JCET's 2Q gross margin beat expectations, with advanced packaging ramp-up supporting earnings improvement; BofA reiterates Buy and raises PO to CNY90

Overview

The report focuses on JCET's 2Q26 results, progress in advanced packaging, scope for margin improvement, and valuation. BofA believes the second-quarter results validated the positive effects of high utilization and product mix upgrades. Although rising memory chip prices may weaken demand for consumer chips, expansion in advanced packaging and automotive chip packaging should continue to support medium-term revenue and EPS growth. It therefore reiterates Buy and raises its price objective to CNY90.

Core views

First, 2Q26 results exceeded BofA's expectations in both revenue and margins. The company generated revenue of CNY10.4bn, up 13% QoQ and 12% YoY, above BofA's forecast of CNY9.8bn; gross margin was 15.7%, also above the 15.0% forecast. Operating margin increased from 4.5% in 1Q26 to 6.6%, while net profit reached CNY554mn, up 97% QoQ and 101% YoY. Based on this, the report concludes that the earnings improvement was not driven solely by revenue growth: high capacity utilization, higher average selling prices, and changes in product mix all contributed. It expects this trend to continue in 2H26. Second, lower revenue from the core customer did not prevent overall growth. Revenue from the major customer declined 23% YoY in 1H26, and its revenue contribution fell to 18%, below the historical first-half range of 24%—35%. However, revenue from the US and China increased 34% and 35% YoY, respectively, while revenue from South Korea was flat YoY. BofA believes growth across multiple regions offset the decline from the core customer and lifted 2Q26 capacity utilization to its estimate of approximately 90%, thereby supporting gross margin. The company's historical gross and operating margins have been approximately 14% and 6%, respectively, and the report expects both to rise gradually in 2027—2028 as the product mix improves. Third, advanced packaging is central to the report's view of improving margins and earnings quality. The JME plant generated revenue of CNY212mn in 1H26, indicating that the 2.5D/3D packaging business is progressing as planned. However, JME and the automotive chip packaging plant JSAC remained loss-making in 1H26, implying further scope to reduce losses and improve margins as capacity ramps. The company guides for CNY10bn of capex for advanced packaging capacity in 2026, and BofA assumes annual capex of CNY10bn in both 2026 and 2027 for advanced packaging R&D and capacity construction. The report expects emerging businesses, including chiplet packaging and JSAC automotive chip packaging, to contribute more than 10% of total revenue by 2027—2028 and lift gross margin to 16%—17%, above the historical average of approximately 14% in 2015—2025 and consensus expectations of 15%—16%. Fourth, BofA distinguishes between demand risks and structural growth. Because high memory chip prices may weaken demand for consumer-related chips, the report cuts its 2026—2028 sales forecasts by 4%—5%. Corresponding EPS forecasts were reduced from CNY1.54, CNY2.08, and CNY3.04 to CNY1.30, CNY2.02, and CNY2.48. Meanwhile, 2026E EBITDA was lowered from CNY7.6262bn to CNY7.2847bn, but 2027E and 2028E EBITDA were raised from CNY9.1048bn to CNY9.2948bn and from CNY9.6389bn to CNY10.5556bn, respectively, reflecting a stronger medium- to long-term margin outlook. BofA still expects sales to deliver a 15% CAGR through 2028, with quarterly revenue reaching CNY11bn—CNY15bn from 2H26 through 2028 and growing 12%—20% YoY. EPS is expected to grow at a 38% CAGR over 2026—2028, mainly driven by margin improvement, although interest expenses associated with higher capex may weigh on net profit. Fifth, capacity expansion will increase near-term cash flow and leverage pressure, but the report believes the company's financing capacity remains sufficient. Free cash flow per share is forecast at CNY-1.83 and CNY-1.28 in 2026E and 2027E, respectively, before turning positive at CNY2.13 in 2028E. Net debt-to-equity ratios are projected at 20.2%, 26.0%, and 15.4%, respectively. After accounting for short-term financial investments, the 2Q26 net debt-to-equity ratio was approximately 20%, which BofA considers healthy and sufficient to provide further borrowing capacity for 2027—2028 capex. Rising operating cash inflows should also help cushion the pressure from capacity expansion. Finally, the price objective increase primarily reflects a shift in the valuation base period and expectations of margin improvement rather than a rating change. The new CNY90 price objective is based on a 40x P/E multiple applied to the average 2027E and 2028E EPS of CNY2.25. The previous CNY55 price objective used a 30x P/E multiple applied to average 2026E and 2027E EPS. The 40x multiple is in the upper-middle portion of the company's historical 20x—50x valuation range. The report believes advanced packaging improves long-term growth visibility, earnings upside, and earnings quality while reducing pressure from price competition in the traditional packaging and testing market. The shares have historically traded broadly at 20x—40x P/E and approached 60x in June—July. The report's reference price implies approximately 44x next-12-month P/E, while the company's approximately 30x—40x valuation for 2027—2028 remains below the approximately 50x—60x average for Chinese foundry and packaging and testing peers.

