2Q Gross Margin and 3Q Guidance Significantly Exceed Expectations; Target Price Raised to HK$78

Overview

SMIC delivered strong 2Q26 gross-margin performance, and its 3Q gross-margin guidance was clearly above expectations. JPMorgan believes supply-demand tightness and price increases driven by AI peripheral demand will continue to support revenue and margins over the next several quarters. However, rising depreciation associated with capacity expansion will constrain further long-term gross-margin improvement, supporting the maintenance of a Neutral rating.

Core views

Near-term earnings improvement is primarily driven by price increases resulting from AI peripheral demand. In particular, demand for products such as power-management ICs is tightening 8-inch supply and demand, with the impact extending to 12-inch wafers. The company's continued 12-inch capacity expansion should support revenue growth; however, rising raw-material costs and a heavier depreciation burden imply limited margin upside. Gross margin is expected to remain broadly at 24%–26% in 2026–2028, below the 35%–40% peak in 2022.

Analysis framework

The report combines quarterly results and 3Q guidance, supply-demand and capacity-utilization analysis, revenue and depreciation growth forecasts, and a price-to-book valuation framework to assess earnings revisions and the target price.

Methodology notes

• Valuation methodsPrice-to-Book Valuation

  Forward Price-to-Book

  The June 2027 target price of HK$78 is derived using approximately 2.8x the average FY27–FY28E book value per share.

• Earnings ForecastingQuarterly Results and Guidance Comparison

  Actual Results Versus Expectations

  It compares 2Q actual gross margin and 3Q guidance with JPMorgan and market expectations, then adjusts full-year gross-margin and net-profit forecasts accordingly.

• Industry AnalysisSupply-Demand and Capacity Utilization Analysis

  Supply Tightness and Pricing

  AI peripheral demand, fab utilization, 12-inch capacity expansion, and price-increase negotiations are used to assess the sustainability of revenue and gross margins.

Asset mapping & comparison

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

• SMIC (0981.HK)

  Covered company

  Strengths

  Strong AI peripheral demand, improved pricing from tight supply-demand conditions, and 12-inch capacity expansion supporting revenue growth.

  Weaknesses

  Consumer-electronics demand remains soft; rising depreciation and raw-material costs constrain gross-margin upside.

  Comparison

  Both 2Q26 gross margin and 3Q26 guidance were significantly above prior JPMorgan and market expectations.

  Risks

  Increased pricing pressure, customer demand below expectations, and depreciation growth outpacing revenue growth.

Key data

• 2Q26 Gross Margin25.3%3.6–4.0 percentage points above JPMorgan and market expectations.
• 3Q26 Gross Margin Guidance26%–28%Above prior market and JPMorgan expectations of approximately 22%.
• FY26 Revenue Growth Forecast27.1%JPMorgan forecasts year-over-year growth, followed by low- to mid-teens growth in 2027–2028.
• FY26 Gross Margin Forecast24.4%Approximately 2.8 percentage points above the previous forecast and 3.4 percentage points higher year-over-year.
• FY26 Adjusted Net Profit ForecastUS$1,545 millionRaised 41.5% from the prior US$1,091 million.
• FY27 Adjusted Net Profit ForecastUS$1,561 millionRaised 34.9% from the prior US$1,157 million.
• Depreciation Growth ForecastApproximately 30% in 2026; approximately 20% in 2027Depreciation growth is expected to outpace revenue growth, constraining long-term gross-margin expansion.
• Target PriceHK$78Jun-27 target price; previous target price was HK$67.

Impact & implications

In the short term, price increases and AI-related demand support upward earnings revisions and the higher target price. Over the medium to long term, depreciation pressure from capital expenditures and new capacity additions reduces confidence in sustained margin expansion; the market must balance growth delivery against improving returns.

Risks

• Pricing pressure exceeds expectations, weakening price increases and gross-margin improvement.
• Customer demand is weaker than expected, particularly if consumer-electronics demand deteriorates.
• New capacity additions cause depreciation growth to outpace revenue growth.
• Rising raw-material costs, especially higher raw-wafer costs.
• AI peripheral demand or capacity utilization falls below expectations.

What to watch

• Progress in price-increase negotiations and price execution in 2H26 and 2027.
• AI peripheral product demand and 8-inch and 12-inch supply-demand conditions.
• Whether utilization can remain at approximately 95% in 3Q and subsequent quarters.
• The pace of new 12-inch capacity additions and their contribution to revenue.
• Relative changes in depreciation, raw-material costs, and revenue growth.
• Actual demand from consumer customers locking in capacity for 2027 and their inventory digestion.