In 2023, influenced by factors such as a sluggish global economy and weak market demand, the semiconductor industry entered a downcycle.

Affected by this, the two leading domestic wafer foundries—SMIC and Hua Hong Semiconductor—both showed poor performance in their 2023 financial reports. Notably, they experienced the rare situation of simultaneous declines in both revenue and net profit.

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Analysis of SMIC's Financial Report

In 2023, SMIC achieved a total revenue of approximately 45.25 billion yuan, a year-on-year decrease of 8.61%, and a net profit attributable to shareholders of listed companies of about 4.823 billion yuan, a year-on-year reduction of 60.3%. The profit before interest, taxes, depreciation, and amortization (EBITDA) was 27.18 billion yuan, a year-on-year decrease of 12.3%.

By examining its financial data for each quarter, it was found that:

In the first quarter of 2023, SMIC's revenue was 10.21 billion yuan, with a net profit attributable to shareholders of listed companies of 1.59 billion yuan;

In the second quarter of 2023, SMIC's revenue was 11.11 billion yuan, with a net profit attributable to shareholders of listed companies of 1.41 billion yuan;

In the third quarter of 2023, SMIC's revenue was 11.78 billion yuan, with a net profit attributable to shareholders of listed companies of 680 million yuan;In the fourth quarter of 2023, SMIC (Semiconductor Manufacturing International Corporation) reported a revenue of 12.15 billion yuan, with a net profit attributable to shareholders of listed companies amounting to 1.15 billion yuan.

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Looking at the revenue, SMIC's quarterly revenue showed a sequential increase throughout 2023. The significant decrease in net profit attributable to the parent company in the third quarter was mainly due to a year-on-year reduction in wafer sales volume and a decline in utilization rate. However, with certain signs of recovery in the terminal market demand in the second half of 2023, SMIC's revenue in the fourth quarter also showed a noticeable rebound compared to the beginning of the year.

Decrease in production, increase in capacity

In 2023, SMIC's wafer production volume was 6.074 million pieces, a year-on-year decrease of 19.1%; its wafer sales volume was 5.8667 million pieces, a year-on-year decrease of 17.4%. Additionally, due to factors such as production and inventory preparation, its inventory volume was 724,000 pieces, a year-on-year increase of 40.1%. Furthermore, SMIC's capacity increased in 2023, with a monthly wafer production capacity of 806,000 8-inch equivalent wafers. In contrast, the annual report for 2022 showed SMIC's monthly wafer production capacity at 714,000 8-inch equivalent wafers.

Against the backdrop of declining production and increasing capacity, SMIC's utilization rate of capacity has noticeably decreased. Moreover, as SMIC is in a high investment period, depreciation and amortization increased by 3.472 billion yuan compared to 2022, with the amount rising from 15.388 billion yuan to 18.86 billion yuan.

This is also one of the main reasons why, despite a more than 60% drop in net profit attributable to the parent company in 2023, SMIC's profit before interest, taxes, depreciation, and amortization (EBITDA) was 27.18 billion yuan, only a 12.3% decrease year-on-year.

Gross margin and capacity utilization situation

In terms of gross margin, in 2023, SMIC's gross margin was 21.9%, a decrease of 16.4 percentage points from 2022. Regarding the decline in gross margin, SMIC stated that it was mainly due to the decrease in capacity utilization rate, reduction in wafer sales volume, and changes in product mix in 2023. In addition, the group is in a high investment period, with depreciation increasing compared to 2022.

In terms of capacity utilization, in 2023, SMIC's capacity utilization rate was 75%. The number of wafers sold was 5.867 million 8-inch equivalent wafers, with a monthly wafer production capacity of 806,000 8-inch equivalent wafers. From the first quarter to the fourth quarter of 2023, its capacity utilization rates were 68.1%, 78.3%, 77.1%, and 76.8%, respectively.

