SMIC (0981.HK)_ High exposure to smartphone and consumer electronics; downgrade to Neutral(1)

We downgrade SMIC from Buy to Neutral considering TP upside of 25% (vs. our coverage average of 42%). We previously lowered our earnings estimates to reflect weak smartphone and consumer electronics end-demand (report link ). Whilewe remain positive on SMIC’s long-term growth driven by local fabless customers’ growing demand, we see slow profit growth in the near-term given the industry down-cycle and slow demand from smartphones and consumer electronics (~50% of revenue). We model SMIC’s revenue growth to slow down from +40%/+29% YoY in 2Q-3Q22E to +10%/-6%/+6% in 4Q22-2Q23E. We could turn more positive/cautious on the stock if we see faster/slower demand recovery and end-market diversification. Revenue to slow down in 4Q22E-1H23E given higher exposure to smartphone and consumer electronics: The strong growth in 2021 and 1Q-3Q22E is mainly driven by local customers’ growing demand across all applications and overall industry capacity supply tightness. While we remain positive on SMIC’s long-term growth, we expect revenue growth to slow down in the near-term due to slower demand from smartphone/consumer electronics (~50% of SMIC’s revenue). Also, SMIC has limited exposure to power semis and automotive applications, which we think will enjoy stronger growth than smartphone/ consumer electronics and be relatively resilient during industry downturn due to growing EV penetration (driving higher power semis content per car). Slow profit growth during industry down cycle: We model SMIC’s operating profit growth at +30%/-5% YoY in 2022E/23E. If excluding the US$231m disposal gain (booked as other operating income) in 2021, we estimate SMIC’s operating profit/pretax profit would grow 56%/19% in 2022E. However, we expect operating profit YoY growth to slow down in 4Q22E-1H23E given lower revenue and higher depreciation costs due to capacity expansion in past few years. We also expect SMIC’s utilization rate to slow down from >90% in 1Q-3Q22E to 80~85% in 4Q22E-2Q23E, and ASP to decline by 3~4% per quarter during the same period. What could make us more positive/ cautious? We expect SMIC’s earnings growth to regain momentum from 2H23E when smartphone/consumer electronics inventory is mostly digested and customers rebuild their inventory for 2H23 hot season demand. If we see signals of earlier/slower demand recovery, we could turn Allen Chang +852-2978-2930 | allen.k.chang@gs.com Goldman Sachs (Asia) L.L.C. Lynn Luo +886(2)2730-4244 lynn.luo@gs.com | Goldman Sachs (Asia) L.L.C., Taipei Branch Ting Song +852-2978-6466 ting.song@gs.com | Goldman Sachs (Asia) L.L.C.SMIC (0981.HK): High exposure to smartphone and consumer electronics; downgrade to Neutral1 August 2022 | 8:18PM HKT Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in m