Hygon's second-quarter revenue beat expectations, but rising costs weighed on gross margin and cash flow

Overview

This report reviews Hygon's 2Q26 and 1H26 results. Bernstein's core view is that the company's revenue growth was significantly faster than full-year expectations, with both server CPUs and DCUs providing growth momentum. Although gross margin, GAAP profit growth, and operating cash flow came under pressure, profit performance excluding share-based compensation continued to demonstrate strong operating leverage, supporting the maintained Outperform rating.

Core views

Hygon delivered strong 2Q26 revenue of RMB5.065 billion, up 65.3% YoY and 25.6% QoQ, with growth exceeding Bernstein's and consensus FY26 full-year revenue growth forecasts; 2Q26 net profit attributable to shareholders was RMB1.111 billion, up 60% YoY. Bernstein attributes the high revenue growth to two main drivers: agentic AI workloads continued to boost server CPU demand, directly benefiting the company's CPU business; meanwhile, increased local supply of advanced logic chips supported continued rapid growth in the AI-chip DCU business. The report therefore views the revenue result as an upside surprise and believes the market may react positively. First-half data further reinforced the demand outlook. 1H26 revenue increased 66.5% YoY to RMB9.1 billion, exceeding Bernstein's and consensus FY26 full-year growth forecasts of 63% and 56%, respectively. This means the company achieved a faster growth rate in the first half than expected for the full year, with expanding CPU demand and ramping DCU supply jointly underpinning revenue growth. The report forecasts revenue rising from RMB14.377 billion in F25A to RMB23.477 billion in F26E and RMB39.667 billion in F27E, corresponding to the stated CAGR of 66.1%. High revenue growth did not fully translate into gross margin improvement. 2Q26 gross margin was approximately 55%, below Bernstein's expectation; 1H26 gross margin declined 4.9 percentage points YoY to 55.2%. Cost of revenue increased 87.2% YoY over the same period, significantly faster than revenue, which Bernstein suggests may have been related to rising foundry and memory costs. The report's forecast table shows gross margins of 57.8%, 61.1%, and 61.6% for F25A, F26E, and F27E, respectively, but the actual margin in the current period indicates that near-term cost pressures need to be absorbed. Profit was also materially affected by share-based compensation expenses. 1H26 GAAP net profit attributable to shareholders increased 49.7% YoY, slower than revenue growth, mainly because share-based compensation expenses rose from RMB52 million in the same period last year to RMB634 million. Excluding share-based compensation, 1H26 net profit attributable to shareholders increased 82.3% YoY to RMB2.27 billion, faster than revenue growth. Bernstein therefore believes that the company's underlying operating leverage remains strong despite gross margin pressure. The forecast table shows net margins of 17.7%, 20.2%, and 21.0% for F25A, F26E, and F27E, respectively. Cash flow was another area of pressure in the results. 1H26 operating cash flow fell from a net inflow of RMB2.18 billion in 1H25 to a net outflow of RMB428 million. The report believes this mainly reflected tightening upstream supply and the company's proactive efforts to secure supply: supplier prepayments increased by RMB1.89 billion from the end of 2025, while inventories increased by RMB1.11 billion. At the same time, the company fulfilled deliveries of products for which customer prepayments had previously been received, reducing contract liabilities by RMB2 billion and reversing a significant source of cash inflow. Therefore, the cash flow deterioration was closely related to working capital tied up in securing supply and fulfilling deliveries, rather than simply being caused by weaker revenue. From a long-term competitive positioning perspective, Bernstein views Hygon as China's leading domestic x86 server CPU supplier, with a technology stack built on AMD licensing and exposure to domestic substitution in x86 server CPUs. DCUs could become a second growth engine: the second-generation DCU was launched in 3Q23, and although the report believes its technology still trails leading vendors such as Huawei and Cambricon, Hygon may secure sizable government orders by bundling DCUs with CPUs, creating additional growth potential. On valuation, Bernstein sets a target price of 450.00 CNY based on 2028E EPS of 6.30 CNY and a 71x P/E multiple. Based on the August 19, 2026 closing price of 259.74 CNY, the report indicates potential upside of 73% and maintains its Outperform rating. The market snapshot also shows a 52-week price range of 395.17/146.77 CNY, a dividend yield of 0.1%, market capitalization of RMB603.724 billion, enterprise value of RMB601.959 billion, and the ASIAX Index at 1,957.80. The report lists F25A, F26E, and F27E valuations of 72.4x, 42.0x, and 24.6x EV/gross profit; 236.1x, 127.1x, and 72.3x reported P/E; and 7.3x, 1.5x, and 1.0x PEG, respectively.

Analysis framework

Bernstein first compares 2Q26 and 1H26 revenue, gross margin, and profit on a YoY and QoQ basis and against its own and consensus full-year forecasts, then explains the variances through server CPU demand, DCU supply, the cost structure, and share-based compensation expenses. The report subsequently analyzes the deterioration in operating cash flow through changes in prepayments, inventories, and contract liabilities, and assesses the sustainability of growth based on the company's position in domestic x86 CPUs, DCU competitiveness, and order-acquisition pathways. Finally, it determines the target price using 2028E EPS and a P/E multiple.

Methodology notes

• Valuation MethodologyP/E and PEG Valuation

  Target-price valuation based on 2028E EPS and a forward P/E multiple

  The report derives its 450.00 CNY target price using 2028E EPS of 6.30 CNY and a 71x P/E multiple, and presents reported P/E and PEG multiples for each year to illustrate how valuation changes with earnings growth.