Analysis framework

BofA first compares 2Q26 revenue, gross margin, and profit with its own expectations and the previous quarter, then breaks down revenue changes by customer and region and explains margin improvement through capacity utilization, ASP, and product mix. The report then assesses the ramp-up path for advanced packaging using JME and JSAC revenue, their loss-making status, and capex plans, and adjusts its 2026—2028 revenue, EPS, and EBITDA forecasts based on the potential impact of memory chip prices on consumer demand. Finally, it determines the price objective using a P/E methodology based on the historical valuation range, peer valuations, and average 2027—2028 EPS.

Methodology notes

• Valuation methodologyP/E and PEG valuation

  P/E-based price objective methodology using average forward EPS

  The report applies a 40x P/E multiple to average 2027E and 2028E EPS of CNY2.25 to derive a price objective of CNY90 per share, and assesses the positioning of this multiple against the company's historical valuation range and peer P/E multiples.

• Industry/Sector analysis frameworkVolume-price decomposition

  Breakdown of revenue, utilization, ASP, and product mix

  The report separately examines revenue growth, capacity utilization of approximately 90%, higher ASPs, and changes in the proportion of high-end products to explain the second-quarter gross margin beat and subsequent margin improvement.

• Industry/Sector analysis frameworkSupply-demand framework

  Analysis of semiconductor demand and packaging and testing capacity utilization

  The report links overall semiconductor demand, risks to consumer chip demand, and advanced packaging capacity expansion to assess changes in revenue growth, utilization, and packaging and testing service prices.

• Company fundamentals and financial framework

  iQmethod SM standard metrics framework

  The report uses BofA's standardized business performance, earnings quality, and validation metrics and combines income statement, balance sheet, and cash flow forecasts to compare historical data with future estimates.

Asset mapping & comparison

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

• JCET Group Co Ltd (A) (600584.SS)

  The Chinese semiconductor packaging and testing company covered by the report, with advanced packaging capacity expansion, higher utilization, and product mix upgrades viewed as the main drivers of revenue and margin growth.

  Strengths

  China's largest OSAT supplier and the world's third-largest OSAT supplier in 2024; it maintains a leading position in China's semiconductor back-end sector and has packaging capabilities including WLP, 2.5D/3D, SiP, flip-chip, and wire bonding.

  Weaknesses

  JME and JSAC remained loss-making in 1H26; high capex in 2026—2027 creates free cash flow pressure and may increase interest expenses.

  Comparison

  The report states that its approximately 30x—40x P/E valuation for 2027—2028 is below the approximately 50x—60x average for Chinese foundry and packaging and testing peers.

  Risks

  Lower-than-expected adoption of high-end technologies by major customers, failure to acquire new customers, worsening price competition, loss of overseas customer share due to geopolitical factors, and rising memory chip prices weighing on consumer chip demand.

