Cambricon benefits from China’s AI localization wave; improved supply visibility drives target-price hike

Overview

This report constitutes Morgan Stanley’s company research and earnings commentary on Cambricon Technology. The firm believes Cambricon is positioned at the cusp of China’s AI chip localization and accelerating investment in AI infrastructure. Strong 1Q26 results validate the resilience of domestic AI demand, while improvements in the supply chain enhance visibility into future shipments and revenues. The report maintains an Overweight rating and raises the target price from Rmb1,588 to Rmb2,000.

Core views

Key insights include: First, robust 1Q26 performance has triggered a market reassessment, with order resilience and growth in advance receipts underscoring solid customer demand. Second, MLU580, MLU590, and MLU690 provide a clearer path to product delivery, with MLU580 expected to ramp up in Q3 2026 and MLU690 slated to begin shipping in Q4 2026. Third, China’s AI accelerator market is driven by inference demand and export controls, with the domestic substitution rate poised for rapid expansion. Fourth, although the absolute valuation appears elevated, the report contends that strong revenue and EPS growth, coupled with improved supply-chain visibility and industry positioning, can support a premium valuation.

Analysis framework

The report integrates an earnings review, supply-chain research, TAM and domestic substitution-rate projections for the AI chip market, product roadmaps, customer demand assessments, revised financial forecasts, and a residual income valuation model, supplemented by bull-bear scenarios and relative valuation to gauge risk-reward dynamics.

Methodology notes

• Valuation methodsResidual income model

  Residual Income Valuation Model

  The report continues to employ the residual income model to derive the base-case target price, with key assumptions including an 8.4% cost of equity, a 57% long-term dividend payout ratio, a 16% mid-term growth rate, and a 6.0% terminal growth rate.

• scenario_analysisbull/base/bear case

  Bull, Base, and Bear Scenarios

  The report sets a base-case target price of Rmb2,000, while raising the bull-case valuation to Rmb3,778 and the bear-case valuation to Rmb1,008, to bracket the valuation range under varying degrees of growth realization and competitive pressure.

• financial_forecastMorgan Stanley ModelWare

  Earnings Forecast Revision

  The report updates revenue, gross margin, net profit, and EPS forecasts using the Morgan Stanley ModelWare framework, primarily reflecting the normalization of the SMIC supply chain and stronger demand for domestically produced AI chips.

Asset mapping & comparison

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

• Cambricon Technology Corporation (688256.SS)

  Research Subject; Chinese A-share AI Chip Company

  Strengths

  Strong 1Q26 results and robust growth in advance receipts; MLU580 has entered production and is expected to ramp up in Q3 2026; MLU690 is slated to ship in Q4 2026; deep partnerships with major CSP customers; benefits from AI chip domestic substitution.

  Weaknesses

  Valuation remains elevated; shifting the supply chain to SMIC still poses yield challenges; gross margin may be pressured by pricing competition and cost fluctuations.

  Comparison

  The report characterizes the company as China’s second-largest domestic AI chip supplier after Huawei’s Ascend; compared with leading overseas manufacturers, domestic players still trail in process-node capabilities but can narrow the performance gap through packaging, system architecture, and software-hardware optimization.

  Risks

  Lower-than-expected domestic AI capital expenditure, slower progress in LLM commercialization, loss of market share, inability to secure large-scale orders from top-tier customers, intensified price competition, rising wafer-manufacturing costs, and underutilized capacity.

• China AI Accelerator Market

  Core Industry Driver

  Strengths

  Accelerating inference demand, export controls spurring domestic substitution, rising CSP capital expenditure and large-model token demand driving long-term TAM expansion.

  Weaknesses

  Intensifying competition may push the market into a more aggressive share-grabbing phase sooner than expected; pricing pressures are beginning to emerge.

  Comparison

  Compared with global giants like NVIDIA, Chinese suppliers lag in process technology but may gain share in the domestic market through lower TCO, deployability, customer service, and ecosystem support.

  Risks

  Price erosion, premature commoditization of products, insufficient software ecosystems, and slower-than-expected customer adoption rates.

