Everbright Securities has released a research report stating that the AI siphon effect is driving a repatriation of production capacity for specialized memory and consumer electronics to China, accelerating the domestic substitution process. Benefiting from the dual certainties of AI computing demand and domestic substitution, the combined forces of AI-related demand, domestic manufacturing repatriation, and specialized memory orders are expected to strengthen continuously, leading to a more optimistic outlook for orders and operations in 2026. The firm is optimistic about the sustained performance improvement at SMIC (00981) driven by capacity ramp-up and technological upgrades, maintaining a "Buy" rating on both its Hong Kong and A-shares.
Regarding profit forecasts, factoring in significant depreciation pressure from new production line ramps, Everbright Securities has adjusted its net profit attributable to shareholders forecast for SMIC's Hong Kong shares in 2026-2027 to USD 990 million / USD 1.25 billion (representing changes of -8% / +0% from prior forecasts). It has also added a 2028 forecast of USD 1.57 billion, implying year-over-year growth rates of 45%, 27%, and 26% for 2026, 2027, and 2028, respectively. Similarly, for SMIC's A-shares (688981.SH), the forecast for 2026-2027 net profit attributable to shareholders is adjusted to RMB 6.93 billion / RMB 8.65 billion (-7% / +1% from prior forecasts), with a new 2028 forecast of RMB 10.76 billion.
Key points from Everbright Securities are as follows:
**Event: Q1 2026 Earnings Beat Expectations, Q2 2026 Guidance is Positive** Q1 2026 revenue reached USD 2.505 billion, up 11.5% year-over-year and 0.7% quarter-over-quarter, exceeding the company's previous guidance of USD 2.49 billion. Wafer shipments increased 9.5% year-over-year but declined 0.2% quarter-over-quarter. Average selling price (ASP) per wafer rose 0.5% year-over-year and 2.5% quarter-over-quarter. Gross margin for Q1 2026 was 20.1%, down 2.4 percentage points year-over-year but up 0.9 percentage points quarter-over-quarter, exceeding the upper end of the company's guidance range of 18%-20%, primarily due to product mix optimization and ASP increases. Q1 2026 net profit was USD 231 million, down 28.6% year-over-year but up 13.5% quarter-over-quarter. Net profit attributable to shareholders was USD 197 million, increasing 5.0% year-over-year and 14.2% quarter-over-quarter. Non-controlling interests amounted to USD 33 million, down 75.3% year-over-year but up 9.6% quarter-over-quarter.
Guidance for Q2 2026 is positive, with revenue projected to grow 14%-16% quarter-over-quarter and gross margin guidance set at 20%-22%, both exceeding market expectations.
**Consumer Electronics Revenue Share Increases** Revenue breakdown by application in Q1 2026: Smartphones/Computers & Tablets/Consumer Electronics/Interconnect & Wearables/Industrial & Automotive accounted for 18.9%/13.6%/46.2%/7.3%/14.0%, respectively. Consumer electronics revenue grew 27% year-over-year, while industrial and automotive revenue surged 63% year-over-year and 16% quarter-over-quarter. Smartphone revenue declined 13% year-over-year and 12% quarter-over-quarter.
By wafer size: 12-inch wafer revenue accounted for 76.4% of total wafer revenue in Q1 2026, down 1.7 percentage points year-over-year and 0.8 percentage points quarter-over-quarter.
By region in Q1 2026: China/North America/Eurasia accounted for 88.9%/9.3%/1.8% of revenue, with the share from China continuing to rise.
**AI Demand, Domestic Repatriation, and Specialized Memory Orders Fuel Optimism for 2026** The company holds robust order backlogs: 1) AI is driving demand for supporting chips and order repatriation. Power management and data transmission chips are in short supply due to AI data center construction. Concurrently, AI demand is siphoning overseas foundry capacity, leading to the repatriation of orders from consumer and IoT clients to China. 2) New demand is emerging in areas like edge AI. Demand for logic circuit products related to edge AI, including IoT, robotics, and electric vehicles, is growing rapidly. 3) Specialized memory supply is tight. Memory capacity is being prioritized for High Bandwidth Memory (HBM), with some IDM manufacturers even exiting the niche memory market. This has widened the supply gap for specialized memory like Nor Flash and SLC NAND Flash, with SMIC securing related transferred orders. 4) The domestic substitution process continues to accelerate.
Based on this more optimistic order and operational outlook, the company expects to implement gradual price increases in 2026, with the effects visible from Q2 to Q4.
**Capacity Shift to High-Demand Products, Sustained Capital Expenditure in 2026** 1) Capacity: Monthly capacity in 8-inch wafer equivalents reached 1.078 million in Q1 2026. The company plans active expansion, prioritizing capacity for high-demand, continuously iterating product lines like specialized memory, power management, and AFE analog. 2) Utilization Rate: Q1 2026 utilization was 93.1%, up 3.5 percentage points year-over-year but down 2.6 percentage points quarter-over-quarter. Wafer shipments (8-inch equivalent) totaled 2.509 million. 3) Capital Expenditure: Q1 2026 capex was USD 1.563 billion, up 10.4% year-over-year but down 35.1% quarter-over-quarter. For 2026, the company expects capex to be largely flat compared to 2025, indicating continued significant investment. 4) Depreciation: The company guides for a 30% year-over-year increase in depreciation for 2026, indicating sustained high pressure from depreciation expenses. 5) Advanced Packaging: SMIC is expanding its advanced packaging footprint, establishing an Advanced Packaging Research Institute to explore cutting-edge technologies. It has also set up a subsidiary, Shanghai Xin 3D Semiconductor, to build supporting capacity to meet customer demand for advanced packaging.
**Risk Factors:** Weaker-than-expected downstream demand; intensifying industry competition; technological development falling short of expectations.
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