SMIC Significantly Exceeds Expectations Across the Board in 2Q26; AI Demand Continues to Tighten Capacity
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SMIC Significantly Exceeds Expectations Across the Board in 2Q26; AI Demand Continues to Tighten Capacity
Bernstein maintains its Outperform rating and 120.00 HKD target price for SMIC, believing that AI spillover demand, higher ASPs, and high utilization will continue to support improved profitability.
- 2Q26 revenue was US$3.0 billion, up 36% YoY and 20% QoQ, exceeding the company's prior guidance and market expectations.
- Gross margin rose to 25.3%, above guidance of 20% to 22%; EBITDA margin reached 70.2%.
- Wafer shipments increased 14% QoQ, capacity utilization rose to 93.7%, and monthly capacity reached approximately 1.096 million 8-inch equivalent wafers.
- 3Q26 guidance calls for revenue growth of 2% to 4% QoQ and gross margin of 26% to 28%, with utilization expected to rise to approximately 95%.
Report interpretation
Overview
SMIC's 2Q26 results significantly exceeded expectations across revenue, gross margin, operating margin, and net profit. Growth was primarily driven by capacity expansion, higher capacity utilization, rising ASPs, and an improved product mix. Bernstein believes that AI infrastructure buildout and memory shortages are spilling over into mature-node logic and specialty-process chips, keeping foundry capacity tight.
Core views
AI-related peripheral chips, computing and tablets, industrial, and automotive demand were the primary growth drivers this quarter, while consumer electronics remained resilient. The company expects incremental capacity to be allocated to higher-priced products; together with tight supply and demand, this leaves room for further ASP and gross-margin upside. On this basis, the research institution raises its revenue and margin forecasts for 2026 through 2028, while maintaining its H-share target price of 120.00 HKD and A-share target price of 220.00 CNY.
Analysis framework
The report combines quarterly results with company guidance, tracking revenue, wafer shipments, ASPs, capacity utilization, capacity, and end-market revenue mix, and sets target prices using a forward book-value and price-to-book valuation approach.
Methodology notes
Price-to-book valuation
Based on next-twelve-month forward book value per share, the report applies a 4.6x P/B multiple and a 1.6x A-H premium for A shares to derive H-share and A-share target prices.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- 0981.HKSMIC H shares
- Strengths
- Strong 2Q26 results, with AI spillover demand, higher ASPs, and high utilization supporting profitability; target price is 120.00 HKD.
- Weaknesses
- Valuation already reflects part of the recovery expectations, and the company needs to continue investing capital expenditures to expand capacity.
- Comparison
- Versus the current price of 71.30 HKD, the target price implies approximately 68.3% upside.
- Risks
- U.S. sanctions, weaker-than-expected downstream demand, and supply-demand imbalances caused by faster capacity expansion by competitors.
- 688981.SSSMIC A shares
- Strengths
- Shares the company's improving fundamentals and AI-related demand drivers; target price is 220.00 CNY.
- Weaknesses
- The A-share valuation premium relative to H shares may affect the realization of the target price.
- Comparison
- The report's valuation applies a 1.6x A-H premium.
- Risks
- U.S. sanctions, weaker-than-expected downstream demand, and supply-demand imbalances caused by faster capacity expansion by competitors.
Key data
- 2Q26 RevenueUS$3.0 billion, +36% YoY, +20% QoQAbove prior guidance of +14% to +16% QoQ and market expectations.
- Gross Margin25.3%Above company guidance of 20% to 22%.
- EBITDAUS$2.1 billion, margin of 70.2%Management said it is likely to remain at a high level over the next several quarters.
- Wafer Shipments+14% QoQCapacity utilization rose to 93.7%.
- Monthly CapacityApproximately 1.096 million 8-inch equivalent wafersA record high.
- 3Q26 Revenue Guidance+2% to +4% QoQThe company said the lower apparent growth rate is related to proactively smoothing the pace of wafer shipments.
- 3Q26 Gross Margin Guidance26% to 28%The research institution considers this above market expectations.
- China Revenue Share90.2%Further increased in 2Q26.
Impact & implications
If AI demand, memory shortages, and related infrastructure investment persist, the company's high utilization and pricing power will support improved revenue and margins. Accelerated capacity expansion also reflects upward revisions to customer demand and supply-chain tightness, although future performance remains sensitive to the ramp-up of new capacity and supply-demand balance.
Risks
- Further U.S. sanctions could hinder capacity expansion plans or severely affect ongoing operations.
- A weaker-than-expected recovery in downstream demand could result in lower-than-expected capacity utilization and ASPs.
- Competitors expanding capacity faster than expected could cause supply-demand imbalances and pricing deterioration.
What to watch
- Whether 3Q26 revenue, gross margin, and utilization meet company guidance.
- Demand sustainability for AI peripheral chips, computing and tablets, and industrial and automotive end markets.
- Progress in ASP increases and the introduction of capacity for new higher-priced products.
- The pace of capacity expansion, equipment qualification progress, and easing of supply-chain tightness.
- Changes in U.S. export controls or sanctions policies.