SMIC (00981) Report Interpretation

Overview

This earnings review examines SMIC’s stronger-than-expected 2Q26 profitability and 3Q26 outlook. JPMorgan sees sustained support from AI-adjacent demand and pricing, but retains a Neutral rating because capacity-related depreciation is likely to constrain longer-term margin expansion.

Core views

SMIC reported 2Q26 revenue of US$3,005.6 million, up 20% quarter on quarter and 36% year on year, and gross margin of 25.3%. The gross margin exceeded JPMorgan’s 21.7% estimate by 360 basis points and Bloomberg consensus of 21.4% by 396 basis points. Gross profit was US$760.6 million, 22% above JPMorgan’s forecast, while net profit of US$479.2 million and EPS of US$5.98 cents were 81% and 81% above JPMorgan estimates, respectively. JPMorgan attributes the margin outperformance mainly to price increases negotiated in 1Q that were reflected in reported results. For 3Q26, management guided revenue to US$3,066-3,126 million, up 2-4% quarter on quarter, and gross margin to 26-28%. The margin range is above JPMorgan’s prior 26.0% estimate and consensus of 23.5%, and materially above the roughly 22% market expectation cited in the report. JPMorgan believes tight supply-demand conditions, with utilization around 95% in 3Q and expected to remain high, are allowing resilient pricing. AI-peripheral products, including power-management ICs, were the main source of first-half demand strength; AI-related revenue rose about 40% quarter on quarter. This demand has tightened supply in 8-inch wafers and extended into 12-inch capacity. JPMorgan expects SMIC’s 12-inch expansion to support growth as capacity comes online, estimating about 40,000 wafers per month of additional 12-inch capacity in 2026. It now forecasts revenue growth of 27% year on year in 2026, followed by low- to mid-teens annual growth in 2027-28. Consumer demand remains soft, and some first-half inventory was built ahead of possible second-half memory-price increases, but management indicated that second-half demand should be relatively stable rather than face severe inventory digestion because customers are securing capacity for 2027. The stronger pricing outlook leads JPMorgan to lift FY26-28 revenue estimates by 2%, 4%, and 4%, respectively. It raises gross-profit estimates by 15%, 20%, and 11%; FY26-28 gross-margin forecasts increase by 275, 330, and 175 basis points to 24.4%, 24.6%, and 26.5%. FY26 and FY27 adjusted net-income forecasts rise to US$1,545 million and US$1,561 million from US$1,091 million and US$1,157 million, increases of 41.5% and 34.9%. The central constraint is depreciation. Management guided depreciation to rise about 30% year on year in 2026 and continue increasing in 2027; JPMorgan estimates roughly 20% growth in 2027. Because this is expected to outpace revenue growth of 27% in 2026 and 16% in 2027, the institution sees limited room for incremental margin upside to drive the stock. It expects gross margin to remain broadly in a 24-26% range in 2026-28, still below SMIC’s 35-40% peak in 2022. Raw-wafer cost inflation is an additional constraint. JPMorgan keeps its Neutral rating but raises the Jun-27 target price to HK$78 from HK$67. The target is based on an unchanged approximately 2.8x price-to-book multiple applied to average FY27-28 estimated book value per share; the multiple reflects its concern that depreciation limits longer-term margin upside.

Analysis framework

JPMorgan compares reported 2Q26 results and 3Q26 guidance with its own estimates and Bloomberg consensus, then traces the variance to pricing, utilization, AI-related demand and capacity additions. It revises earnings forecasts through revenue, gross-margin, operating-profit and net-income assumptions, and values the shares using price-to-book on average FY27-28 estimated book value per share.

Methodology notes

• Industry AnalysisSupply-demand framework

  Semiconductor supply-demand and utilization analysis

  The report links tight wafer supply, utilization around 95%, and AI-peripheral demand to stronger pricing and gross margins.

• Valuation methodsPB valuation

  Price-to-book valuation

  JPMorgan derives its HK$78 Jun-27 target price using an approximately 2.8x P/B multiple on average FY27-28 estimated BVPS.

• Corporate Fundamentals and FinanceVolume-price decomposition

  Pricing, capacity and depreciation-driven earnings forecast revisions

  The report separates pricing, shipment utilization, capacity expansion and depreciation to explain revenue and margin revisions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SMIC (0981.HK)

  Primary covered semiconductor company; benefits from AI-peripheral demand, tight supply and favorable pricing.

  Strengths

  2Q26 gross-margin beat, 3Q26 margin guidance of 26-28%, resilient pricing, and expanding 12-inch capacity.

  Weaknesses

  Consumer demand remains soft and the depreciation burden is expected to rise faster than revenue in 2026-27.

  Comparison

  2Q26 gross margin was 3.6-4.0 percentage points above JPMorgan and Bloomberg consensus estimates.

  Risks

  Higher pricing pressure or weaker-than-expected customer demand could hurt results; stronger broad-based price hikes or leading-edge yield improvement are upside risks.

Key data

• 2Q26 revenueUS$3,005.6 millionUp 20% QoQ and 36% YoY; 5% above JPMorgan and consensus estimates.
• 2Q26 gross margin25.3%360 bps above JPMorgan’s 21.7% estimate and 396 bps above Bloomberg consensus of 21.4%.
• 3Q26 gross-margin guidance26-28%Above JPMorgan’s 26.0% estimate and consensus of 23.5%.
• FY26 revenue growth forecast27.1% YoYJPMorgan forecasts FY26 revenue of US$11,857 million.
• FY26 gross-margin forecast24.4%Raised by 275 bps versus the prior forecast.
• FY26 adjusted net income forecastUS$1,545 millionRaised 41.5% from US$1,091 million.
• FY27 adjusted net income forecastUS$1,561 millionRaised 34.9% from US$1,157 million.
• Depreciation growth~30% YoY in 2026; ~20% YoY in 2027Expected to outpace revenue growth and constrain margin expansion.

Impact & implications

The report argues that AI-peripheral demand, tight supply and pricing should support SMIC’s revenue and margins over coming quarters, justifying higher earnings estimates and a higher target price. However, expanding capacity brings a depreciation burden that JPMorgan expects to cap sustained margin upside, underpinning its Neutral stance.

Risks

• Higher pricing pressure could weaken SMIC’s margins and earnings.
• Customer demand could be worse than expected.
• Rising depreciation and raw-wafer cost inflation could limit further margin expansion.
• A stronger and broader price increase following consumer-demand recovery is an upside risk to the rating and target price.
• Stronger leading-edge growth driven by yield improvement is an upside risk to the rating and target price.

What to watch

• The durability and breadth of semiconductor price increases through 2H26 and potentially 2027.
• AI-peripheral demand, utilization levels and the pace at which tight supply persists.
• The ramp of 12-inch capacity and associated depreciation growth.
• Consumer demand and customers’ capacity-securement behavior for 2027.
• Leading-edge yield improvement and its effect on growth.