.

However, the company is quite aggressive in expanding its production capacity.

In the second quarter of 2024, SMIC shipped more than 2.11 million 8-inch wafer equivalent units, a sequential increase of 17.7%. In comparison, SMIC's shipments in the second quarter of 2023 were 1.403 million units. This means that SMIC's wafer shipments in the second quarter of 2024 increased by 50.5% year-on-year.

At the same time, SMIC's utilization rate has increased significantly, reaching 85.2% in the second quarter of 2024, up 4.4 percentage points from the previous quarter.

At present, SMIC's strategy has been quite effective.In the second quarter of 2024, SMIC's average sales price per unit decreased by 8% quarter-over-quarter. It is reported that the proportion of 12-inch wafers decreased quarter-over-quarter in the second quarter of 2024, while the proportion of 8-inch wafers increased.

Despite the decline in unit price, SMIC's gross margin in the second quarter of 2024 (13.65%) was not significantly different from the first quarter (14.19%), and the net margin increased (8.71% in the second quarter, 3.57% in the first quarter).

This is because the main cost of wafer foundry is manufacturing expenses, accounting for more than 85%, which are all fixed costs. After the sales volume increases, the cost allocated to each product is lower. Therefore, expanding scale and improving capacity utilization is conducive to reducing costs and increasing efficiency.

So, SMIC's strategy is correct, and it is highly likely to benefit from this round of semiconductor recovery.

Although the company's net profit decreased by 45.07% in the first half of the year, according to the company's performance guidance, it is expected that the revenue in the third quarter will increase by 13% to 15% quarter-over-quarter, and the gross margin will be between 18% and 20%.

It can be seen that the company expects the gross margin in the third quarter to be significantly higher than in the second quarter. The main reason is the increase in the proportion of high-value products in the third quarter.

According to SMIC, the proportion of 8-inch wafers will relatively decrease in the third quarter, while the proportion of 12-inch wafers will relatively increase, coupled with the steady growth in the price of 12-inch wafers.

In this case, it is estimated that there will be no problem with the improvement of SMIC's performance in the third quarter.

At present, SMIC's valuation is not low. Although there was a sharp drop in a single day, the previous increase was huge. On October 10th, the company's price-to-earnings ratio was 172.25 times. In fact, this round of increase has set a historical high for SMIC's price-to-earnings ratio.

However, when speculating on technology stocks, is the price-to-earnings ratio important? This question is a matter of personal opinion.