AI demand, product mix, and capacity expansion support SMIC's growth; Goldman Sachs maintains Buy

Overview

This report is Goldman Sachs' earnings review and valuation update on SMIC. The core conclusion is that AI-related supporting-chip demand, improved demand for mainstream products, continued capacity expansion, domestic customers' need for supply security, and a higher mix of higher-margin products will together drive SMIC's revenue growth in 2026 and over the medium to long term. Goldman Sachs maintains Buy ratings on SMIC's A- and H-shares and slightly raises the target prices.

Core views

Goldman Sachs believes SMIC's growth outlook for 2026 is more positive than before. The 2Q26 revenue guidance implies qoq growth of 14%-16%, driven by stockpiling from consumer and IoT customers and demand for semiconductors used in AI edge devices such as AI data center PMICs, robotics, and smart electric vehicles. Management expects both 2Q volume and ASP to improve, with gross margin reaching 20%-22%. Although capacity expansion will bring depreciation pressure, price increases for high-demand products and an improved product mix are expected to sustain the gross margin recovery trend.

Analysis framework

The report incorporates 1Q26 results and 2Q26 guidance into its model, raises 2026-2029E revenue and earnings forecasts, and uses a discounted P/E approach to estimate the H-share target price; the A-share target price is derived from the H-share target price and the 196% average A-H valuation premium. The valuation multiple references the relationship between peers' earnings growth and trading P/E multiples.

Methodology notes

• Valuation methodsDiscounted P/E valuation

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

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

• Valuation methodsA-H valuation premium method

  Add the A-share relative premium to the H-share target price

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

• factor frameworkGS Factor Profile

  Compare stock attributes across growth, financial returns, valuation multiples, and composite factors

  Goldman Sachs' factor framework uses standardized rankings to measure growth, financial returns, and valuation multiples, and calculates a composite percentile to provide investment context across covered stocks and industry peers.

Asset mapping & comparison

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

• SMIC H-share 0981.HK

  core covered name of the report

  Strengths

  Demand for AI-related supporting chips, higher capacity utilization, ASP improvement, a product mix tilt toward higher-margin products, and long-term growth in domestic wafer foundry demand.

  Weaknesses

  Depreciation and amortization pressure from capacity expansion, and consumer electronics and smartphone demand may still fluctuate.

  Comparison

  The H-share target price is derived from an 80.7x 2028E P/E discounted back; at the same growth level, the H-share valuation is lower than the A-share valuation, and the A-H premium is used to derive the A-share target price.

  Risks

  Demand weaker than expected, product diversification or capacity expansion slower than expected, and restrictions on some equipment or material supply due to the BIS entity list.

• SMIC A-share 688981.SS

  the A-share listing of the same company

  Strengths

  Benefits from the same fundamental improvement logic, including AI demand, domestic customer demand, and capacity expansion.

  Weaknesses

  Valuation embeds a relatively high A-H premium, making it more sensitive to market risk appetite and premium compression.

  Comparison

  The A-share target price is derived from the H-share target price and the 196% average A-H valuation premium.

  Risks

  Narrowing A-H valuation premium, weaker-than-expected demand or gross margin recovery, and supply chain constraints.

Key data

• 2Q26 revenue guidance+14%-16% QoQManagement said this is supported by stocking by consumer and IoT customers and AI-related demand.
• 2Q26 gross margin guidance20%-22%Higher volumes, ASP improvement, and product mix optimization support gross margin.
• 1Q26 capexUS$1.6bnUp 10% year over year.
• 1Q26 added capacity19.5k wpmMeasured on an 8-inch equivalent basis, below 4Q25's 36.0k wpm.
• 2026E revenue forecastUS$11.578bnRaised by 4% versus the previous forecast.
• 2026E gross margin forecast22.1%Lowered by 0.6 percentage points versus the previous forecast, mainly reflecting depreciation and amortization pressure.
• 2029E revenue forecastUS$19.967bnRevenue is expected to continue growing over the forecast period.
• 2029E net profit forecastUS$2.966bnForecast net profit rises significantly versus US$1.184bn in 2026E.
• 12-month H-share target priceHK$135.0Previously HK$134.
• 12-month A-share target priceRmb243.4Previously Rmb241.6.
• Cost of equity assumption15.0%Composed of Beta 1.8, risk-free rate 3.5%, and equity risk premium 6.5%.

Impact & implications

If AI-related demand and domestic customers' need for supply security continue, SMIC is likely to see support in revenue, ASP, and product mix, while gradually repairing gross margin. The depreciation pressure from high capex remains a near-term constraint on margins, but the report believes pricing on high-demand products and expanding revenue scale can partially offset this impact. From a valuation perspective, Goldman Sachs believes the company's long-term growth is solid and its share price remains attractive relative to historical average P/E.

Risks

• Smartphone and consumer electronics demand weaker than expected.
• Product diversification and capacity expansion slower than expected.
• The company being added to the U.S. BIS entity list, which may restrict supply of certain equipment or materials.
• Continued capex leading to higher-than-expected depreciation and amortization pressure, weighing on gross margin recovery.
• A narrowing A-H valuation premium may affect the derivation of the A-share target price.

What to watch

• Whether 2Q26 revenue achieves the guided 14%-16% qoq growth.
• Whether 2Q26 gross margin can reach the guided range of 20%-22%.
• The sustainability of orders for AI-related PMICs, robotics, smart electric vehicles, and other edge AI semiconductors.
• Whether ASP improvement and a better high-margin product mix can offset depreciation and amortization pressure.
• The impact of 2026 capex, capacity release, and 30% year-over-year depreciation growth.
• Whether the A-H valuation premium remains near the historical average level of 196%.