• Corporate Fundamentals and Financial FrameworkWorking capital cycle

  Cash flow decomposition based on prepayments, inventories, and contract liabilities

  The report explains the shift in operating cash flow from positive to negative through a RMB1.89 billion increase in supplier prepayments, a RMB1.11 billion increase in inventories, and a RMB2 billion decrease in contract liabilities.

• Corporate Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Comparison of profit growth excluding share-based compensation with revenue growth

  The report compares the growth of GAAP net profit attributable to shareholders with growth excluding share-based compensation to determine whether core operating leverage continued to materialize amid gross margin pressure.

• Competitive and Strategic FrameworkMoat / competitive advantage

  Domestic x86 server CPU position and a growth pathway based on bundling DCUs with CPUs

  The report assesses Hygon's competitive foundation based on its leading position in China's domestic x86 server CPU market, its AMD-licensed technology stack, and domestic substitution opportunities, while analyzing the potential to drive DCU orders through CPU bundling.

Asset mapping & comparison

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

• Hygon (688041.CH)

  Agentic AI is driving server CPU demand, while increased local supply of advanced logic chips supports DCU volume growth; the company also benefits from domestic substitution in x86 server CPUs.

  Strengths

  China's leading domestic x86 server CPU supplier; strong CPU demand; rapidly expanding DCU business; profit growth excluding share-based compensation demonstrates operating leverage.

  Weaknesses

  Gross margin was below expectations, and cost of revenue grew faster than revenue; operating cash flow turned negative; DCU technology still trails leading vendors such as Huawei and Cambricon.

  Comparison

  1H26 revenue growth of 66.5% exceeded Bernstein's and consensus FY26 growth forecasts of 63% and 56%; DCU technology is considered to lag Huawei and Cambricon.

  Risks

  Lagging server CPU iteration, constraints on AMD technology licensing and advanced-node foundry capacity, slower deployment of Xinchuang servers, and further tightening of sanctions by the United States and its Western allies.

Key data

• 2Q26 RevenueRMB5,065mnUp 65.3% YoY and 25.6% QoQ
• 2Q26 Net Profit Attributable to ShareholdersRMB1,111mnUp 60% YoY
• 1H26 RevenueRMB9.1BnUp 66.5% YoY; above Bernstein's and consensus FY26 growth forecasts of 63% and 56%
• 1H26 Gross Margin55.2%Down 4.9 percentage points YoY; 2Q26 gross margin was approximately 55%, below Bernstein's expectation
• 1H26 Cost of Revenue Growth87.2%YoY growth was faster than revenue; the report believes this may have been related to rising foundry and memory costs
• 1H26 GAAP Net Profit Attributable to Shareholders Growth49.7%Slower than revenue growth, mainly due to increased share-based compensation expenses
• 1H26 Share-Based Compensation ExpensesRMB634MnRMB52Mn in the same period last year
• 1H26 Net Profit Attributable to Shareholders Excluding Share-Based CompensationRMB2.27BnUp 82.3% YoY
• 1H26 Operating Cash FlowNegative RMB428MnPositive RMB2.18Bn in 1H25
• Change in Supplier PrepaymentsIncrease of RMB1.89BnIncrease from the end of 2025, reflecting the company's efforts to secure upstream supply
• Change in InventoriesIncrease of RMB1.11BnIncrease from the end of 2025
• Change in Contract LiabilitiesDecrease of RMB2BnThe company delivered products for which customer prepayments had previously been received, reducing a source of cash inflow
• Revenue ForecastF25A 14,377M; F26E 23,477M; F27E 39,667MThe report states a CAGR of 66.1%
• Gross Margin ForecastF25A 57.8%; F26E 61.1%; F27E 61.6%Data from the report's forecast table
• Net Margin ForecastF25A 17.7%; F26E 20.2%; F27E 21.0%Data from the report's forecast table
• Target Price Valuation Basis2028E EPS 6.30 CNY, 71x P/ECorresponding to a target price of 450.00 CNY
• Closing Price and Potential Upside259.74 CNY; 73%Report figures based on the August 19, 2026 closing price and the 450.00 CNY target price
• Valuation MetricsEV/GP: 72.4x/42.0x/24.6x; P/E: 236.1x/127.1x/72.3x; PEG: 7.3x/1.5x/1.0xCorresponding to 25A, 26E, and 27E, respectively

Impact & implications

Bernstein believes the revenue beat indicates that agentic AI-driven server CPU demand and increasing DCU supply are materializing, although higher foundry and memory costs are pressuring gross margin. Profit growth excluding share-based compensation was faster than revenue growth, demonstrating that underlying operating leverage remains intact; the shift to negative operating cash flow reflects working capital tied up in securing supply and fulfilling product deliveries. Considering the growth drivers, competitive positioning, and valuation, the report expects the market may react positively and maintains its Outperform rating.

Risks

• If the company is unable to develop next-generation server CPUs or keep pace with Intel's and AMD's technology iterations, its competitiveness may be impaired.
• Because Hygon is included on the U.S. BIS Entity List, AMD technology licensing and advanced-node foundry capacity face supply-chain risks.
• If China's macroeconomy is weaker than expected, future deployment of Xinchuang servers may slow.
• The United States and its Western allies may impose further and more stringent sanctions on the company.