UBS: Upgrading the SMIC (00981) rating to “buy” and raising the target price to HK$96.2

The Zhitong Finance App learned that UBS released a research report saying that its opinion on SMIC (00981) has turned positive, raising its rating from “neutral” to “buy”, raising the target price from HK$76 to HK$96.2, based on an unchanged target market account ratio of 3.3 times, and rolling the valuation basis to an average net book value of 3.7 dollars per share from 2027 to 2028, higher than the original $2.9, but this was partially offset by a reduction in profit forecasts. The bank believes that the market has underestimated the extent to which SMIC is benefiting from the localization trend of artificial intelligence semiconductors in China. Although the 2026-2028 profit forecast was lowered by 17% to 19% to reflect the dilution of share capital and the reduction in non-recurring income assumptions, its forecast is still about 20% to 30% higher than market consensus.

UBS pointed out that as the only wafer foundry in China with 7-nanometer node technical capabilities and mass production experience, SMIC can best benefit from structural artificial intelligence requirements and localization of advanced manufacturing processes. As export controls become manageable and domestic equipment and supply chains mature, SMIC Advanced Logic's production capacity is expected to increase from 26,000 pieces/month by the end of 2025 to 98,000 pieces/month by the end of 2028, and further increase to 166,000 pieces/month in 2030. As China's advanced logic supply is expected to remain tight in the next year or two, production capacity is expected to be close to full utilization, and the average price of advanced node subsidiaries will also rise moderately. The bank predicts that SMIC Advanced Logic's revenue will increase from US$1.6 billion in 2025 to a compound annual growth rate of 55% to US$6 billion in 2028.

The bank expects the compound annual revenue growth rate of 23% from 2026 to 2028, higher than the 16% year-on-year increase in 2025, thanks to rising demand for localization, inventory replenishment during the upward cycle of semiconductors, healthy capacity utilization, improved average prices, and increased contributions from advanced processes. In terms of gross margin, despite high depreciation costs, gross margin is expected to increase from 21% in 2025 to 22% to 28% from 2026 to 2028, benefiting from improvements in pricing, utilization, and product portfolio.