AMEC accelerates expansion of its etching and deposition platforms; BofA forecasts a 70% operating profit CAGR through 2028

Overview

The report assesses AMEC's 2Q26 results, progress in etching and deposition equipment, and its growth trajectory through 2027-2028. Its core view is that demand for wafer fabrication equipment in China, fab capacity expansion, and equipment localization will support continued revenue growth. Although heavy R&D investment is weighing on near-term operating margins, economies of scale and the ramp-up of deposition equipment are still expected to improve profitability.

Core views

2Q26 results were broadly in line with operating expectations, although the earnings mix was materially affected by non-operating gains. AMEC recorded revenue of CNY3.8bn, up 35% YoY and 30% QoQ, matching BofA Securities' CNY3.8bn forecast; gross margin was 39.6%, close to the 39.9% forecast. R&D expenses rose to a record CNY785mn, reducing the operating margin from 13% in 1Q26 to 11% in 2Q26. Net profit reached CNY1.9bn, up 382% YoY, mainly driven by valuation gains on equity investments; 1H26 EPS was CNY4.3. The report estimates that approximately 40% of 2026 EPS will come from revaluation and investment gains, meaning that the current net profit growth rate does not fully represent the growth of core operating earnings. Product progress provides the technical foundation for the medium-term growth outlook. AMEC's etching equipment is already being used in mass production of 128-layer NAND flash memory, while the company is also developing next-generation ultra-high-aspect-ratio CCP products. In logic chips, high-selectivity etching equipment for 7nm and below is undergoing customer validation. In deposition equipment, tungsten-series CVD, HAR, and ALD products now cover all process steps in memory chip manufacturing and have been validated by key memory customers; deposition equipment for advanced logic chip customers has also secured repeat orders. The report therefore believes that AMEC is not only maintaining its advantage in etching equipment but has also entered a more meaningful volume-ramp stage in the commercialization of deposition equipment. Revenue forecasts are based on three assumptions: demand for wafer fabrication equipment in China, capacity expansion, and localization. The report conservatively assumes that China's annual serviceable WFE market is USD50bn-55bn, that the localization rate for etching equipment supplied by AMEC and other domestic manufacturers will exceed 50%, and that AMEC will capture more than 10% market share in deposition equipment. Under these assumptions, revenue is expected to increase from CNY16.876bn in 2026 to CNY25.153bn in 2027 and CNY35.403bn in 2028, maintaining YoY growth of approximately 40%-50% in 2027-2028. BofA Securities believes its 2027 revenue forecast is above consensus, mainly due to strong order momentum and continued capacity expansion by domestic wafer fabs and memory manufacturers. The revenue mix is also expected to change. Etching equipment will remain the primary revenue driver, but the LPCVD ramp-up will provide an increasing contribution, with CVD expected to account for more than 30% of equipment sales by 2028. As the deposition business scales up and capacity utilization improves, the margin gap between LPCVD and etching equipment is expected to narrow. The company's platform strategy therefore both broadens its revenue sources and helps spread R&D expenses over a larger sales base. Profitability improvement will lag revenue growth because the report continues to assume high R&D investment. Gross margin is expected to remain at approximately 40% in 2027-2028, with operating margin at approximately 18%-20%, slightly below consensus expectations of a low-40% gross margin and low-20% operating margin. The report uses lower margin assumptions to reflect continued R&D investment but expects R&D expenses to be absorbed more effectively as revenue, particularly deposition equipment revenue, expands, allowing the operating margin to rise to approximately 20% by 2028. Operating profit is expected to increase from CNY2.433bn in 2026 to CNY4.417bn in 2027 and CNY7.054bn in 2028, corresponding to the report's cited operating profit CAGR of approximately 70% through 2028. Earnings forecast revisions reflect a mismatch among non-operating gains, high R&D expenses, and later-stage growth. The 2026 EPS forecast was raised from CNY3.93 to CNY4.89, the 2027 forecast was lowered from CNY5.06 to CNY4.82, and the 2028 forecast was raised from CNY6.26 to CNY7.40. Corresponding EBITDA forecasts were revised from CNY4.3146bn, CNY5.5436bn, and CNY6.8129bn to CNY5.2329bn, CNY5.3402bn, and CNY8.0144bn, respectively. Adjusted attributable net profit is forecast at CNY4.583bn in 2026, CNY4.534bn in 2027, and CNY6.963bn in 2028, representing YoY EPS growth of 115.5%, -1.5%, and 53.6%, respectively. The report raised its 2027-2028 revenue forecasts but lowered its operating margin assumptions because 2Q26 R&D expenses were higher than expected. Regarding financial position, the report states that the company maintains a healthy balance sheet and ample net cash. Net debt in the model is negative, at CNY-7.202bn, CNY-6.818bn, CNY-5.583bn, and CNY-5.543bn in 2025, 2026, 2027, and 2028, respectively. However, working capital requirements lead the model to forecast free cash flow of CNY-2.152bn, CNY-0.768bn, and CNY-0.040bn for 2026-2028, respectively. Operating cash flow is forecast at CNY-0.975bn, CNY0.032bn, and CNY0.760bn, respectively, indicating that the conversion of earnings growth into cash flow is expected to take time. On valuation, AMEC was trading at approximately 77x next-12-month P/E at the time of the report, versus a historical range of roughly 30x-90x. BofA Securities raised its price objective from CNY269.80 to CNY428, applying a 70x P/E multiple to average 2027 and 2028 EPS of CNY6.11, compared with the previous methodology of applying a 60x P/E multiple to average 2026-2027 earnings. The 70x multiple is near the upper end of the company's historical valuation range and broadly in line with the average 2027-2028 P/E of Chinese semiconductor equipment manufacturers. The report believes this valuation reflects the long-term revenue potential arising from equipment localization in China and the prospect of improved operating margins over the medium term, supporting its reiterated Buy rating.

