2Q earnings beat on pricing turn and earnings recovery

2Qearnings beatonpricingturnand earningsrecovery SMIC posted record2Q26revenue of US$3,006mn, up20.0% QoQ/36.1% YoY,and GPM of 25.3%, up5.2pptsQoQ/4.9pptsYoY, both above the upper end ofguidance and Bloomberg consensus.Company’sguidancefor 3Q26remainssolid, with revenue expected to grow 2-4% QoQ and GPM reaching 26-28%,supported by elevated utilization and continued pricing momentum. Given thestronger-than-expected2Q26results and3Qguidance, we raise our FY26/27Erevenueforecasts by 5.3%/9.2%and GPM estimates by 3.4/2.3ppts,respectively.Maintain BUY, with TP raised to HK$119, based on 5x FY27EP/B. Target PriceHK$119.00(Previous TPHK$110.00)Up/Downside76.2%Current PriceHK$67.55 China Semiconductors Kevin ZHANG(852) 3761 8727kevinzhang@cmbi.com.hk Pricing was the key margin unlock, while one-offs amplified the netprofit beat.2Q26shipments increased 14.4% QoQ, supported by AI-relateddemand, customer pull-forward and newly qualified capacity, while blended8-inch-equivalent ASP rose 5.7% QoQ as price increases negotiated in1Qflowed through, particularly in tighter AI-related and power-managementsupply chains.Mgmt. stressed that pricing contributed more to the GPM beatthan mix, while 93.7% utilization and scale helped offset higher depreciation.Attributable net profit reached US$479mn (+142.7% QoQ/+261.7% YoY),well above Bloomberg consensus of ~US$257mn, with operating profit ofUS$534mn(+254.5%YoY)confirming strong core earnings growth.However, other income, net reached US$276mn versus US$9.7mn a yearago, driven by FX gains, fair-value gains and associate/JV contributions,meaning the headline 15.9% attributable net margin materially overstates thenormalized run-rate. Aaron GUO(852) 3916 3715aaronguo@cmbi.com.hk Demand mix is rotating toward industrial & auto, while smartphoneexposure continues to decline.Industrial & Automotive increased to 16.5%of wafer revenue (+5.9pptsYoY/+2.5pptsQoQ), while Smartphone fell to16.9% (-8.3pptsYoY/-2.0pptsQoQ). Consumer Electronics remained thelargest category at 44.2% (+3.2pptsYoY/-2.0pptsQoQ), PC & Tablet roseto 15.6% (+0.6pptsYoY/+2.0pptsQoQ), and Connectivity & IoT declined to6.8% (-1.4pptsYoY/-0.5pptsQoQ). We see the mix shift as consistent withstronger demand from industrial/auto and AI-adjacent applications, whilehandset exposure continues to become less dominant. Localization deepens as 12-inch becomes an increasingly dominantpart of therevenue mix.China accounted for 90.2% of revenue in 2Q26(+6.1pptsYoY/+1.3pptsQoQ), while America fell to 8.2% (-4.7pptsYoY) andEurasiato 1.6%(-1.4ppts YoY).By wafer size,12-inch revenue mixincreased to 78.2% from 76.1% a year ago, while 8-inchdeclined to 21.8%.Thisreflects SMIC’s continued shift toward its expanding 12-inchmanufacturing base and a more localized customer mix, while the quarter’smargin improvement was primarily driven by ASP uplift and broader product-mix improvement ratherthan wafer size alone.Maintain BUY, with TP adjusted to HK$119, reflecting 5x FY27E P/B,vs. Source: FactSet peers trading at around 4.0x.We believe SMIC deserves a premium givenits unique strategic position, leading scale and technology breadth withinChina’sfoundry ecosystem.Improving pricing,utilization and capacitymonetization should continue to support earnings recovery, despite near-term depreciation pressure. Key risks include weaker pricing, slower capacityramp and geopolitical uncertainties. Management Commentary Highlights: Pricing, Capacity Allocation & Demand Structure Targeted, not blanket, price hikes.Since Feb–Mar, SMIC negotiated price increasesmainlyin tighter and more differentiated segments(AI-related chips,powermanagement), while handset and consumer products saw limited pricing actions.Management emphasized pricing discipline, noting SMICis neither the first nor themost aggressive player to raise prices. The 2Q ASP increase (+5.7% QoQ) mainlyreflected 1Q-negotiated price hikes flowing through, with further impact expected in 3Qas shipments carry newly negotiated pricing. Capacity allocation prioritizes strategic relationships.SMIC continues to prioritizeexisting commitments with long-term strategic customers, while seeking reasonablepricing in segments where it has reached first-tier competitiveness and pricing power.Capacityallocation remains based on strategic partnerships and long-termcommitments rather than simply maximizing near-term pricing. Demand remains highly differentiated across applications.Managementhighlighted three demand trends: 1.Supply tightness:AI-related chips(logic,BCD,optical modules,powermanagement), NOR Flash and other specialty low-density memory, as overseasplayers exit certain segments;2.Inventory correction:handset-related inventory remains elevated, withsoftDDICdemand and pricing already low;3.Early restocking:some customers are building inventory ahead of potentialcapacity constraints or price increases next year.4.BCD demand remains resilient.AI infrastructure demand is supporting BCD