MetaX's second-quarter revenue met expectations but gross margin was weak; Morgan Stanley maintains Equal-weight

Overview

This report reviews MetaX Integrated Circuits' 2Q26 results. Revenue, driven by shipments of the new C600 product, was broadly in line with expectations, but gross margin and earnings excluding non-recurring gains were weaker than forecast. Morgan Stanley therefore maintains Equal-weight while awaiting the C700's tape-out and mass-production stages.

Core views

2Q26 revenue was Rmb762mn, up 36% QoQ and 28% YoY, broadly in line with Morgan Stanley's Rmb772mn forecast. Growth was primarily driven by shipments of the new-generation C600 series, indicating that the ramp-up of new products had become the core driver of revenue expansion during the quarter. The AlphaSignals section characterized the results relative to consensus as “Meaningful upside,” while also indicating a modest downward revision to consensus EPS over the next 12 months. Gross margin was the main weakness in these results. The 2Q26 gross margin was 55.1%, 4 percentage points below Morgan Stanley's forecast. According to its supply-chain checks, the pressure stemmed partly from rising memory costs, especially HBM costs, and partly from strategic price cuts implemented by the company to expand market share. Together, these two factors weakened the conversion of revenue growth into gross profit growth. Reported profit must be separated into recurring operating performance and valuation gains. Net profit attributable to shareholders reached Rmb711mn, significantly above Morgan Stanley's forecast, but included Rmb883mn in fair-value gains on financial assets. Excluding this non-recurring factor, the underlying net loss was Rmb172mn, which was weaker than its forecast. Therefore, the quarterly earnings beat does not mean that the core operating business achieved a comparable improvement in profitability. In terms of working capital, inventory was Rmb1.4bn, broadly flat QoQ, and the report believes inventory growth was under control. Prepayments rose to Rmb2.2bn, reflecting the company's advance procurement of wafers and HBM to secure future production. This combination indicates that while controlling existing inventory, the company is using prepayments to secure critical inputs in preparation for future product supply. Product competitiveness remains critical to the rating assessment. The report notes that the C600 primarily uses the N+1 (12nm) node and slightly trails peers in energy efficiency and thermal performance. This technological gap is expected to continue constraining product pricing and gross margin. Even though the C600 is delivering rapid revenue growth, the current product's cost and performance constraints continue to limit the scope for profitability improvement. Morgan Stanley therefore reiterates its Equal-weight rating and places the next stage of its assessment on the C700's tape-out and mass-production ramp. ModelWare forecasts a path of rapid revenue expansion and a gradual return to profitability: net revenue rises from Rmb1,644.1mn in 12/25 to Rmb4,085.5mn in 12/26e, Rmb6,208.6mn in 12/27e, and Rmb7,482.9mn in 12/28e; EBITDA improves from Rmb(543.3)mn to Rmb81.8mn, Rmb434.9mn, and Rmb856.9mn; and ModelWare net profit moves from Rmb(786.8)mn to Rmb24.0mn, Rmb554.9mn, and Rmb996.9mn. EPS over the same period is Rmb(2.1), Rmb0.1, Rmb1.4, and Rmb2.5, implying that the model assumes the company will achieve a small profit in 12/26e and continue expanding earnings over the following two years. In terms of valuation, the target price is Rmb758.00, implying 12% upside from the August 28, 2026 closing price of Rmb674.90. Key assumptions include a 6.5% cost of equity, a beta of 0.75, a 2.0% risk-free rate, a 6.5% equity risk premium, a 51% long-term target payout ratio (previously 50%), an 18% medium-term CAGR through 2038e, and a 6% perpetual growth rate. The report also lists faster CUDA migration, stronger orders from governments and cloud service providers, and a better-than-expected C600 ramp as upside scenarios; product concentration, weaker-than-expected demand, and intensifying competition constitute downside scenarios.

Analysis framework

The report first compares 2Q26 revenue, gross margin, and net profit with Morgan Stanley's forecasts and consensus expectations, then excludes fair-value gains to identify recurring earnings. It subsequently uses supply-chain checks to explain the effects of HBM costs and price cuts on gross margin and examines the stocking behavior reflected in inventory and prepayments. Finally, the report compares the C600's process node, energy efficiency, and thermal performance with peers and combines ModelWare financial forecasts, long-term valuation parameters, and C700 product progress to conclude that the Equal-weight rating should be maintained.

Methodology notes

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Analysis of differences between actual results, Morgan Stanley forecasts, and consensus expectations

  The report separately assesses whether revenue met expectations, whether gross margin was below expectations, and why net profit substantially exceeded expectations, thereby identifying the difference between headline financial figures and core operating performance.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Industry Chain Transmission

  Supply-chain checks and the pass-through of key input costs

  Using supply-chain checks, Morgan Stanley attributes the weak gross margin to rising memory costs, especially HBM costs, and strategic price cuts implemented to expand market share.

• (Out-of-Vocabulary Method)

  Morgan Stanley ModelWare framework

  The report uses ModelWare to consistently organize historical and forecast indicators such as revenue, EPS, EBITDA, net profit, returns, and valuation multiples, while using consensus expectations provided by Refinitiv Estimates as a benchmark for certain comparisons.

• Valuation MethodDDM Dividend Discount Model

  Equity valuation approach based on the cost of equity, target payout ratio, and long-term growth rate

  The report constructs the long-term valuation assumptions required for the target price using a 6.5% cost of equity, a 51% long-term target payout ratio, an 18% medium-term CAGR through 2038e, and a 6% perpetual growth rate.

