SMIC’s Q4 and First-Half 2023 Could Look Bad; Stock Undervalued on Underappreciated China Recovery

We maintain our HKD 21 fair value estimate for Semiconductor Manufacturing International Corporation after trimming our 2022-26 revenue and operating expenses and moving some of the 2023 capital expenditure to 2022. The stock is modestly undervalued in our view, as it is trading just below book value and a slowdown in 2023 is already priced in. SMIC’s share price is depressed by potential setbacks from U.S. export controls announced in October, and lower utilization in the next three quarters due to tepid consumer electronics demand. Abating inflation in the U.S. and gestures by China to eventually exit its zero-tolerance COVID-19 policy lead us to view that downside to the stock is limited, and the stock can be pushed higher by a potential rebound in China consumer electronics demand.