In the face of a newly initiated round of economic stimulus measures, the semiconductor sector on the A-share market has witnessed a remarkable surgeNotably, Semiconductor Manufacturing International Corporation (SMIC), which trades on A and H shares, has reached a new height after a three-year hiatus, encouraging investors and raising hopes for a rebound in the semiconductor industry.

Since October began, the Hong Kong stock market's semiconductor sector has experienced significant growth, led by SMIC, which saw its shares rise by 21.76%. Other key players such as Shanghai Fudan and Hua Hong Semiconductor also saw impressive increases exceeding 14%. While the gains of large-cap semiconductor stocks are noteworthy, the lesser-known small-cap stocks showcased even more astonishing rises, with Brain Hole Technology experiencing an intra-day increase of over 599%, ultimately finishing with a remarkable gain of 275.94%. However, these gains proved fleeting, as the small-cap stocks quickly retreated, continuing to struggle for favor in the capital markets.

Analysts have suggested that the sudden explosion in Hong Kong’s chip stocks is closely linked to heightened investor enthusiasm and market momentum

Advertisements

Historical trends in financing indicate that during prior bullish cycles, technology stocks typically garner early support from capital flowsRenowned financial institution Zhao Yin International has also predicted that the semiconductor industry might face a revaluation opportunityNonetheless, the reality may not be so straightforward.

SMIC, despite its recent successes, faced a three-day decline in its stock price, dropping from a closing price of 33.30 Hong Kong dollars to 25.5 Hong Kong dollars, marking a loss of approximately 23% over three trading daysShanghai Fudan and Hua Hong Semiconductor encountered similar downturns, each experiencing consecutive stock price drops.

Overall, the performance of semiconductor stocks on the Hong Kong Stock Exchange has been strong throughout the year, with SMIC up 27.2%, Shanghai Fudan rising 19%, and Hua Hong Semiconductor increasing 26%. Meanwhile, Brain Hole Technology stood out with a remarkable 228% rise this year, making it one of the highest gainers on the Hong Kong market

Advertisements

While several semiconductor companies saw their prices surge to yearly or even historical highs at the beginning of October, they rapidly retreated shortly after.

Initially, the semiconductor stocks had been performing well on the Hong Kong market, but the recent and unusual collective downturn raises questions regarding whether this could signify a turning point for these stocksThis article aims to analyze the performance of prominent chip stocks like SMIC in light of these developments.

The phenomenon of increasing revenue without a corresponding rise in profit is prevalent within the industry.

SMIC has demonstrated particularly high stock price growth in the recent Hong Kong market, making it a standout performer this yearAs the largest integrated circuit manufacturer in China, the corporation embodies national expectations surrounding the domestic chip sector

Advertisements

The recent stock performance of SMIC has triggered intense market discussions about the resilience of the semiconductor sector, with some industry insiders suggesting that the rise in SMIC’s stock highlights investor optimism for the semiconductor industry and may indicate an imminent recovery.

As a pivotal player in the global semiconductor supply chain, SMIC has made significant technological strides, progressing from 28nm technologies to 14nm and below at an impressive pace, establishing itself as the third-largest wafer foundry worldwideAccording to the latest report from research firm Counterpoint, SMIC has claimed a 6% market share in the global wafer foundry sector for Q1 2024, trailing only TSMC and SamsungThe rapid advancements in technology, driven by the surge in demand for artificial intelligence and 5G technology, have propelled an unprecedented demand for semiconductors

• Monster Charging Eyes Private Exit, Investors at Risk
• Navigating the $36 Trillion U.S. Debt Crisis
• Record High in Korean Engineering Orders
• Unexpectedly Broad Credit Policy Stabilizes Lending
• Record High for Japanese Corporate Bankruptcies

SMIC's robust industry positioning and innovation have contributed to rapid growth, making it a compelling prospect for investors.

In 2019, SMIC posted revenues of 21.74 billion yuan, which soared to 50.66 billion yuan by 2022, marking an increase of more than two-foldIts net profit exploded from 1.637 billion yuan in 2019 to 12.66 billion yuan in 2022, illustrating nearly an eightfold riseHowever, 2023 proved challenging as SMIC faced a revenue decline, reporting annual revenues of 44.77 billion yuan, a year-on-year drop of 13.09%. Correspondingly, its net profit plummeted by 50.35%, falling from 12.66 billion yuan in 2022 to 6.39 billion yuan in 2023.

In the first half of 2024, SMIC managed to reverse its revenue downturn, reporting first-half revenues of 26.02 billion yuan, a 20.80% year-on-year growthAfter experiencing four consecutive quarters of revenue declines, this marks a much-anticipated rebound for the company

However, SMIC's net profit continues to dwindle, indicating an imbalance in operational efficiency, with a 62.71% decrease resulting in a net profit of 1.684 billion yuan.

Guo Hu, a seasoned semiconductor professional (a pseudonym), noted that the phenomenon of increased revenue without a corresponding rise in profit is common across the sectorThe intensifying competition within the global chip industry has led major players such as TSMC and Samsung to proactively reduce prices to capture market share, consequently forcing domestic chip manufacturers to follow suitThis downward pressure on prices has adversely impacted profit margins, and there is increasing urgency for vulnerable companies to either enhance their product offerings or improve cost efficiency to bolster profitability.

