Pricing and Product-Mix Improvements Offset Cost Pressure; Neutral Rating Maintained

Overview

Nomura believes SMIC's 2Q26 revenue and gross margin materially exceeded expectations, driven by AI-related peripheral-chip demand, customer pull-ins, and new pricing initiatives. Despite higher depreciation and summer utility expenses, high capacity utilization, higher ASPs, and product-mix improvements are expected to continue supporting 3Q26 profitability.

Core views

The report's central view is that the pricing environment for mature-node wafer foundries is improving: AI directly drives demand for computing chips, BCD/analog products, and other segments, while AI's absorption of overseas capacity indirectly boosts demand for consumer-electronics and connectivity nodes such as 40/28nm. SMIC has not implemented across-the-board price increases, but instead negotiates with customers on supply-constrained platforms; pricing benefits may be more fully reflected in 3Q26. Meanwhile, demand remains weak for smartphones, consumer electronics, and certain industrial/automotive segments, so pricing actions remain cautious.

Analysis framework

Fundamental assessment is based on 2Q26 results, management conference-call highlights, company 3Q26 guidance, wafer shipment volumes, ASPs, capacity utilization, and application mix, with the target price set using a price-to-book valuation approach.

Methodology notes

• Valuation methodsPrice-to-Book Valuation Method

  The target price is calculated at 3.5x 2026 forecast book value per share.

  The HKD 75.00 target price is based on 2026 forecast BVPS of USD 2.76 and 3.5x P/B; this multiple is at the high end of the company's historical trading range of 0.7x to 4.0x and references the P/B and ROE of global semiconductor companies.

• Operating AnalysisVolume, Price, and Capacity Utilization Analysis

  Shipment volume, ASP, capacity utilization, and cost changes are used to explain revenue and gross-margin trends.

  Both shipment volume and ASP improved in 2Q26; high capacity utilization in 3Q26 is expected to help dilute unit costs, partially offsetting depreciation and utility-cost pressures.

Asset mapping & comparison

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

• 0981.HK

  SMIC's Hong Kong-listed shares and the report's primary coverage target.

  Strengths

  2Q26 results exceeded guidance; strong AI-related peripheral-chip demand; improved ASP; high capacity utilization supports cost dilution; localized manufacturing in China and returning overseas orders provide support.

  Weaknesses

  End-market demand remains weak for smartphones and consumer electronics; capacity additions in 3Q26 are limited; depreciation is rising significantly.

  Comparison

  The target valuation of 3.5x 2026F P/B is at the high end of the company's historical range of 0.7x to 4.0x; the report states the shares trade at 3.3x 2026F P/B.

  Risks

  Depreciation and manufacturing-cost inflation, customer destocking or reduced pull-ins, delayed pricing negotiations, and weaker-than-expected end-market demand could constrain earnings improvement.

• 688981.SS

  SMIC's A-share listing, corresponding to the Hong Kong-listed entity.

  Strengths

  Benefits from the same operational improvements and industry supply-demand environment.

  Weaknesses

  The report does not provide an independent valuation or rating for the A shares.

  Comparison

  The report's rating, target price, and valuation analysis apply to 0981.HK.

  Risks

  The same risks related to company operations and mature-node supply and demand apply, and no independent A-share price target is provided.

Key data

• 2Q26 RevenueUSD 3,006mn; +20.0% QoQ, +36.1% YoYAbove the company's previous guidance of 14% to 16% QoQ growth.
• 2Q26 Gross Margin25.3%Up 5.2 percentage points from 20.1% in 1Q26, above guidance of 20% to 22%.
• 2Q26 Wafer Shipments2,869 thousand 8-inch equivalent wafers; +14.4% QoQMainly driven by AI-related peripheral chips and customer pull-ins.
• 2Q26 Blended ASP+5.7% QoQNew pricing initiatives and supply-constrained platforms contributed to improved pricing.
• Capacity Utilization93.7%93.1% in 1Q26; the company expects utilization to remain around 95%, excluding new capacity.
• 3Q26 GuidanceRevenue +2% to +4% QoQ; gross margin 26% to 28%ASP is expected to remain stable, while higher utilization should help lower unit costs.
• 2026 Depreciation ForecastClose to USD 5bn; approximately +30% YoYDepreciation is a significant pressure on gross margin.
• Target Price and ValuationHKD 75.00; 3.5x 2026F P/BThe report states that the stock trades at 3.3x 2026F P/B.

Impact & implications

For SMIC, supply-demand tightness in AI peripheral chips, BCD/analog, logic, and certain memory-related demand enhances its bargaining power on specific platforms and benefits capacity utilization and gross margin. For the industry, the shift of overseas leading foundry resources toward AI may reshape mature-node foundry supply and demand and improve overall pricing conditions; however, demand recovery and price pass-through are uneven across end applications.

Risks

• 2026 depreciation is expected to increase by approximately 30% YoY, potentially continuing to erode gross margin.
• Manufacturing-chain cost inflation and higher summer utility expenses may exceed the offset from improved utilization and pricing.
• Weak demand in smartphones, consumer electronics, and certain industrial and automotive segments, together with customer destocking, may delay pricing negotiations.
• Following customer pull-ins in 2Q26, demand and shipment pacing may normalize, limiting volume growth in 3Q26.
• There is uncertainty around new capacity and expansion timing, while the company retains part of its capacity for R&D.

What to watch

• Whether 3Q26 QoQ revenue growth falls within the 2% to 4% guidance range.
• Whether 3Q26 gross margin can reach 26% to 28%, and the extent of pass-through from new pricing initiatives.
• Order and pricing trends for AI peripheral chips, BCD/analog, logic, and optical-module-related products.
• Destocking progress, restocking behavior, and subsequent price negotiations among smartphone and consumer-electronics customers.
• Whether capacity utilization can remain high, and the actual impact of depreciation and utility costs on gross margin.
• The sustainability of localized manufacturing in China, returning overseas orders, and the restructuring of mature-node supply and demand.