SMIC's 2Q26 Results Beat Expectations; Morgan Stanley Maintains Overweight
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SMIC's 2Q26 Results Beat Expectations; Morgan Stanley Maintains Overweight
2Q26 revenue grew 20% QoQ and gross margin rose to 25.3%; despite moderating 3Q26 revenue growth guidance, improved pricing and product mix continue to support the margin outlook.
- 2Q26 revenue reached US$3.01bn, up 20% QoQ, with shipments up 14% and blended ASP increasing by approximately 6%.
- Gross margin increased 5.2 percentage points QoQ to 25.3%, above expectations, mainly driven by improved pricing and a higher advanced-node mix.
- The company guided for 3Q26 revenue growth of 2% to 4% QoQ and gross margin of 26% to 28%.
- Advanced-node capacity ramp-up is expected to support domestic Chinese AI accelerator production; high utilization, favorable pricing, and product-mix improvement are key supports.
Report interpretation
Overview
Morgan Stanley believes SMIC delivered strong 2Q26 results, with revenue and gross margin both exceeding expectations, and therefore maintains its Overweight rating and HK$85.00 target price. Although 3Q26 QoQ revenue growth guidance is only 2% to 4%, the bank expects further blended ASP improvement to continue supporting margin expansion.
Core views
The core bullish thesis includes continued advanced-node capacity ramp-up supporting domestic Chinese AI accelerator production; sustained high capacity utilization; an improving pricing environment; and product-mix optimization and stronger structural margins from greater advanced-node contribution.
Analysis framework
The report assesses quarterly actual results against market consensus, the company's 3Q26 guidance, shipment and blended ASP trends, gross-margin drivers, as well as future earnings forecasts and residual income valuation.
Methodology notes
Base-Case Residual Income Valuation
Valuation uses a base-case residual income model, assuming a cost of equity of 8.6%, medium-term growth of 16%, perpetual growth of 5%, and a cash dividend payout ratio of 85%.
Forecast Financial Metrics
Unless otherwise stated, financial metrics are based on the Morgan Stanley ModelWare framework; consensus data are provided by Refinitiv Estimates.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- SMIC (0981.HK)Covered Company
- Strengths
- 2Q26 results exceeded expectations; a higher advanced-node contribution; high utilization, improved pricing, and product-mix optimization support gross margin; benefits from domestic Chinese AI accelerator manufacturing demand.
- Weaknesses
- 3Q26 QoQ revenue growth guidance has slowed to 2% to 4%, while limited incremental capacity release may constrain shipment growth.
- Comparison
- Analysts expect its risk-adjusted total return over the next 12 to 18 months to exceed the average of the industries under coverage.
- Risks
- Weaker semiconductor demand, intensifying price competition, capacity utilization or ASP below expectations, and product-mix deterioration.
Key data
- 2Q26 RevenueUS$3.01bn, +20% QoQShipments were +14% QoQ, while blended ASP increased by approximately 6%.
- 2Q26 Gross Margin25.3%, +5.2 percentage points QoQAbove expectations, driven by improved pricing and a higher advanced-node product mix.
- 3Q26 GuidanceRevenue +2% to +4% QoQ; gross margin 26% to 28%Limited incremental capacity release may constrain shipment growth, but ASP improvement is expected to support margins.
- 2026E RevenueUS$11,938mnMorgan Stanley forecast.
- 2026E EPSUS$0.207Morgan Stanley forecast.
- 2026E ROE7.7%Morgan Stanley forecast.
Impact & implications
The results validate the positive effects of utilization, pricing, and product-mix improvement on profitability. If advanced-node capacity progresses as expected and serves domestic Chinese AI demand, SMIC's margins and earnings forecasts retain a basis for upward revision; in the near term, investors should monitor the balance between lower 3Q26 revenue growth and shipment constraints.
Risks
- Global and Chinese semiconductor demand may be weaker than expected.
- Intensifying price competition could pressure margins.
- Capacity utilization, product mix, or ASP trends may be weaker than expected.
- Advanced-node technology breakthroughs or capacity ramp-up may fall short of expectations.
- Export controls and related compliance restrictions may affect investment or trading activities.
What to watch
- Whether 3Q26 revenue and gross margin reach the company's guidance ranges.
- Whether blended ASP and product mix can continue improving.
- Progress in advanced-node capacity ramp-up and support for domestic Chinese AI accelerator production.
- Capacity utilization and the pace of incremental capacity release.
- Changes in global and Chinese semiconductor demand and industry price competition.