Investors may consider purchasing SMIC (00981) at a price of HK$81.5, with a target price of HK$90, according to a recent research note. A stop-loss level is suggested if the share price falls below HK$75.
Rationale for the Investment Thesis
The report highlights SMIC as mainland China's largest and most technologically advanced wafer foundry, positioning it as the primary beneficiary of the domestic semiconductor supply chain's "localization substitution" trend. Given the tense external geopolitical environment and U.S. restrictions on exporting advanced semiconductor products to China, the analysis suggests domestic fabless chip design companies are increasingly prioritizing supply chain security. This is expected to accelerate the shift of orders from overseas foundries to SMIC.
Catalysts for Growth and Pricing Power
The rapid development of artificial intelligence is identified as a key driver, significantly boosting demand for semiconductors and memory. SMIC is reportedly operating at full capacity with high utilization rates, which strengthens the pricing power across the semiconductor supply chain. This environment supports a rationale for potential price increases on the company's orders.
Strategic Product Shift and Margin Benefits
Historically, the company's product focus was more concentrated on consumer electronics. However, the current product portfolio is increasingly aligned with AI product lines, marking a strategic shift away from reliance on traditional consumer electronics. Benefiting from the reshaped supply and demand dynamics for mature-process nodes driven by AI peripheral components, SMIC is leveraging its robust mature and specialty process technologies to integrate into the extensive AI supply chain. The higher average selling prices associated with these AI-related products are anticipated to contribute positively to the company's gross margin.
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