Strong Foundry Cycle Transmits Downstream to OSAT; JCET and V-Test Both Receive Overweight Ratings

Overview

The report is positive on the continuation of favorable conditions in China's packaging and testing industry in 2H26. Strong revenue, shipments, and pricing at SMIC and Hua Hong, together with their continued 3Q26 growth guidance, are viewed as leading indicators for downstream OSAT demand. The report prefers JCET and V-Test but believes they should be valued under different frameworks.

Core views

Foundry shipments in 2Q-3Q26 will transmit to packaging and testing over the next one to two quarters, creating a relatively ample order backlog. JCET will benefit from AI demand, localization demand, tight supply, and price increases, with further margin improvement potential in 2H26; while its advanced-packaging investments create near-term depreciation pressure, they establish a foundation for long-term growth. V-Test is a leading domestic third-party testing provider. Its upfront investment in high-end testing equipment and higher CP business exposure position it to benefit from ramping domestic AI chips. Following near-term margin pressure, revenue and gross margin are expected to improve from 4Q26.

Analysis framework

The report uses foundry revenue, shipments, and capacity utilization as leading indicators of downstream packaging and testing demand, combined with packaging and testing companies' preliminary results, pricing power, capacity expansion, product mix, depreciation burden, and relative historical valuations.

Methodology notes

• Industry-chain transmissionLeading-indicator framework from wafer shipments to packaging and testing demand

  Foundry shipments typically translate into packaging and testing demand one to two quarters later.

  By monitoring SMIC's and Hua Hong's revenue, shipments, pricing, and guidance, the report infers order conditions for downstream OSAT and testing companies in 2H26.

• Valuation methodsForward P/E valuation

  Target prices are determined using one-year forward P/E and comparisons with historical averages.

  JCET's target price is based on 40x one-year forward P/E; V-Test's target price is based on 30x one-year forward P/E, with valuation upside assessed separately in light of advanced-packaging and AI-testing growth drivers.

• ProfitabilityOperating leverage and product-mix analysis

  Price increases, a higher share of value-added products, and improved capacity utilization can drive margin expansion.

  JCET is primarily driven by price increases and order-mix optimization; V-Test faces near-term depreciation and investment pressure, but a higher contribution from AI chip testing could lead to a subsequent margin inflection.

Asset mapping & comparison

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

• JCET（600584.SS）

  A leading Chinese OSAT company, benefiting from foundry shipments transmitting to downstream packaging demand.

  Strengths

  Strong AI and localization demand, tighter supply enhancing pricing power, short production cycles allowing price increases to translate quickly into earnings, and advanced-packaging investment supporting long-term growth.

  Weaknesses

  High R&D and capital-expenditure intensity in advanced packaging may create near-term depreciation and expense pressure; current valuation is already above the historical average.

  Comparison

  The investment thesis is tilted toward visible near-term price increases and margin improvement. The report assigns OW, with a December 2027 target price of Rmb110 based on 40x one-year forward P/E.

  Risks

  Weaker-than-expected smartphone and consumer electronics demand, logistics-related disruptions to substrate and other raw-material supplies, and intensified competition in traditional packaging that compresses profitability.

• V-Test（688372.SH）

  A Chinese third-party chip testing company benefiting from the expansion of domestic AI chips and high-end testing demand.

  Strengths

  Early deployment of high-end testing equipment, high CP business exposure, and a favorable customer mix; strong revenue and earnings elasticity after domestic AI chips ramp, with valuation relatively low versus its historical range.

  Weaknesses

  Near-term pressure from rapidly rising depreciation, weak consumer electronics demand, and resource investment in AI projects; margin improvement in 2Q-3Q26 may be limited, and near-term pricing flexibility is relatively weaker.

  Comparison

  The investment thesis is tilted toward operating leverage and valuation recovery following the ramp-up of AI testing business in 2H26-2027. The report assigns OW, with a June 2027 target price of Rmb220 based on 30x one-year forward P/E.

  Risks

  Restrictions on testing-equipment procurement affecting capacity expansion, export controls affecting the return of overseas foundry testing business to Mainland China, lower equipment barriers due to support from domestic ATE suppliers, and weak non-AI demand.

Key data

• SMIC 2Q26 revenue growth20% QoQ, 36% YoYQuarterly revenue reached a record high.
• Hua Hong 2Q26 revenue growth9% QoQ, 27% YoYQuarterly revenue reached a record high.
• SMIC 3Q26 guidanceapproximately 3% QoQ, 30% YoYCalculated using the midpoint of guidance.
• Hua Hong 3Q26 guidanceapproximately 8% QoQ, 22% YoYCalculated using the midpoint of guidance.
• JCET 2Q26 adjusted net profitRmb560mnMidpoint of preliminary results; up 112% QoQ and 28% YoY.
• JCET 2026-2028 forecast CAGRRevenue 16%, earnings 46%Report forecasts.
• V-Test 2Q26 forecast revenue/net profitRmb570mn / Rmb92mnUp 63% and 23% YoY, respectively.
• V-Test 2026-2028 forecast CAGRRevenue 59%, earnings 73%Report forecasts.
• JCET valuation and target price42.1x 2027E P/E; Rmb110Valuation is at a 19% premium to the historical average; target price is based on 40x one-year forward P/E.
• V-Test valuation and target price25.5x 2027E P/E; Rmb220Valuation is at a 17% discount to the historical average; target price is based on 30x one-year forward P/E.

Impact & implications

The report's key implication is that improving foundry conditions benefit not only upstream manufacturing but also transmit through orders and capacity utilization to packaging, testing, and related segments. For JCET, near-term investment catalysts are relatively clear, centered on price increases, tight supply, and margin improvement. For V-Test, near-term earnings may be affected by upfront capital expenditures, but if domestic AI chip shipments scale as expected, this will drive revenue growth, gross margin improvement, and a narrowing valuation discount.

Risks

• Smartphone and other consumer electronics demand is weaker than expected.
• Shortages of substrates and other raw materials or logistics disruptions.
• Intensifying competition in traditional packaging, pressuring pricing and profitability.
• Restrictions on high-end testing-equipment procurement that hinder V-Test's capacity expansion.
• Export controls affecting the return of overseas foundry testing business to Mainland China.
• Domestic ATE suppliers lowering barriers to equipment entry and intensifying industry competition.
• Weak non-AI demand or domestic AI chip ramp-up falling short of expectations.
• High capital expenditure and depreciation pressure from advanced-packaging and testing businesses lasting longer than expected.

What to watch

• Subsequent quarterly trends in shipments, pricing, capacity utilization, and capital expenditures at SMIC and Hua Hong.
• Progress of price increases, changes in order mix, and implementation of advanced-packaging projects at JCET and peers.
• JCET's margin improvement in 2H26 and revenue contribution from AI-related advanced packaging.
• Actual domestic AI chip shipment volumes from late 2026 and their effect on V-Test's testing demand.
• V-Test's high-end testing-equipment deployment, capacity utilization, CP business mix, and gross-margin inflection point.
• Changes in consumer electronics demand recovery, raw-material supply, export controls, and testing-equipment procurement policies.