SMIC's Cash Flows Threatened by High Capital Spending

Even though restrictions on Semiconductor Manufacturing International Corp. may be here to stay, we maintain our view that the company can win customers in nascent industries by a combination of reasonable pricing, reliable supply, and wide product offering. The company’s long-term growth driver is to ride on China’s massive investments in data centers, artificial intelligence, autonomous driving, and automation. This echoes the Chinese government’s pledge to deploy CNY 10 trillion in support of the AI and semiconductor sectors. Most of these applications require powerful compact chips, boosting demand in advanced nodes. Assuming development in these industries does not slow, we think it would take at least 20 years for the new markets to mature, supporting SMIC’s long-term investment thesis as China’s prime foundry.