Goldman Sachs maintains a Buy rating on SMIC, with AI demand, utilization, and product mix supporting upside

Overview

This is Goldman Sachs' earnings review and valuation update on SMIC. The report notes that SMIC's 1Q26 gross margin came in above Goldman Sachs' expectations, and that 2Q26 should remain strong as orders, utilization, product mix, and ASP improve. Goldman Sachs maintains Buy ratings on the A and H shares and slightly raises the H-share target price to HK$135 and the A-share target price to Rmb243.4.

Core views

The core view is that SMIC's 2026 growth drivers are becoming clearer: first, the AI trend is boosting demand for analog and logic supporting chips; second, as overseas peers shift further toward high-end AI chips, demand for mainstream products is improving; third, continued capacity expansion is unlocking more revenue room; fourth, domestic customers are increasing demand for supply-security reasons; and fifth, demand growth for high-margin products such as memory and BCD is outpacing traditional products, which should help improve product mix. The report also acknowledges ongoing depreciation and amortization pressure, but believes pricing for higher-demand products and product-mix improvement can partially offset it.

Analysis framework

The report updates its 2026 to 2029 earnings forecasts based on 1Q26 results, 2Q26 management guidance, order and demand mix, capacity expansion, and gross margin and expense assumptions, and derives the H-share target price using a discounted P/E approach; the A-share target price is based on the 196% A-H valuation premium relative to the H share.

Methodology notes

• Valuation methodsDiscounted P/E valuation

  Based on the 2028E target P/E multiple and discounted back to 2026E

  The HK$135.0 12-month H-share target price is based on an 80.7x 2028E P/E, discounted back to 2026E using a 15.0% cost of equity; the target multiple reflects the relationship between peers' earnings growth and trading P/E multiples.

• Relative valuationA-H valuation premium

  A-share target price based on the historical average premium to the H share

  The Rmb243.4 12-month A-share target price is based on a 196% valuation premium to the H share, derived from SMIC's average A/H valuation premium since January 2024.

• Factor analysisGoldman Sachs Factor Profile

  Growth, financial return, valuation multiples, and a composite factor profile

  The Goldman Sachs factor profile compares a stock's position versus the market and industry peers using growth, financial return, valuation multiples, and composite indicators; the report discloses the framework's standard definition.

Asset mapping & comparison

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

• SMIC (H) 0981.HK

  Core coverage name

  Strengths

  China's largest foundry, with growth supported by AI-related supporting chips, demand for mainstream products, domestic customers' supply-security needs, and ongoing capacity expansion.

  Weaknesses

  Depreciation and amortization rise with capex, and the 2026E gross margin assumption has been slightly lowered.

  Comparison

  The report says the H-share target price is based on the relationship between peers' earnings growth and P/E, and SMIC-H is valued lower than SMIC-A when growth is similar.

  Risks

  Demand for smartphones and consumer electronics weaker than expected, slower-than-expected product diversification or capacity expansion, and constrained equipment and materials supply.

• SMIC (A) 688981.SS

  Same-company A-share mapping

  Strengths

  Shares the same fundamental improvement logic as the H share and is influenced by the A-H valuation premium framework.

  Weaknesses

  A-share valuation depends on the relative premium to the H share; a narrowing premium would affect the target price.

  Comparison

  The A-share target price is based on a 196% valuation premium relative to the H share.

  Risks

  Volatility in the A-H premium, company-specific fundamental risks, and regulatory/supply-chain restrictions.

Key data

• 2Q26 revenue guidance+14% to +16% QoQManagement said the strong guidance is supported by orders from consumer and IoT customers, AI-related chips, and semiconductor demand for edge-AI devices.
• 2Q26 gross margin guidance20% to 22%Management expects both volume and ASP to increase, supporting gross margin.
• 1Q26 capital expenditureUS$1.6bn, +10% YoY1Q26 new capacity was 19.5k wpm, on an 8-inch-equivalent basis.
• 2026E revenue forecastUS$11.578bn, +24% YoYGoldman Sachs' model shows 2026E revenue rising from US$9.327bn in 2025E to US$11.578bn in 2026E.
• 2026E gross margin forecast22.1%Down 0.6 percentage points from the prior forecast, but still above the 2025E 21.0%.
• 2029E revenue forecastUS$19.967bnThe model shows revenue rising from US$8.030bn in 2024 to about US$20.0bn in 2029E.
• 2029E gross margin forecast29.0%Goldman Sachs expects gross margin to gradually recover from 18.0% in 2024 to 29.0% in 2029E.
• H-share target priceHK$135.0Slightly raised from the prior HK$134.
• A-share target priceRmb243.4Raised from the prior Rmb241.6.

Impact & implications

The implications for SMIC are broadly positive: demand for supporting chips from AI infrastructure and edge AI should provide revenue and gross margin support through utilization, ASP, and product mix; continued capacity expansion raises the long-term revenue ceiling. For investors, the key is whether pricing and product-mix improvement in higher-demand products can continue to offset depreciation and amortization pressure, and whether the company can keep advancing capacity and product upgrades under U.S. BIS Entity List restrictions.

Risks

• Demand for smartphones and consumer electronics weaker than expected.
• Slower-than-expected product diversification and capacity expansion.
• Because the company is on the U.S. BIS Entity List, some equipment or material supply may be constrained.
• Rising depreciation and amortization could continue to weigh on gross margin.
• Changes in the A-H valuation premium or target P/E assumptions could affect the target price.

What to watch

• Whether 2Q26 revenue achieves 14% to 16% QoQ growth.
• Whether 2Q26 gross margin reaches the 20% to 22% guidance range.
• The persistence of orders for AI-related supporting chips, data center PMICs, and semiconductors related to robots and smart EVs.
• The pace of capacity expansion, capital expenditure, and depreciation and amortization pressure.
• The growth rate and revenue contribution of high-margin products such as memory and BCD.
• Whether restrictions on equipment and materials supply related to the U.S. BIS Entity List intensify.