Analysis framework

The report first compares 2Q26 revenue, gross margin, and expenses with its own forecasts, distinguishing core operating performance from valuation gains on equity investments. It then assesses product competitiveness based on mass production, customer validation, and repeat orders for etching and deposition products. The forecasting model uses the size of China's WFE market, equipment localization rates, and AMEC's share of the deposition equipment market as its main assumptions to project the revenue mix, gross margin, R&D expense absorption, and operating margin. It then compares these results with consensus expectations, the company's historical valuation range, and valuations of Chinese semiconductor equipment peers to derive its earnings forecasts and price objective.

Methodology notes

• Valuation MethodP/E and PEG Valuation

  Forward P/E valuation based on average 2027-2028 EPS

  The report multiplies average 2027 and 2028 EPS of CNY6.11 by a 70x P/E multiple to derive a CNY428 price objective, validating the multiple against the company's historical range of 30x-90x and the average valuation of Chinese semiconductor equipment peers.

• Industry/Sector Analysis FrameworkSupply-demand framework

  China WFE demand, fab capacity expansion, and equipment localization

  The report estimates AMEC's addressable equipment demand and revenue growth potential based on the annual size of China's wafer fabrication equipment market, capacity expansion by domestic wafer fabs and memory manufacturers, and the localization rate of etching equipment.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Spreading R&D investment over a larger sales base to improve operating margin

  The report believes that the ramp-up of deposition equipment and overall revenue expansion can better support R&D spending, allowing gross margin to remain at approximately 40% while operating margin gradually rises to approximately 20% by 2028.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Distinguishing core operating profit from revaluation and investment gains

  The report notes that the sharp increase in 2Q26 net profit was mainly driven by valuation gains on equity investments and estimates that approximately 40% of 2026 EPS will come from revaluation or investment gains. It therefore separately examines operating margin and subsequent core business growth.

• Company Fundamentals and Financial Framework

  method SM standardized operating performance, earnings quality, and validation metrics

  The report applies BofA Global Research's method SM methodology to conduct structured comparisons and validation of the income statement, balance sheet, cash flow, operating performance, earnings quality, and valuation metrics.

