SMIC’s Q2 2026 Guidance Beats Expectations; Buy Rating Maintained

Overview

This report reviews SMIC's Q1 2026 results and Q2 2026 guidance. The key conclusion is that the company delivered better-than-expected gross margins in Q1 2026 and provided Q2 2026 revenue guidance significantly above market consensus, reflecting strong operational momentum. Based on growing demand from domestic Fabless clients and AI-related opportunities, Goldman Sachs maintains its 'Buy' rating on SMIC’s A/H shares and assigns a high implied upside to its target price.

Core views

In terms of performance, SMIC reported Q1 2026 revenue of USD 2.51 billion, up 11% YoY and 1% QoQ, in line with management guidance and market expectations. The highlight was profitability: Q1 2026 gross margin reached 20.1%, not only hitting the top end of management’s guidance range (18%-20%) but also notably exceeding Goldman Sachs’ forecast of 19.0% and market consensus of 19.4%. Management attributed the margin improvement to an optimized product mix and higher average selling prices (ASP), with ASP rising 3% QoQ. On the expense side, operating expenses were controlled at 10.2% of revenue, resulting in operating profit of USD 248 million—8% above Goldman Sachs’ estimate and 4% above consensus. Net profit came in at USD 197 million, up 14% QoQ, broadly in line with expectations. Looking ahead, the company issued stronger-than-expected guidance for Q2 2026. Revenue is expected to grow 14%-16% QoQ, translating to approximately USD 2.86–2.91 billion—far surpassing Goldman Sachs’ prior forecast of +6% and market consensus of +7%, implying sustained high YoY growth of 29%-32%. Gross margin guidance for Q2 2026 is 20%-22%, roughly in line with market consensus (20.5%), indicating stable profitability even as revenue scales up. On operations and capacity, as of end-Q1 2026, the company’s monthly capacity (8-inch equivalent) had increased to 1.08 million wafers (from 1.06 million in the prior quarter). Despite continued capacity expansion, utilization remained healthy at 93.1% (down slightly from 95.7% last quarter), reflecting effective absorption of new capacity by downstream demand. The report notes that this combination of rising volume and pricing, alongside steady capacity ramp-up, validates the company’s ability to deliver on its long-term growth thesis.

Analysis framework

The report employs a classic analytical framework of 'results review + forward guidance validation + valuation.' First, it compares actual financial results against four benchmarks: Goldman Sachs’ own forecasts, market consensus, and company guidance to precisely identify outperformance drivers (primarily gross margin and ASP). Second, it focuses on the deviation between Q2 2026 guidance and market expectations to assess industry inflection points and shifts in the company’s market share. Finally, for valuation, it avoids simple current-year P/E multiples and instead uses a discounted forward P/E methodology, anchored additionally by historical A/H share premium averages, to account for the earnings volatility typical of capital-intensive semiconductor firms.

Methodology notes

• Valuation MethodPE/PEG valuation

  Discounted Forward P/E Valuation

  The H-share target price is based on a 2028E P/E of 80.3x, discounted back to 2026 using a 15% cost of equity. This approach is suitable for capital-intensive growth companies whose current earnings are depressed by depreciation but are expected to see rapid EPS growth in coming years, offering a fairer reflection of long-term earnings potential rather than short-term reported profits.

• Valuation Method

  A/H Share Historical Premium Anchoring

  The A-share target price is not independently modeled but derived by applying the average A/H premium since January 2024 (196%) to the H-share target price. This reflects the tendency for A/H valuation gaps in dual-listed stocks to exhibit mean-reversion or range-bound behavior; using the historical premium midpoint aligns better with A-share trading realities than pure fundamental valuation alone.

• Company Fundamentals & Financial FrameworkVolume-price decomposition

  Revenue Growth Driver Breakdown (Volume vs. ASP)

  The report decomposes QoQ revenue growth into two factors: 'flat wafer shipments' and 'ASP up 3% QoQ.' In foundry analysis, distinguishing whether growth stems from volume recovery or price increases is critical; ASP gains typically signal product mix upgrades or stronger pricing power, serving as a leading indicator of improved earnings quality.

Asset mapping & comparison

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

• SMIC (0981.HK)

  Primary beneficiary: Long-term growth driven by domestic Fabless demand and AI opportunities; Q2 2026 guidance beat validates sector strength

  Strengths

  Continuously improving gross margin, rising ASP, high capacity utilization, core position in domestic supply chain

  Weaknesses

  Higher net interest expenses (USD 24 million in Q1 2026 vs. net interest income of USD 45 million in same period last year)

  Risks

  Weaker-than-expected smartphone and consumer electronics demand; restrictions on equipment and material access due to U.S. BIS Entity List designation

• SMIC (688981.SS)

  A/H linked ticker: Benefits from same fundamental improvements, with additional historical A/H premium

  Strengths

  A-share liquidity premium, leadership position among semiconductor firms on STAR Market

  Weaknesses

  Significantly higher valuation than H-shares, more sensitive to earnings volatility

  Comparison

  A-share target price set by adding 196% historical avg. premium to H-share target

  Risks

  Slower-than-expected product diversification and capacity ramp; risk of A/H premium narrowing

Key data

• Q1 2026 RevenueUSD 2.51bnUp 11% YoY, 1% QoQ; in line with guidance and market expectations
• Q1 2026 Gross Margin20.1%Above Goldman Sachs’ forecast (19.0%) and consensus (19.4%); at upper end of guidance
• Q2 2026 Revenue Guidance14%~16% QoQSignificantly above Goldman Sachs’ forecast (+6%) and consensus (+7%)
• Q2 2026 Gross Margin Guidance20%~22%Broadly in line with consensus (20.5%)
• Q1 2026 Capacity (8-inch equiv.)1.08 million wafers/monthFurther expanded from 1.06 million last quarter
• Q1 2026 Utilization Rate93.1%Slightly down QoQ (95.7% last quarter) but remains high
• H-share Target PriceHK$134.0Based on 80.3x 2028E P/E discounted; implies 87.4% upside
• A-share Target PriceRMB 241.6Derived from H-share target + 196% historical avg. premium; implies 104.9% upside

Impact & implications

The report argues that SMIC’s significantly raised Q2 2026 revenue guidance confirms robust recovery in domestic Fabless client demand and incremental opportunities in AI-related chips. Sustained ASP improvement and product mix optimization indicate the company is gradually moving away from low-end price competition toward higher-value segments. For investors, this means the company is not only recovering in volume from the cycle trough but also achieving structural improvements in quality—supporting its long-term investment value even at elevated valuation multiples.

Risks

• Smartphone and consumer electronics end-demand recovery weaker than expected
• Product diversification and capacity expansion progressing slower than anticipated
• Potential restrictions on access to certain equipment and materials due to U.S. BIS Entity List designation