Looking at the main business revenue situation, in 2023, SMIC achieved a main business revenue of 44.59 billion yuan, a year-on-year decrease of 8.8%. Among them, the revenue from wafer foundry services was 40.88 billion yuan, a year-on-year decrease of 9.8%. In addition to integrated circuit wafer foundry services, SMIC is also committed to building a platform-based ecological service model, providing customers with one-stop supporting services such as design services and IP support, photomask manufacturing, etc.12-inch wafer revenue share increases, 8-inch wafer revenue share decreases

The annual report shows that, according to the latest 2023 sales figures released by global pure wafer foundry companies, SMIC ranks fourth globally and first among Chinese mainland companies.

From a regional perspective, SMIC's main business revenue from the China region in 2023 increased from 74.2% to 80.1%. Additionally, analyzing the integrated circuit wafer manufacturing foundry revenue, SMIC's 12-inch wafer revenue share in 2023 rose from 67% to 73.7%, while the 8-inch wafer share decreased from 33% to 26.3%. Data indicates that the increase in semiconductor wafer diameter leads to an exponential growth in wafer area, which in turn doubles the number of chips that can be produced per wafer. The larger the wafer diameter, the lower the average production cost per chip, thereby providing more economical economies of scale.

Continue to expand production under depreciation pressure

The main driving force for the localization development of the semiconductor industry comes from the scaling of domestic market demand and the resilience of local economic development. Looking at the industry situation in mainland China, as one of the world's largest semiconductor consumer markets, China's integrated circuit industry still relies on imports to a certain extent at this stage. The current scale of the domestic integrated circuit industry, including wafer foundry capacity and process technology capabilities, does not match the actual market demand. With the promotion of a new round of technological innovation, the domestic industry chain has significant growth potential.

SMIC plans to continue advancing the 12-inch factory and capacity construction plans announced in recent years in 2024, with capital expenditure expected to be roughly the same as the previous year.

2023 SMIC core technology and R&D progress

Regarding core technology and R&D progress, the annual report shows that in 2023, SMIC's 28-nanometer ultra-low power platform project, 40-nanometer embedded memory process automotive platform project, 4X-nanometer NOR Flash process platform project, and 55-nanometer high-voltage display driver automotive process platform project have all completed R&D and entered the pilot production phase.

Here are the specific progress or phased results of each project:Hua Hong Semiconductor Financial Report Analysis

In 2023, Hua Hong Semiconductor achieved a total operating revenue of 16.232 billion yuan, a year-on-year decrease of 3.30%, demonstrating strong resistance to cyclical fluctuations. The net profit attributable to shareholders of the listed company was 1.936 billion yuan, a year-on-year decrease of 35.64%; the net profit attributable to shareholders of the listed company, after deducting non-recurring gains and losses, was 1.614 billion yuan, a year-on-year decrease of 37.21%. This significant decline also reflects that the company may have encountered some major challenges in terms of profitability.

Examining its financial data for each quarter reveals the following:

- In the first quarter of 2023, Hua Hong Semiconductor's operating revenue was 4.37 billion yuan, with a net profit attributable to shareholders of the listed company of 1.04 billion yuan.

- In the second quarter of 2023, Hua Hong Semiconductor's operating revenue was 4.47 billion yuan, with a net profit attributable to shareholders of the listed company of 540 million yuan.

- In the third quarter of 2023, Hua Hong Semiconductor's operating revenue was 4.11 billion yuan, with a net profit attributable to shareholders of the listed company of 96 million yuan.

- In the fourth quarter of 2023, Hua Hong Semiconductor's operating revenue was 3.28 billion yuan, with a net profit attributable to shareholders of the listed company of 250 million yuan.

