Cash Flows of Chinese Foundries Threatened by High Capital Spending; Cutting Valuations

Our fair value estimates on Semiconductor Manufacturing International, or SMIC, and Hua Hong Semiconductor are cut to HKD 10.80 from HKD 15.60 and to HKD 16.50 from HKD 18.40 per share, respectively, after both firms commit to elevated capital expenditures for 2024 amid a longer-than-expected downturn. We view SMIC as overvalued as we are more pessimistic about the long-term profitability of its hot-headed investments. In contrast, Hua Hong looks fairly valued as its new sites are cheaper than SMIC’s, and its capital intensity is not as high. The main upside surprise to our fair value estimates is both firms issuing new shares based on their higher valuations in Shanghai. SMIC shares dropped 8% and Hua Hong 11% on Wednesday.