• Quantitative/Factor/Portfolio TheoryCAPM Capital Asset Pricing Model

  Deriving the cost of equity from beta, the risk-free rate, and the equity risk premium

  The report states that the 6.5% cost of equity is based on a beta of 0.75, a 2.0% risk-free rate, and a 6.5% equity risk premium. These parameters are used for long-term valuation.

Asset mapping & comparison

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

• MetaX Integrated Circuits (688802.SH)

  The primary company covered by the report; 2Q26 revenue met expectations, but gross margin and recurring profitability were weak.

  Strengths

  C600 shipments drove revenue growth of 36% QoQ and 28% YoY; inventory was broadly flat QoQ, while prepayments were used to secure wafer and HBM supply in advance.

  Weaknesses

  Gross margin was 4 percentage points below forecast, and the company still recorded an underlying net loss of Rmb172mn after excluding fair-value gains; the C600 slightly trails peers in energy efficiency and thermal performance.

  Comparison

  The report believes that the C600 uses the N+1 (12nm) node and slightly trails peers in energy efficiency and thermal performance.

  Risks

  Product concentration, weaker-than-expected demand, intensifying competition, and continued gross margin pressure from HBM costs and strategic price cuts.

Key data

• 2Q26 revenueRmb762mnUp 36% QoQ and 28% YoY; broadly in line with Morgan Stanley's Rmb772mn forecast and primarily driven by C600 shipments.
• 2Q26 gross margin55.1%4 percentage points below Morgan Stanley's forecast.
• 2Q26 net profit attributable to shareholdersRmb711mnSignificantly above forecast, but supported by non-recurring fair-value gains.
• Fair-value gains on financial assetsRmb883mnExcluding this, the underlying net loss was Rmb172mn, weaker than Morgan Stanley's forecast.
• InventoryRmb1.4bnBroadly flat QoQ, with inventory growth under control.
• PrepaymentsRmb2.2bnReflects the company's advance stocking of wafers and HBM for future production.
• Rating and industry viewEqual-weight / AttractiveThe company rating remains Equal-weight, while the industry view is Attractive.
• Target price and upsideRmb758.00 / 12%Relative to the August 28, 2026 closing price of Rmb674.90.
• 52-week price rangeRmb1,033.00–479.01Range listed on the report cover.
• Current diluted shares outstanding400mnMarket data from the report cover.
• Current market capitalization and enterprise valueRmb269,960.0mn / Rmb260,597.1mnCurrent market capitalization and current EV, respectively.
• Average daily trading valueRmb1,515mnAverage daily trading value listed in the report.
• Net revenue forecastRmb1,644.1mn / Rmb4,085.5mn / Rmb6,208.6mn / Rmb7,482.9mnCorresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• EPS forecastRmb(2.1) / Rmb0.1 / Rmb1.4 / Rmb2.5Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• EBITDA forecastRmb(543.3)mn / Rmb81.8mn / Rmb434.9mn / Rmb856.9mnCorresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• ModelWare net profit forecastRmb(786.8)mn / Rmb24.0mn / Rmb554.9mn / Rmb996.9mnCorresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• Price-to-earnings ratioNM / 11,259.4 / 486.5 / 270.8Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• Price-to-book ratio16.3 / 20.5 / 19.6 / 18.3Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• ROE(66.8%) / 0.2% / 4.2% / 10.0%Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• Free cash flow yield(0.6%) / (0.4%) / (0.3%) / 0.3%Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• Period-end leverage(71.1%) / (61.7%) / (53.3%) / (54.3%)Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• Dividend yield0.0% / 0.0% / 0.0% / 0.0%Corresponding sequentially to 12/25, 12/26e, 12/27e, and 12/28e.
• Cost of equity assumption6.5%The report states that it is based on a beta of 0.75, a 2.0% risk-free rate, and a 6.5% equity risk premium.
• Long-term target payout ratio51%Previously assumed at 50%.
• Medium-term CAGR and perpetual growth rate18% / 6%The medium-term CAGR assumption extends through 2038e, while the perpetual terminal-value growth rate is 6%.
• AlphaSignalsMeaningful upside / ↓ Modest revision lowerCorresponding respectively to results relative to consensus and the direction of consensus EPS over the next 12 months.

Impact & implications

The report believes that C600 shipments demonstrate that revenue growth momentum is being released, but the below-expected gross margin, continuing losses in the recurring business, and the 12nm product's slight disadvantage in energy efficiency and thermal performance mean that revenue growth has not yet been fully converted into improved profitability. Maintaining Equal-weight indicates that the current assessment remains balanced, while whether the C700 can complete tape-out smoothly and enter a mass-production ramp will affect whether the technological gap, pricing constraints, and gross margin pressure can be alleviated.

Risks

• High product concentration may amplify the impact of a single product underperforming expectations.
• Market demand may be weaker than expected.
• Intensifying competition may further affect market share, pricing, and profitability.
• Rising memory costs such as HBM, strategic price cuts, and the C600's shortcomings in energy efficiency and thermal performance may continue to constrain pricing and gross margin.

What to watch

• Tape-out progress and the mass-production ramp of the C700 series.
• Whether CUDA migration accelerates.
• Whether orders from governments and cloud service providers strengthen.
• Whether the C600 volume ramp exceeds expectations.