Maintain SMIC's "Buy" rating and raise the target price of Hong Kong stocks to HK$55.6, with a potential increase of 15.8%, and raise the target price of SMIC's A-shares to RMB120.1, with a potential increase of 15.2%.

Maintain SMIC's "Buy" rating: SMIC's revenue grew 34% and 32% year-over-year in the third and fourth quarters of 2024, respectively, and gross margin was 20.5% and 22.6%, respectively. The company guided a year-on-year revenue growth rate of 35% and a gross profit margin of 20% in the first quarter, maintaining a high or upward trend. In the short term, domestic subsidies for consumer electronics products and overseas geopolitics have led to higher demand for orders, capacity utilization to maintain a good level, and product mix to improve. Moreover, we remain optimistic about SMIC's long-term localization needs and leading advantages. Currently, SMIC's 2025 EV/EBITDA is 13.9x, which still has upside and reiterates its "buy" rating.

Fourth-quarter gross margin exceeded market expectations, and first-quarter gross margin guidance remained strong: SMIC's revenue in the fourth quarter of last year reached US$2.21 billion, a new record for a single quarter, up 2% quarter-on-quarter and 32% year-on-year, and the year-on-year growth rate remained high in the third quarter of last year. The company has guided median revenue of $2.36 billion in the first quarter of this year, up 35% year-over-year, and the growth rate is up again. The company's gross margin in the fourth quarter was 22.6%, up 2.2 percentage points sequentially and 6.2 percentage points year-on-year, above the upper end of the guidance and significantly higher than market expectations. The company has guided a median gross margin of 20% in the first quarter of this year, which remains high. The company's strong revenue and gross margin performance was primarily driven by high utilization rate performance from full orders and improved product mix, partially offset by higher depreciation. The company's net income for the fourth quarter of last year was $108 million, down 28% sequentially and down 38% year-on-year.

Highlights and outlook: 1) The Company expects revenue growth in 2025 to be higher than the comparable peer average, capital expenditures broadly flat compared to the prior year, and depreciation to increase by approximately 20% year-over-year. 2) The company maintains a cautious attitude towards the demand for orders in the second half of this year, and needs to observe the customer's advance delivery in the first half of the year and the new production capacity of the same industry. 3) In the long run, SMIC aims to increase the proportion of automobile-related revenue to 10%, accounting for about one-third of domestic automotive chip demand.

Valuation: Based on SMIC's 4Q24 results and 1Q25 guidance, we adjust SMIC's EBITDA forecasts for 2025 and 2026. Gave SMIC 15.9x EV/EBITDA and raised the target price of SMIC's Hong Kong shares to HK$55.6, with a potential increase of 15.8%, and raised the target price of SMIC's A-shares to RMB120.1, with a potential increase of 15.2%.

Investment risk: The downstream demand for semiconductors (smartphones, new energy vehicles, industry, consumption, etc.) is slow to recover, and the company's fundamentals are slow to rise, affecting the rebound in valuation. The new production capacity of semiconductor wafer foundry is relatively fast, and the company's capacity utilization rate is slow. Intensified competition in the industry and increased price pressure dragged down profit performance.