AI Demand and Capacity Expansion Drive Earnings Forecast Upgrades; Goldman Sachs Maintains Buy on SMIC

Overview

SMIC's 2Q26 gross margin exceeded Goldman Sachs' expectations. The report believes that AI-related analog and logic chip demand, increasing orders for data-center and AI edge-device supporting chips, and local customers' needs to strengthen supply-chain security will support the company's orders, capacity utilization, and ASPs in the second half of 2026. Goldman Sachs maintains Buy ratings on SMIC's A and H shares.

Core views

Goldman Sachs expects 3Q26 capacity utilization to remain elevated, with ASPs continuing to rise on strong AI demand and customer expansion. Despite higher depreciation, stronger pricing and product mix upgrades should partly offset cost pressures and support gross margin improvement. Earnings upgrades are underpinned by revenue growth in advanced-node products and accelerated capacity expansion.

Analysis framework

The report adjusts earnings forecasts based on quarterly results, management guidance, capacity and capex progress, AI-related demand, and product mix changes. For valuation, the H shares use a discounted P/E method, while the A-share target price is based on the historical average A/H valuation premium.

Methodology notes

• Valuation methodsDiscounted P/E Method

  H-share Target Price

  Based on a 2028E P/E multiple of 80.7x and discounted back to 2026 using a 15.0% cost of equity, the method derives a 12-month H-share target price of HK$153.

• Relative ValuationPeer Earnings Growth and P/E Correlation

  Target P/E Setting

  The target P/E multiple is determined with reference to the relationship between peer earnings growth and trading P/E multiples.

• Relative ValuationA/H Premium Method

  A-share Target Price

  The A-share target price is based on a 196% valuation premium relative to the H shares, consistent with SMIC's average A/H premium since January 2024.

Asset mapping & comparison

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

• SMIC (0981.HK)

  Directly Covered Security

  Strengths

  Strengthening AI-related demand, solid customer orders, continued capacity expansion, improving ASPs and product mix, and upgraded earnings forecasts.

  Weaknesses

  Depreciation growth will create cost pressure, while valuation is at a relatively high level.

  Comparison

  The H-share target price is determined by discounting an 80.7x 2028E P/E multiple; the A shares apply a 196% valuation premium relative to the H shares.

  Risks

  Weaker-than-expected smartphone and consumer electronics demand, slower-than-expected product diversification or capacity expansion, and restricted access to equipment and materials.

• SMIC (688981.SS)

  A Shares of the Same Company

  Strengths

  Benefits from the same AI-demand, capacity-expansion, and earnings-improvement thesis as the H shares.

  Weaknesses

  Valuation depends on the A/H premium assumption.

  Comparison

  The 12-month A-share target price is Rmb257.90, based on a 196% valuation premium relative to the H shares.

  Risks

  Changes in the A/H premium may affect A-share valuation and the target price.

Key data

• 2Q26 Monthly Capacity1.097 million wafers/monthCalculated on an 8-inch equivalent wafer basis, increasing from 1.080 million wafers/month in 1Q26.
• 2Q26 CapexUS$1.8bnUp 18% QoQ.
• 3Q26 Revenue Guidance2% to 4% QoQ growthManagement said there was some order pull-in during 2Q26 but remains positive on AI demand and customer orders.
• 3Q26 Gross Margin Guidance26% to 28%2Q26 gross margin was 25%.
• 2026-2029 Earnings Forecast RevisionsRaised by 19%/15%/13%/13%Primarily driven by advanced-node product revenue, accelerated capacity expansion, and improvements in pricing and product mix.
• 2026-2029 Gross Margin Forecast RevisionsRaised by 2.3 to 2.8 percentage pointsReflects stronger pricing amid robust demand and product mix upgrades.
• 0981.HK Target Price and UpsideHK$153.00; 116.1%Current price HK$70.80.
• 688981.SS Target Price and UpsideRmb257.90; 94.1%Current price Rmb132.87.

Impact & implications

If AI-related demand continues to materialize, SMIC's elevated capacity utilization, ASPs, and gross margin are expected to continue improving in the second half, while capacity expansion will further amplify advanced-node revenue growth. The higher target price and substantial potential upside reflect Goldman Sachs' positive view of the medium- to long-term growth outlook, although valuation is already at a high level and is therefore more sensitive to demand, capacity expansion execution, and external supply constraints.

Risks

• Smartphone and consumer electronics demand is weaker than expected.
• Product diversification or capacity expansion is slower than expected.
• As the company is on the U.S. BIS Entity List, supply and access to certain equipment or materials may be restricted.
• Depreciation growth exceeds improvements in pricing and product mix, potentially compressing gross margin.
• AI-related orders or ASP increases fall short of expectations.

What to watch

• Actual 3Q26 revenue growth, capacity utilization, and ASP trends.
• Whether 3Q26 gross margin can meet management's guidance of 26% to 28%.
• The sustainability of orders for AI data-center and edge-device supporting chips.
• Monthly capacity expansion progress and capex execution.
• The revenue contribution of advanced-node products and progress in product mix upgrades.
• The impact of equipment and materials supply restrictions on capacity expansion and production.