12-inch silicon carbide substrates open up long-term opportunities, but fair valuation drives downgrade to Neutral

Overview

SICC is a global leading supplier of silicon carbide substrates, with products covering 4-inch, 6-inch, 8-inch, and 12-inch sizes, and providing both conductive and semi-insulating substrates. The report believes the company will benefit from the adoption of silicon carbide in applications such as electric vehicles, AI data center power supplies, advanced packaging for AI chips, AR glasses, and automotive AR HUDs, while driving revenue and margin growth through large-size product upgrades, continued capacity expansion, and yield improvement. However, price declines in 6-inch and 8-inch products are pressuring near-term revenue and gross margin assumptions, while the current valuation has already largely reflected growth expectations; therefore, the rating is downgraded from Buy to Neutral.

Core views

Long-term fundamentals remain attractive: net profit CAGR is expected to be about 87% from 2026E to 2028E, the product mix will upgrade from small-size substrates to 8-inch and 12-inch products, and yield improvement is also expected to drive continued gross margin expansion. With lower unit chip cost, excellent thermal conductivity, and low dielectric loss, 12-inch substrates may enter fields such as advanced packaging, thermal interface materials, AR optical waveguides, and automotive displays. But industry yield improvement increases supply and drives price declines in traditional-size products, leading to earnings forecast cuts; meanwhile, the company's 2027E P/E is about 43x, and its valuation is not cheap relative to peers, with positives broadly priced in.

Analysis framework

The report analyzes earnings prospects by combining revenue and gross margin forecasts by product size, end-application penetration, industry supply-demand, and pricing trends, and determines the target P/E using a peer relative valuation framework. The target price is derived by applying a 32.2x target P/E to 2029E EPS and discounting it back to 2027E at a 12.5% cost of equity.

Methodology notes

• Valuation methodsDiscounted P/E method

  Valuation based on forward target P/E and discounting

  Apply a 32.2x target P/E to 2029E EPS and discount it back to 2027E at a 12.5% cost of equity to derive a 12-month target price of Rmb104.

• Relative valuationPeer P/E and forward fundamentals ratio

  Compare peers using the ratio of P/E to earnings growth and operating margin

  The target P/E references the average ratio of peer trading P/E to next-year EPS growth and operating margin, and is determined in combination with the company's 2029E to 2030E EPS growth of 14% and operating margin of 36%.

• Earnings forecastProduct-by-product revenue and gross margin forecast

  Break down pricing, revenue, and gross margin by substrate size

  Assess pricing trends, product mix, and gross margins for 4-inch and below, 6-inch, 8-inch, and 12-inch silicon carbide substrates separately to reflect the combined impact of large-size upgrades and industry price declines.

Asset mapping & comparison

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

• SICC (688234.SS)

  Core covered stock in the report

  Strengths

  A global leading supplier of silicon carbide substrates, with broad coverage of sizes and material types; leading 12-inch technology; R&D, capacity expansion, and product mix upgrades are expected to drive share and margin improvement.

  Weaknesses

  Near-term earnings are sensitive to price declines in 6-inch and 8-inch products, and gross margin performance in 2025 and 1Q26 indicates prior earnings assumptions were too aggressive.

  Comparison

  2027E P/E is about 43x; its ratio of trading P/E to earnings growth and operating margin is about 0.4x, broadly close to the 0.3x to 0.5x peer range for InnoScience, ST Micro, Starpower, and Naura.

  Risks

  12-inch commercialization slower than expected, traditional-size substrate price declines exceeding expectations, and yield and gross margin improvement falling short of expectations.

Key data

• Rating changeDowngraded from Buy to NeutralThe main reason is fair valuation and narrowed relative upside.
• 12-month target priceRmb104Previously Rmb115, still implying 20% upside versus the current price.
• Current priceRmb86.65The price benchmark used in the report.
• 2026E to 2028E net profit CAGRAbout 87%Driven by silicon carbide penetration, product upgrades, market share, and gross margin improvement.
• Net profit forecast revision2026E -6%; 2027E -8%; 2028E -8%Mainly reflecting price declines for 6-inch and 8-inch substrates and lowered revenue and gross margin forecasts.
• Revenue forecast2026E Rmb2,851.1mn; 2027E Rmb4,088.3mn; 2028E Rmb5,683.6mnCorresponding to YoY growth of 94.6%, 43.4%, and 39.0%.
• Net profit forecast2026E Rmb480.8mn; 2027E Rmb973.3mn; 2028E Rmb1,689.7mnNet loss in 2025 was Rmb208.3mn.
• Gross margin forecast2026E 33.7%; 2027E 39.7%; 2028E 46.9%Previous forecasts were 34.4%, 41.1%, and 48.7%, respectively.
• Valuation2027E P/E of about 43xThe new target price implies a 2027E P/E of about 52x.
• Target valuation parameters2029E target P/E of 32.2x; cost of equity of 12.5%The target P/E is derived from peer forward fundamentals ratios.

Impact & implications

If 12-inch products are successfully commercialized after 2027E, they could expand the company's addressable market and improve product mix and profitability through lower unit costs and high-value-added applications. Rising AI chip power consumption, advanced packaging demand, and AR optical applications provide incremental opportunities for semi-insulating silicon carbide. However, industry yield improvement both lowers costs and promotes adoption, while also expanding supply and accelerating price declines for 6-inch and 8-inch products. The investment implication is that long-term growth and near-term valuation are becoming more balanced; further share price re-rating will require 12-inch volume ramp, price resilience, or gross margin improvement to exceed current expectations.

Risks

• Commercialization of 12-inch silicon carbide devices, end-application adoption, or production yield improvement may be slower than expected, potentially delaying the volume ramp of 12-inch substrates.
• Increased new entrants or weak end demand may intensify competition, causing price declines for 6-inch and 8-inch silicon carbide substrates to exceed expectations.
• Product mix upgrades or production yield improvement may be slower than expected, potentially causing gross margins to fall below forecasts.
• The target price depends on forward earnings, peer valuation ratios, and a 12.5% cost of equity; changes in earnings or the valuation center will affect valuation results.
• Goldman Sachs disclosed that it has had an investment banking client relationship with SICC over the past 12 months and expects or intends to seek compensation for related services in the next 3 months.

What to watch

• Customer validation, device commercialization, and 2027E mass production ramp progress for 12-inch silicon carbide substrates.
• Adoption pace of new applications such as AI server advanced packaging, AR glasses, and automotive AR HUDs.
• Price declines for 6-inch and 8-inch silicon carbide substrates and new industry supply.
• Production yields, defect rates, and unit cost changes across product sizes.
• Whether the company's gross margin can continue improving from 13.1% in 2025 and 19.1% in 1Q26.
• Revenue contribution of 8-inch and 12-inch products and their contribution to the overall product mix.
• Whether 2026E to 2028E revenue, net profit, and operating margin can meet forecasts.