It was observed that in the fourth quarter of 2023, Hua Hong Semiconductor's revenue declined significantly. Regarding the reasons for the performance decline, Hua Hong Semiconductor explained that in the fourth quarter of the previous year, the company's sales revenue from China was $367 million, accounting for 80.5% of the total sales revenue, a year-on-year decrease of 19.8%. This was mainly due to reduced demand for MCU, smart card chips, super junction, and NOR flash products. It is noteworthy that, classified by end markets, electronic consumer products, as its largest end market, contributed sales revenue of $253 million in the fourth quarter of the previous year, accounting for 55.4% of the total sales revenue, but also experienced a year-on-year decrease of 35.4%.

The main reasons for the significant decline in net profit are the decrease in average selling prices and the increase in manufacturing costs and R&D expenses.

Utilization of production capacity has declined significantly, and the gross margin has reached a record low.The decline in capacity utilization is also hard to avoid. In the first quarter of 2023, Hua Hong's 8-inch wafer capacity utilization rate was 107.1%, an increase of 1.2% quarter-on-quarter, while the 12-inch wafer capacity utilization rate was 99.0%, a decrease of 0.9% quarter-on-quarter. In the second quarter, the 8-inch wafer capacity utilization rate reached as high as 112.0%, and the 12-inch wafer capacity utilization rate also reached 92.9%, with an overall capacity utilization rate of 102.7%. In the third quarter, the 8-inch wafer capacity utilization rate was 95.3%, and the 12-inch wafer capacity utilization rate was 78.4%, with the overall capacity utilization rate declining both quarter-on-quarter and year-on-year to 86.8%. In the fourth quarter, the 8-inch wafer capacity utilization rate was 91%, and the 12-inch capacity utilization rate was 77.5%, with an overall capacity utilization rate of 84.1%.

Hua Hong also faced challenges in its overall gross margin in 2023, which declined to 27.10%, a decrease of 8.76% year-on-year. With the slowdown in global economic growth and the contraction of market demand, Hua Hong Semiconductor's sales revenue and profitability were affected under such macroeconomic challenges, and the gross margin continued to plummet to an all-time low. According to the quarterly reports of Hua Hong Semiconductor, the gross margin for the four quarters of 2023 was 32.1%, 27.7%, 16.1%, and 4.0%, respectively.

Actively advancing the 12-inch production line

As of the end of 2023, Hua Hong Semiconductor's equivalent 8-inch monthly production capacity was expanded to 391,000 wafers, with a total of 4.103 million wafers shipped throughout the year. Among them, the monthly production capacity of 94,500 wafers in Hua Hong Wuxi has been fully released, covering IC process nodes from 90 to 65/55 nanometers. It is not only the world's leading 12-inch specialty process production line but also the world's first 12-inch power device foundry production line.

Similarly, the wafer capacity that Hua Hong focuses on expanding is mainly on 12-inch wafers. Specifically, the increased capacity of Hua Hong Semiconductor is mainly for 12-inch wafers. In the four quarters of 2023, Hua Hong Semiconductor's 8-inch monthly production capacity was 178,000 wafers, the same as in the same period of the previous year. That is, the 8-inch monthly production capacity was not expanded within a year. In contrast, in the fourth quarter of 2023, Hua Hong Semiconductor's 12-inch monthly production capacity was 95,000 wafers, compared to 65,000 wafers in the same period of the previous year, an increase of 30,000 12-inch monthly production capacity.

Hua Hong stated that it expects its 12-inch wafer foundry business to become a new growth point for the company in 2024. Currently, the main plant steel structure of the second 12-inch wafer production line of Hua Hong Semiconductor in Wuxi has been completed, and it is expected to be put into production by the end of 2024, with a monthly production capacity of 83,000 wafers by the end of 2027. Hua Hong Semiconductor stated that the release of production capacity at the Wuxi manufacturing base will provide strong support for the improvement and development of the integrated circuit industry chain in the Yangtze River Delta region.

Hua Hong Semiconductor's core technology and R&D progress in 2023

Regarding core technology and R&D progress, the annual report shows that in 2023, the development of several platform projects of Hua Hong Semiconductor, including 40-nanometer embedded flash memory, a new generation of standalone flash memory (4X ETOX NOR FLASH), 90-nanometer BCD, and a new generation of power devices, is progressing as planned.