• SMIC Supply Chain

  Critical Support for Cambricon’s Supply and Localization Journey

  Strengths

  The SMIC-manufactured MLU580 version has completed tape-out and entered production, with supply-chain normalization progressing faster than anticipated.

  Weaknesses

  Yield remains a challenge, and production ramp-up will take time.

  Comparison

  Shifting the supply chain domestically enhances controllability but still carries execution and capacity-ramp risks compared with mature overseas networks.

  Risks

  Yield improvements falling short of expectations, capacity constraints, rising costs, and delays in achieving mass-production rhythms.

Key data

• Target PriceRmb2,000.00Raised from Rmb1,588 to Rmb2,000.
• RatingOverweightMaintains an Overweight rating, with an Attractive industry view.
• Current Stock PriceRmb1,699.96Closing price as of April 30, 2026.
• Upside to Target Price18%Relative to the April 30, 2026, closing price.
• 1Q26 Stock Performance+20%The stock surged to its daily limit on April 30, 2026, following the release of 1Q26 results, while the CSI 300 rose by 0.8% over the same period.
• 1Q26 Advance ReceiptsRmb1.9 billionA 155% sequential increase, highlighting demand strength and order visibility.
• China AI Chip Market TAMUS$67 billion by 2030The report projects a compound annual growth rate of approximately 23% starting in 2024.
• Domestic Substitution Rate Forecast86% by 2030Expected to climb from 41% in 2025 to 86% by 2030.
• Revenue Forecasts2026/2027/2028: +3%/+16%/+16%Reflecting supply-chain stabilization and heightened demand for domestic AI accelerators.
• EPS Forecasts2026/2027/2028: +8%/+15%/+11%corresponding to EPS estimates of Rmb15.63, Rmb25.92, and Rmb35.43.
• 2026 Revenue ForecastRmb21.669 millionRepresents 2026E net sales.
• 2026 Gross Margin Assumption50.9%Increased from 50.6%, supported by product mix and economies of scale.
• 2025-2028 Revenue CAGR99%A base-case assumption driven by domestic generative AI infrastructure spending.
• 2025-2028 EPS CAGR94%The report anticipates rapid EPS growth for Cambricon during this period.
• Current Valuation~109x 2026E P/E; ~37x 2026E P/SThe report acknowledges the absolute valuation as high but argues it is justified by strong growth and improved supply-chain visibility.

Impact & implications

From an investment perspective, Cambricon is viewed as a key beneficiary of China’s high-end AI chip localization. If SMIC’s supply chain ramps up, MLU580 enters mass production, and the MLU690 roadmap progresses as planned, the company’s revenue and profit growth visibility will strengthen, potentially supporting continued premium valuations. However, if domestic AI capital expenditure slows, price competition intensifies, or yield improvements fall short of expectations, the elevated valuation could amplify downside risks.

Risks

• Domestic AI capital expenditure and LLM commercialization progress slower than expected, resulting in a 2025-2028 revenue CAGR below the report’s assumptions.
• Intensified competition for market share in China’s AI chip sector, preventing Cambricon from securing sustained large-scale orders from top-tier customers.
• Escalating price competition, rising wafer-manufacturing costs, or underutilized capacity could drive 2026 and 2027 gross margins below the bear-case assumption of 40%.
• Execution risks in SMIC’s production transfer and yield improvements could hinder MLU580’s ramp-up and subsequent product deliveries.
• At an elevated valuation level, the stock may be particularly sensitive to downward revisions in revenue, EPS, or supply-chain progress.
• Recovery in NVIDIA supply, shifts in the pace of domestic substitution, or advances by other domestic competitors could erode Cambricon’s relative advantage.

What to watch

• The pace of MLU580’s mass production and customer adoption in Q3 2026.
• Whether MLU690 can begin shipping in Q4 2026 and whether its performance improves to near the reported target of roughly 2.2x.
• SMIC’s yield improvements, capacity ramp-up, and cost dynamics.
• Domestic CSP capital expenditure, AI inference demand, GPU leasing prices, and token price trends.
• Whether advance receipts, inventory, accounts receivable, and order visibility continue to confirm demand strength.
• The extent to which the 2026-2028 revenue, gross margin, and EPS forecasts materialize.
• New-product launches and customer-ecosystem developments at industry events such as WAIC 2026.