Notably, TSMC has also felt the impact of this intensifying competition, as evidenced by a decline in its net profit for three consecutive quarters in Q2 to Q4 2023, reporting decreases of 23.3%, 24.88%, and 19.33% respectively

Only in Q1 2024 did it finally return to growth with an 8.94% increase, following drops in revenue in both Q2 and Q3 2023.

Samsung, another semiconductor giant, has also faced dire circumstances, with a staggering 95% drop in net profitThe preliminary financial results released on October 8 revealed that Samsung's operating profit for the recently concluded quarter amounted to approximately 9.1 trillion Korean won (about 6.78 billion USD), falling short of analysts’ predictionsComparatively, its previous quarter recorded an operating profit of 10.44 trillion won, meaning a decline of approximately 13% in sequential revenue, leading to a cumulative drop of over 20% in Samsung's stock price since the start of this year.

Despite the challenges, the broader industry remains on an upward trajectory.

In its earnings report, SMIC attributed its revenue growth to an increase in wafer sales volumes

The number of silicon wafers sold rose from 2.655 million in the same period last year to 3.907 million this year, representing a significant increase of 47% in sales volume.

However, despite the rising sales volume, there exists a disparity with SMIC’s revenue growth, primarily due to declining average selling pricesDuring the first half of 2024, SMIC's average selling price per wafer was approximately 6724 yuan, a 16.3% drop from 8029 yuan during the same period last yearIn Q2 2024, SMIC reported a sales revenue of 13.68 billion yuan, marking a sequential growth of 23%. The number of 8-inch wafers shipped amounted to 2.11 million units, up 18% sequentiallyHowever, this increase came at the cost of an 8% decline in average selling price.

Guo highlighted the ongoing competition exacerbated by international geopolitical tensions, leading to a downturn in demand across both domestic and international semiconductor markets

Even industry behemoths such as TSMC and Samsung have found themselves amidst such operational challenges, while local companies such as Hygon Information, SMIC, and others have also conspicuously expandedThis fierce competition among domestic firms has exacerbated supply-demand imbalances.

To counter the competitive landscape, palpable price reductions have become a commonplace strategy among key players such as TSMC and Samsung, compelling domestic chip manufacturers like SMIC to follow suit in an attempt to maintain production capacityReports indicate that SMIC's capacity utilization has indeed been declining, evidenced by a drop from 100% in early 2022 to around 75% throughout 2023.

However, there are signs of recovery, as preliminary reports for the first half of 2024 suggested an increase in SMIC’s capacity utilization to 80.8% in Q1 and notably to 85.2% by Q2.

Additionally, the proportion of 8-inch wafers produced signified a substantial sector shift, increasing from 24.4% in Q1 to 26.4% in the second quarter, reflective of the growing demand for lower-end chips, which typically associate with reduced average selling prices.

SMIC remains optimistic about the recovery of the global semiconductor market, anticipating improvements in demand as inventory levels of leading consumer electronic firms improve compared to 2023. The company expressed confidence for 2024, reinforcing its belief in an upward trajectory for its operations and the semiconductor industry overall.

This optimism reflects a broader trend within the semiconductor sector, with projections from the Semiconductor Industry Association predicting a global market value of $611.2 billion in 2024. Despite short-term pressures stemming from price declines, sustained growth remains an inevitable outcome as semiconductor content in consumer electronics continues to elevate in the coming years.

On the domestic front, while SMIC’s performance has been commendable, other firms like Changdian Technology and Hygon Information have also shown strength in their recent reports

Changdian Technology reported a revenue of 15.49 billion yuan, a commendable 27.22% year-on-year growthHygon Information reflected similar robust growth figures, with first-half revenues of 3.763 billion yuan, which marked a 44.08% increase while its net profit saw a 25.97% growth.

Conversely, companies like Shanghai Fudan and Hua Hong Semiconductor have suffered declines in their financial performancesHua Hong's revenue plunged by 25.65% to 6.689 billion yuan, coupled with a net profit drop of over 83%. Similarly, Shanghai Fudan posted a slight revenue decrease of 0.12%, with net profits down by 22.52%, underscoring a challenging environment for these semiconductor firms.

In summary, while the domestic semiconductor industry displayed a mixed performance in the first half of the year, bolstered by a strong showing from leading firms like SMIC, the backdrop of increasing market competition has led to significant struggles for various companies

These dynamics not only emphasize the necessity for certain firms to recalibrate their strategies, but they may also lead to a market consolidation that ultimately empowers competitive players like SMIC, fostering further advancement within the domestic semiconductor landscape.

The recent robust performance of semiconductor stocks on the Hong Kong exchange points to promising new opportunities birthed through the advancement of intelligent technologyMany domestically listed semiconductor firms possess solid technological capabilities and market competitiveness, coupled with substantial investments in research and development, enabling them to adapt to the rapidly evolving market and economic environmentAmidst indications of a global economic recovery, the favorable outlook for the semiconductor industry continues to attract strong investor interest, sustaining confidence in long-term growth prospects even in the face of inevitable fluctuations.