When will it warm up?It can be seen that the foundry industry has experienced a relatively weak period in the past year. Wafer manufacturing companies are facing multiple challenges such as declining demand, rising costs and intensified competition, which cast a shadow on the prospects of the entire industry. So, when will this industry be able to usher in the dawn of light, heralding a new beginning and hope? Recently, IC design manufacturers in Taiwan, China, said that due to the weak demand for mature processes of foundry, the quotations of mature processes of some foundries in the first quarter were reduced by a single-digit percentage (4% to 6%). As the mature process capacity of foundries in mainland China continues to be opened, it is estimated that prices may be reduced again in the second quarter, making the cumulative reduction in the first half of the year about 10%. In terms of mature processes, some chip design factories mentioned that the high-voltage 28nm process is still in short supply and can even be increased in price, but the 40nm and 55nm processes, when the capacity increase is faster than the demand recovery, basically only have price cuts. However, compared with the active pricing strategy of foundry manufacturers in mainland China, Taiwanese foundries are relatively persistent in price. World Advanced emphasized that the recent price pressure from mainland peers is indeed not small, but the company is not prepared to engage in price wars, and even hopes to seize the opportunity of transfer orders from European and American customers. It still aims for moderate growth this year. This price reduction may affect the profitability of mainland Chinese manufacturers. Wafer foundry is a capital-intensive industry, and manufacturers need to invest a lot of money in equipment procurement, research and development, and production operations. Price cuts may lead to the compression of manufacturers' profit margins, which in turn affects their profitability and long-term development. In order to maintain profitability, mainland Chinese manufacturers may need to reduce costs by improving production efficiency and optimizing supply chain management. At the same time, the price reduction trend may also bring some opportunities to mainland Chinese manufacturers. As competition in the wafer foundry market intensifies, some manufacturers may seek to cooperate with mainland Chinese manufacturers to reduce costs and expand market share. This provides mainland Chinese manufacturers with the opportunity to cooperate with international manufacturers, which will help improve their technical level and market competitiveness. Regarding the expectations of the two major wafer foundries for 2024, SMIC said that in 2024, the company still faces challenges from macroeconomics, geopolitics, peer competition and old product inventory. The company is expected to perform "mediocre", get rid of the downturn along with the semiconductor industry chain, and achieve steady and moderate growth under the combined effect of the gradual improvement of customer inventory and the continued recovery of mobile phone and Internet demand. However, from the perspective of the entire market, the strength of demand recovery is not enough to support a strong rebound in semiconductors. Hua Hong Semiconductor remains optimistic about future development. Tang Junjun, president and executive director of Hua Hong Semiconductor, said in commenting on the performance that the sluggish market situation in 2023 is a very challenging year for the global semiconductor industry. However, with the continued destocking of the industry chain and the rapid penetration of new generation communications, Internet of Things and other technologies, the semiconductor market has recently shown signs of boosting. The company's related image sensors, power management and other products have performed well in the fourth quarter, and the overall situation in 2024 is expected to be better than in 2023. Hua Hong Semiconductor said in an institutional survey in February this year that the company's overall capacity utilization rate has been boosted, and order demand has also picked up in the past two months, especially CIS and power management chips that benefit from mobile phones and other related products. The demand for power devices represented by IGBT and super junction is still weak, but the company's management believes that the demand for power devices will return to normal levels after the Spring Festival. In addition, regarding MCU products, the company hopes to see a full recovery in the market in the second half of this year. In terms of price, Hua Hong Semiconductor said that the lowest foundry price has basically been reached in the fourth quarter of 2023, and the foundry price has stabilized. At the same time, in the first quarter of 2024, the company has improved both capacity utilization and order demand, which will be reflected in the company's revenue contribution in the first and second quarters.