Key data

• 2Q26 revenueCNY10.4bnUp 13% QoQ and 12% YoY, above BofA's CNY9.8bn estimate.
• 2Q26 gross margin15.7%Above BofA's 15.0% estimate; the report expects further improvement in 2H26—2027.
• 2Q26 operating margin6.6%4.5% in 1Q26.
• 2Q26 net profitCNY554mnUp 97% QoQ and 101% YoY.
• Estimated 2Q26 capacity utilizationApproximately 90%BofA believes high utilization was an important driver of gross margin improvement.
• 1H26 major customer revenueDown 23% YoYThe major overseas customer accounted for 18% of revenue, versus 24%—35% in previous first halves.
• 1H26 regional revenue growthUS +34%, China +35%, South Korea flat YoYRegional growth partly offset the impact of lower revenue from the major customer.
• 1H26 JME revenueCNY212mnThe 2.5D/3D packaging business progressed as planned, but JME remained loss-making.
• Advanced packaging capexCNY10bn per yearThe report assumes this amount will be used for advanced packaging R&D and capacity construction in 2026—2027.
• Expected emerging business revenue contributionMore than 10% in 2027—2028Including chiplet packaging and JSAC automotive chip packaging.
• Medium-term gross margin expectation16%—17%Above the historical average of approximately 14% in 2015—2025 and consensus expectations of 15%—16%.
• 2026—2028 sales forecast revisionsCut by 4%—5%Primarily reflecting the possibility that memory chip shortages and high prices may weigh on consumer chip demand.
• 2026E—2028E salesCNY43,159mn / CNY50,809mn / CNY57,021mnThe report still expects sales to deliver a 15% CAGR through 2028.
• 2026E—2028E EPSCNY1.30 / CNY2.02 / CNY2.48Previously CNY1.54, CNY2.08, and CNY3.04, respectively; corresponding YoY growth of 48.3%, 55.8%, and 22.4%.
• 2026E—2028E adjusted net profitCNY2,322mn / CNY3,618mn / CNY4,429mnThe report expects a 38% EPS CAGR over 2026—2028.
• 2026E—2028E EBITDACNY7,284.7mn / CNY9,294.8mn / CNY10,555.6mnPreviously CNY7,626.2mn, CNY9,104.8mn, and CNY9,638.9mn, respectively.
• 2026E—2028E free cash flow per shareCNY-1.83 / CNY-1.28 / CNY2.13Affected by high capex in the first two years, turning positive in 2028E.
• 2026E—2028E net debt-to-equity ratio20.2% / 26.0% / 15.4%The report believes current leverage can still support financing for subsequent capacity expansion.
• Price objective valuation basis40x 2027E/2028E average EPS CNY2.25Corresponding to a CNY90 price objective; previously 30x average 2026E/2027E EPS and a CNY55 price objective.
• Report reference price and forward valuationCNY79.48; approximately 44x NTM P/EThe report states that the approximately 30x—40x valuation for 2027—2028 is below the approximately 50x—60x average for Chinese foundry and packaging and testing peers.

Impact & implications

The report believes JCET's growth focus is shifting from traditional packaging and testing toward 2.5D/3D, chiplet, and automotive chip packaging. If the new plants ramp successfully and move from losses to scaled contributions, an improved product mix could lift gross margin above historical levels and drive EPS growth faster than revenue growth. In the near term, the impact of rising memory chip prices on consumer chip demand and the interest expenses generated by high capex may constrain net profit performance. However, BofA believes operating cash flow and current leverage remain sufficient to support capacity expansion. The higher growth visibility and reduced traditional pricing competition associated with advanced packaging are the main reasons for the higher valuation multiple and price objective.

Risks

• Rising memory chip prices may weaken demand for consumer-related chips, thereby affecting revenue.
• Major customers may adopt the company's high-end technologies at a lower-than-expected scale, or the company may fail to acquire new customers.
• Price competition in the traditional packaging and testing market may continue to worsen.
• Escalating geopolitical tensions may cause the company's market share among overseas customers to decline.
• High capex and the resulting increase in interest expenses may weigh on net profit.