Asset mapping & comparison

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

• AMEC (688012.SS)

  A direct beneficiary of wafer fabrication equipment capacity expansion and localization in China, with growth jointly driven by its leading position in etching equipment and the ramp-up of deposition equipment.

  Strengths

  Etching equipment has entered mass production for 128-layer NAND, while logic etching products for 7nm and below are undergoing customer validation. Tungsten-series deposition products cover memory chip processes and have secured repeat orders from advanced logic customers. The balance sheet maintains ample net cash.

  Weaknesses

  R&D spending is high, and the operating margin declined to 11% in 2Q26. A substantial proportion of 2026 earnings comes from revaluation and investment gains, while free cash flow is expected to remain negative in the near term.

  Comparison

  The report's 2027 revenue forecast is above consensus, but its operating margin forecast is below consensus. The target valuation of 70x P/E is broadly in line with the 2027-2028 average for Chinese semiconductor equipment manufacturers.

  Risks

  Slower-than-expected new product development or higher R&D costs, intensifying competition among domestic peers, and further escalation of semiconductor trade restrictions.

Key data

• 2Q26 RevenueCNY3.8bnUp 35% YoY and 30% QoQ, in line with the report's forecast
• 2Q26 Gross Margin39.6%The report forecast 39.9%
• 2Q26 R&D ExpensesCNY785mnA record high, with operating margin declining from 13% in 1Q26 to 11%
• 2Q26 Net ProfitCNY1.9bnUp 382% YoY, mainly driven by valuation gains on equity investments
• 1H26 EPSCNY4.3The report estimates that approximately 40% of 2026 EPS will come from revaluation or investment gains
• 2026-2028 Revenue ForecastsCNY16.876bn / CNY25.153bn / CNY35.403bnRevenue is expected to grow approximately 40%-50% YoY in 2027-2028
• 2026-2028 Operating Profit ForecastsCNY2.433bn / CNY4.417bn / CNY7.054bnThe report forecasts an operating profit CAGR of approximately 70% through 2028
• 2027-2028 Margin AssumptionsGPM approximately 40%; OPM approximately 18%-20%Below consensus to reflect continued R&D investment
• 2028 CVD Equipment Sales Contribution30%+As a share of equipment sales, with deposition equipment becoming a more important revenue source
• 2026-2028 EPS ForecastsCNY4.89 / CNY4.82 / CNY7.40Previous forecasts were CNY3.93, CNY5.06, and CNY6.26, respectively
• 2026-2028 EBITDA ForecastsCNY5,232.9mn / CNY5,340.2mn / CNY8,014.4mnPrevious forecasts were CNY4,314.6mn, CNY5,543.6mn, and CNY6,812.9mn, respectively
• 2026-2028 Free Cash Flow ForecastsCNY-2.152bn / CNY-0.768bn / CNY-0.040bnMainly affected by working capital requirements
• Next-12-Month P/E77xThe company's historical P/E range is approximately 30x-90x
• Price Objective Valuation Basis70x × CNY6.11Based on average 2027-2028 EPS, implying a CNY428 price objective

Impact & implications

The report believes AMEC's growth will gradually shift from being driven solely by etching equipment to being jointly driven by its etching and deposition platforms. Capacity expansion by Chinese wafer fabs, the assumption that etching equipment localization will exceed 50%, and the assumption that deposition equipment will achieve more than 10% market share support rapid revenue growth in 2027-2028. Scaling up the deposition business is expected to spread R&D expenses over a larger revenue base and improve operating margins. However, near-term earnings remain affected by both high R&D investment and the high contribution from investment gains, while cash flow improvement is also expected to lag accounting profit growth.

Risks

• An upside risk is that domestic Chinese semiconductor manufacturers expand capacity faster than expected, generating higher equipment demand.
• AMEC's new product development may progress more slowly than expected, or R&D costs may exceed expectations.
• Competition among domestic semiconductor equipment peers may intensify further.
• Semiconductor trade restrictions may escalate further, particularly those involving critical equipment or materials such as lithography equipment.