Pricing and mix improvements offset cost pressures; maintain Neutral rating on SMIC

Overview

SMIC's second-quarter revenue and gross margin both materially exceeded company guidance, driven by higher shipments, selective price increases, and customer pull-ins. Nomura believes demand for AI-related peripheral chips, the displacement effect from overseas capacity, and localized manufacturing demand are improving supply-demand conditions and pricing for mature-node processes, sufficiently offsetting near-term cost pressures from higher depreciation and electricity tariffs.

Core views

The company has not raised prices across the board; instead, it is negotiating new pricing with platforms and customers facing supply shortages, particularly in AI peripherals, BCD/analog, and specialty memory. Pricing improvement for 8-inch wafers may be stronger than for 12-inch wafers. As new pricing initiatives continue to flow through and capacity utilization remains high, third-quarter gross margin still has room to rise. The company remains more cautious on pricing for smartphones, consumer electronics, and certain industrial and automotive applications.

Analysis framework

Based on actual second-quarter results and management guidance, the analysis compares Nomura's pre-results forecasts and market expectations, and assesses earnings trends using wafer shipments, average selling prices, capacity utilization, costs, and downstream application mix. Valuation uses a 2026F price-to-book methodology.

Methodology notes

• Valuation methodsPrice-to-book method

  The target price is based on 3.5x 2026F book value per share.

  This valuation multiple is at the high end of SMIC's historical trading range of 0.7x-4.0x and references the relationship between P/B and return on equity for global semiconductor companies.

• Operating analysisVolume, pricing, and capacity-utilization analysis

  Gross-margin trends are assessed through changes in shipments, average selling prices, capacity utilization, and costs.

  Second-quarter shipment growth and higher average selling prices jointly drove revenue and gross-margin improvement; high production loading helps dilute unit costs.

Asset mapping & comparison

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

• SMIC (0981.HK)

  Covered company

  Strengths

  Demand for AI peripheral chips, BCD/analog, and specialty memory is relatively strong; high capacity utilization helps dilute costs; localized manufacturing in China and overseas capacity displacement create order opportunities.

  Weaknesses

  Demand in some end markets, including smartphones and consumer electronics, remains weak; new capacity and rising depreciation continue to pressure margins.

  Comparison

  The target price uses 3.5x 2026F P/B, at the high end of the company's historical 0.7x-4.0x P/B range; the report states that the shares trade at approximately 3.3x 2026F P/B.

  Risks

  Weaker-than-expected end-market demand, weaker-than-expected pricing negotiations, higher depreciation and energy costs, changes in the pace of capacity expansion, and industry competition.

Key data

• 2Q26 revenueUSD3,006mnUp 20.0% quarter on quarter and 36.1% year on year.
• 2Q26 gross margin25.3%Up 5.2 percentage points from 20.1% in 1Q26.
• 2Q26 wafer shipments2,869 thousand wafers (8-inch equivalent)Up 14.4% quarter on quarter.
• 2Q26 average selling priceUp 5.7% quarter on quarterSupported jointly by pricing initiative pass-through and product mix.
• 2Q26 capacity utilization93.7%93.1% in 1Q26.
• 3Q26 revenue guidanceUp 2%-4% quarter on quarterThe company expects average selling prices to remain stable.
• 3Q26 gross-margin guidance26%-28%High utilization is expected to offset depreciation and summer electricity-tariff pressure.
• 2026 depreciation forecastClose to USD5bnThe company expects year-on-year growth of approximately 30%.

Impact & implications

The core driver of near-term earnings improvement is pricing rather than product-mix optimization alone. If AI peripheral chips, computing, BCD/analog, and specialty memory remain in short supply, bargaining power and earnings resilience in mature-node processes may persist. However, third-quarter revenue growth has already slowed, while the recovery in consumer electronics and smartphone demand and the pace of restocking will determine whether broader price increases can be achieved.

Risks

• A weaker-than-expected recovery in demand from smartphones, consumer electronics, and industrial/automotive markets.
• Inventory destocking after customer pull-ins, resulting in lower shipments.
• Year-on-year depreciation growth and higher summer electricity tariffs exceeding cost dilution from high utilization.
• Tight supply-demand conditions remaining limited to certain platforms, resulting in weaker-than-expected pricing improvement.
• Intensifying mature-node competition or capacity expansion outpacing demand.

What to watch

• Whether 3Q26 revenue growth falls within the 2%-4% quarter-on-quarter guidance range.
• Whether 3Q26 gross margin can reach 26%-28% and the degree of pass-through from new pricing initiatives.
• The sustainability of orders and pricing for AI peripherals, computing, BCD/analog, and specialty memory.
• The completion of customer destocking and progress in restocking for smartphones and consumer electronics.
• Whether capacity utilization can remain high and the actual impact of depreciation and electricity costs on margins.
• The company's subsequent standalone disclosure of AI peripheral revenue.