Second-quarter gross margin beats expectations; advanced-packaging progress supports raising JCET's price objective to RMB90

Overview

The report focuses on JCET's second-quarter results, advanced-packaging capacity expansion, margin outlook, and valuation. BofA believes high capacity utilization, an improved product mix, and volume growth in 2.5D/3D and automotive-chip packaging will enhance earnings quality, more than offsetting pressure from consumer-chip demand and capital expenditure. It therefore reiterates Buy and raises its price objective.

Core views

JCET's 2Q26 results exceeded BofA's expectations across the board. Revenue was RMB10.4bn, up 12% YoY and 13% QoQ, above its RMB9.8bn forecast; gross margin was 15.7%, also exceeding the 15.0% forecast. Operating margin rose from 4.5% in 1Q26 to 6.6%, while net profit reached RMB554mn, up 101% YoY and 97% QoQ. BofA believes approximately 90% capacity utilization, higher average selling prices, and an improved product mix jointly drove the better-than-expected second-quarter margin, and expects this trend to continue in the second half of 2026, with gross margin improving further through 2H26—2027. The customer and regional mix indicates that the company's growth is no longer entirely dependent on a single major overseas customer. Revenue from the key customer fell 23% YoY in 1H26, reducing its share of company revenue to 18%, versus 24%—35% in prior first-half periods; meanwhile, revenue from the United States and China grew 34% and 35%, respectively, while South Korean revenue was flat YoY. The report believes growth across multiple regions helped maintain high capacity utilization, thereby supporting gross margin and reducing the impact of declining revenue from the key customer on overall operations. Mainstream foundries remain positive on demand for mature-node chips such as power-management and analog products, supporting the company's overall demand. Advanced packaging is central to medium-term earnings improvement. The JME plant generated RMB212mn of revenue in 1H26, indicating that the 2.5D/3D packaging business remains on track, although JME and the new automotive-chip packaging plant JSAC were still loss-making in the first half, leaving room for margin improvement as capacity ramps. The company guides to RMB10bn of capital expenditure for advanced-packaging capacity in 2026, and BofA likewise assumes approximately RMB10bn of annual capital expenditure in 2026—2027 for advanced-packaging R&D and capacity expansion. The report expects emerging businesses such as chiplet packaging, JME's 2.5D/3D packaging, and JSAC's automotive-chip packaging to contribute more than 10% of total revenue in 2027—2028, lifting the company's gross margin to 16%—17%, above the approximately 14% historical average in 2015—2025 and consensus expectations of 15%—16%. The large-scale investment creates pressure on cash flow, debt, and interest expense, but the report considers it manageable overall. With operating cash inflows increasing, annual expansion investment of RMB10bn in 2026—2027 should remain affordable; after accounting for short-term financial investments, the net debt-to-equity ratio was approximately 20% in 2Q26. BofA believes this level remains healthy and preserves room for additional borrowing to fund capital expenditure in 2027—2028. However, higher capital expenditure and the subsequent interest expense could weigh on net profit and represent a key constraint on earnings forecasts. On demand forecasts, BofA lowered its 2026—2028 revenue estimates by 4%—5%, primarily reflecting the possibility that rising memory-chip prices or shortages could weaken demand for consumer-related chips. Even so, based on resilient overall semiconductor demand and new-business expansion, the report still expects the company's revenue to deliver a 15% CAGR through 2028; quarterly revenue from the second half of 2026 through 2028 is expected to reach RMB11bn—15bn, representing 12%—20% YoY growth. Margin improvement is expected to drive a 38% EPS CAGR in 2026—2028. Specifically, EPS forecasts were revised from RMB1.54 for 2026, RMB2.08 for 2027, and RMB3.04 for 2028 to RMB1.30, RMB2.02, and RMB2.48, respectively; corresponding adjusted net profit is projected at RMB2.322bn, RMB3.618bn, and RMB4.429bn. The rating rationale also includes the company's leading position in China's semiconductor back-end packaging sector, its advanced-packaging expansion targeting China's high-performance-computing demand, and what BofA describes as a normalization of the overseas competitive environment following easing concerns over US-China relations and semiconductor tariffs. JCET is China's largest OSAT vendor and ranked third globally based on 2024 figures. Its manufacturing footprint spans China, South Korea, and Singapore, and its technologies include wafer-level packaging, 2.5D/3D, system-in-package, flip-chip, and wire bonding. The price objective was raised from RMB55 to RMB90, applying a 40x P/E multiple to average 2027/28 EPS of RMB2.25; the previous valuation used 30x average 2026/27 EPS. The 40x multiple is in the mid-to-high end of the report's stated historical valuation range of 20—50x, reflecting improved earnings quality from a higher advanced-packaging mix, margin-upside potential, and easing competitive pressure in the traditional semiconductor assembly and testing market. The report also notes that the current share price implies a forward 12-month P/E of approximately 44x; based on 2027—2028 forecasts, JCET trades at approximately 30—40x P/E, below the roughly 50—60x average for Chinese semiconductor-foundry and OSAT peers.

Analysis framework

The report first compares second-quarter revenue, gross margin, and profit with BofA's forecasts and the prior quarter, then explains the drivers of the upside through capacity utilization, average selling prices, customer and regional mix, and product mix. It subsequently assesses the revenue, loss status, capital expenditure, and ramp-up potential of advanced-packaging projects such as JME and JSAC, using these factors to re-estimate revenue, margins, and EPS for 2026—2028. Finally, it determines the price objective by considering the historical P/E range, peer valuations, and the change in earnings quality from advanced packaging, while outlining demand, customer, competition, capital-expenditure, and geopolitical risks.

