SMIC: AI-Driven Demand Growth; Positive Outlook on Utilization and Average Selling Price
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SMIC: AI-Driven Demand Growth; Positive Outlook on Utilization and Average Selling Price
Goldman Sachs maintains its Buy rating and raises the target price to HK$135, citing strong AI-related product demand supporting pricing improvement.
- SMIC’s Q1 results exceeded expectations; AI chip demand is expected to drive growth in 2026.
- Management guidance indicates Q2 revenue growth of 14%–16% quarter-on-quarter, with gross margin expected to reach 20%–22%.
- Ongoing capacity expansion, with capital expenditures reaching USD 1.6 billion; rising depreciation pressure offset by pricing initiatives.
- Revised earnings forecasts for 2026–2029 and raised target price to HK$135.
Report interpretation
Overview
This report analyzes SMIC’s business outlook for 2026, asserting that robust AI-related chip demand will drive improvements in utilization and average selling price. The report maintains a Buy rating and raises the target price to HK$135, primarily reflecting optimistic expectations regarding AI chip demand, domestic customer orders, and product mix enhancement.
Core views
The report highlights that SMIC will benefit from multiple factors in 2026: 1. Rapid growth in AI-related chip demand, particularly for analog/logic chips. 2. Increased market demand for mainstream products as overseas peers shift focus toward high-end AI chips. 3. Continued capacity expansion—although depreciation pressure is rising, it is offset by pricing initiatives that sustain gross margins. 4. Stronger order volumes driven by domestic customers’ supply chain security considerations. 5. Higher-margin product demand (e.g., memory, BCD) growing faster than traditional products, further optimizing product mix. Management expects Q2 revenue to grow 14%–16% quarter-on-quarter and notes that order demand stems from inventory replenishment by consumer/IoT customers. The report revises upward earnings forecasts for 2026–2029 and raises the target price to HK$135, reflecting optimistic expectations for revenue and earnings growth over the coming years.
Analysis framework
The report applies a P/E valuation methodology, using industry-average P/E multiples for valuation. Specific steps include: 1. Analysts first revised upward earnings forecasts for 2026–2029, factoring in strong AI-related product demand and pricing power. 2. Based on an industry-average P/E multiple of 80.7x, combined with the company’s future earnings growth outlook, a 12-month target price of HK$135 is derived. 3. The implied forward P/E multiple exceeds historical levels, reflecting higher anticipated earnings growth over the next two years. The report also notes that SMIC, as China’s largest foundry, holds advantages in capacity scale and technology coverage. Over the long term, the company stands to benefit from growing demand from domestic fabless clients.
Methodology notes
The report applies P/E multiples for valuation, adjusting the target price based on the company’s future earnings growth outlook.
P/E multiples are a commonly used valuation method, assessing valuation levels by comparing current share price to earnings per share. Based on industry averages and the company’s projected earnings growth, the report raises the target price to HK$135, signaling confidence in future growth.
The report analyzes SMIC’s free cash flow position—despite substantial capital expenditures, positive free cash flow is maintained through pricing initiatives.
Free cash flow refers to the residual cash generated after capital expenditures, reflecting a company’s ability to generate cash. The report notes that although SMIC’s capital expenditures are substantial, pricing increases for high-demand products offset depreciation pressure and sustain positive free cash flow.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- SMIC (0981.HK)Benefits from AI-related chip demand growth and improved utilization
- Strengths
- Globally leading foundry with broad technology coverage and strong domestic customer demand
- Weaknesses
- Faces depreciation pressure and risks related to equipment and material supply constraints
- Comparison
- Compared with other semiconductor companies, SMIC holds a more advanced position in AI-related chip development
- Risks
- Weak smartphone and consumer electronics demand may adversely impact financial performance
Key data
- Target PriceHK$1350.7% increase from prior target price; based on 80.7x 2028 P/E
- 2026 Revenue Growth14%–16% QoQManagement guidance indicates significant quarter-on-quarter revenue growth in Q2
- 2026 Gross Margin20%–22%Management expects Q2 gross margin to remain at elevated levels
- Capital ExpendituresUSD 1.6 billion10% year-on-year increase, primarily for capacity expansion
Impact & implications
The report concludes that SMIC will continue benefiting from rising AI-related chip demand—especially as overseas peers pivot toward high-end AI chips, increasing market demand for mid- and low-end products. Management’s optimistic Q2 revenue and gross margin guidance underscores the company’s competitiveness in the current market environment. The upward revision of earnings forecasts and target price reflects strong confidence in the company’s future growth trajectory.
Risks
- Lower-than-expected smartphone and consumer electronics demand
- Slower-than-expected product diversification and capacity expansion
- Constraints on certain equipment and material supplies
What to watch
- Changes in AI-related chip demand
- Order trends from domestic customers
- Fluctuations in gross margin and utilization rates