UBS Maintains "Neutral" on SMIC with Favorable Pricing but Rising Depreciation

UBS has issued a research report adjusting its forecasts for SMIC (00981). The bank raised its revenue projections for 2026 to 2029 by 4%, citing greater localization opportunities and improved supply-demand dynamics. However, it lowered its profit estimates by 8% to 18%, reflecting a higher depreciation burden. UBS set a target price of HK$76, based on a projected price-to-book ratio of 3.3x over the next 12 months and a long-term return on equity of 11.3%, while maintaining a "Neutral" rating. SMIC reported a 4.5% quarter-on-quarter increase in net profit for the last quarter of the previous year, outperforming both its own guidance of 0% to 2% growth and market expectations of a 1.3% rise. This improvement was attributed to slight increases in wafer shipments and blended average selling prices. The company's gross margin stood at 19.2%, aligning with its guidance range of 18% to 20% but falling short of the market's 20% expectation. UBS noted that with 8-inch wafer capacity utilization exceeding 100% and 12-inch capacity nearing full utilization, management expects capital expenditure for the current year to remain flat compared to last year's $8.1 billion. By the end of this year, SMIC plans to add 40,000 wafers per month in 12-inch capacity to meet strong domestic demand from Chinese fabless companies. The company is also focusing expansion on supply-constrained areas such as BCD chips, memory, and memory-related products. Management forecasts flat sales for the first quarter, with a gross margin between 18% and 20%, and expects full-year sales growth to outpace the industry average. The bank further highlighted that, amid ongoing capacity expansion, management anticipates a 30% year-on-year increase in depreciation expenses this year, with levels remaining elevated into the following year, posing additional pressure on gross margins. UBS currently projects a first-quarter gross margin of 20% and a full-year gross margin of 21.2%, expecting that the headwind from depreciation will be offset by a more favorable pricing environment.