Methodology notes

• Valuation methodologyP/E and PEG valuation

  P/E valuation based on forecast EPS

  The report applies a 40x P/E multiple to average 2027/28 EPS of RMB2.25 to derive a price objective of RMB90 per share, and assesses the multiple's relative position against the company's historical range of 20—50x and peer valuations of approximately 50—60x.

• Industry analysis frameworkVolume-price decomposition

  Decomposition of revenue and gross-margin drivers

  The report separately examines shipment demand, capacity utilization, average selling prices, and product mix to explain changes in second-quarter revenue and gross margin, attributing future margin improvement to high utilization and a rising advanced-packaging contribution.

• Company fundamentals and financial frameworkEarnings-quality analysis

  iQmethod business performance, earnings quality, and validation metrics

  The report combines standardized metrics covering margins, return on capital, cash realization, asset investment, leverage, and interest coverage to assess whether advanced-packaging growth can translate into more stable earnings with lower competitive pressure.

Asset mapping & comparison

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

• JCET (600584.SS)

  The report believes the company will benefit from Chinese demand for advanced packaging related to high-performance computing, high capacity utilization, and an improved product mix, and reiterates its Buy rating.

  Strengths

  China's largest OSAT vendor and the world's third-largest in 2024; a leader in China's semiconductor back-end sector, with capabilities in wafer-level, 2.5D/3D, system-in-package, flip-chip, and wire-bonding technologies.

  Weaknesses

  JME and JSAC remain loss-making, revenue from the key customer has declined, and advanced-packaging capacity expansion requires sustained high capital expenditure.

  Comparison

  Based on 2027—2028 forecasts, the company trades at approximately 30—40x P/E, below the roughly 50—60x average for Chinese foundry and OSAT peers.

  Risks

  Consumer-chip demand affected by rising memory-chip prices, weaker-than-expected customer adoption of advanced technologies, worsening price competition, loss of overseas market share due to geopolitics, and rising capital expenditure and interest expense.

Key data

• 2Q26 revenueRMB10.4bnUp 12% YoY and 13% QoQ, above BofA's RMB9.8bn forecast.
• 2Q26 gross margin15.7%Above BofA's 15.0% forecast; the report expects continued improvement through 2H26—2027.
• 2Q26 operating margin6.6%4.5% in 1Q26.
• 2Q26 net profitRMB554mnUp 101% YoY and 97% QoQ.
• 2Q26 capacity utilizationApproximately 90%BofA estimate; high utilization is an important driver of gross-margin improvement.
• Key-customer revenueDown 23% YoY in 1H26Its revenue contribution fell to 18%, versus 24%—35% in prior first-half periods.
• 1H26 regional revenue growthUnited States +34%, China +35%, South Korea flatRegional growth offset the impact of declining revenue from the key customer.
• JME revenueRMB212mn in 1H26The 2.5D/3D packaging business is progressing as planned, although JME remains loss-making.
• Advanced-packaging capital expenditureApproximately RMB10bn annually in 2026—2027For advanced-packaging R&D and capacity construction.
• Emerging-business revenue contributionMore than 10% of total revenue in 2027—2028Including chiplet, 2.5D/3D, and automotive-chip packaging.
• Medium-term gross-margin forecast16%—17%Above the approximately 14% historical average in 2015—2025 and consensus expectations of 15%—16%.
• 2026—2028 revenue forecast revisionLowered by 4%—5%Primarily reflecting the possibility that rising memory-chip prices could suppress demand for consumer-related chips.
• 2026—2028 growth forecastsRevenue CAGR of 15%, EPS CAGR of 38%Supported by semiconductor demand, new-business expansion, and margin improvement.
• EPS forecast revisions2026E cut from RMB1.54 to RMB1.30; 2027E cut from RMB2.08 to RMB2.02; 2028E cut from RMB3.04 to RMB2.48Lower revenue forecasts and pressure from interest expense partly offset margin improvement.
• Price objective and valuationRMB90.00; 40x average 2027/28E P/EThe previous price objective was RMB55.00, and the average 2027/28E EPS used in the valuation is RMB2.25.

Impact & implications

The report believes JCET's earnings drivers are shifting further from traditional semiconductor assembly and testing toward higher utilization and high-value-added advanced packaging. If 2.5D/3D, chiplet, and automotive-chip packaging ramp as planned, a higher contribution from emerging businesses could lift gross margin above its historical midpoint and deliver stronger earnings growth and quality; this is also the primary basis for the higher target valuation multiple. At the same time, the lower revenue forecasts indicate that consumer-chip demand, capital expenditure, and interest expense will continue to affect the pace of earnings realization.

Risks

• Rising memory-chip prices could suppress demand for consumer-related chips and affect revenue growth.
• The key customer's adoption of the company's advanced technologies could be lower than expected, or the company may fail to secure new customers.
• Price competition in the traditional semiconductor assembly and testing market could continue to worsen.
• Geopolitical tensions could reduce the company's market share among overseas customers.
• Higher capital expenditure and subsequent interest expense could weigh on net profit.

What to watch

• Monitor whether gross margin can continue rising through 2H26—2027, supported by high utilization, average selling prices, and an improved product mix.
• Watch the capacity ramp-up and narrowing losses at JME and JSAC, and whether emerging businesses can exceed 10% of revenue in 2027—2028.
• Monitor changes in memory-chip prices and their impact on demand for consumer-related chips.
• Track key-customer adoption of advanced-packaging technologies, new-customer acquisition, and changes in market share relative to back-end peers.
• Monitor the impact of approximately RMB10bn in annual capital expenditure on operating cash flow, debt levels, and interest expense.
• Watch whether chip-supply shortages drive price increases for OSAT services and how changes in US-China relations affect the overseas competitive environment.