SMIC: Cyclical Bull Market + Domestic AI Chips, the Dual Champion Takes Off

SMIC released its 2026 Q2 financial report (for the period ending June 2026) after the Hong Kong stock market close on the evening of August 13, 2026 Beijing time, the key points are as follows:

1. Revenue side: SMIC recorded a revenue of USD 3.01 billion in the second quarter of 2026, significantly beating market expectations (USD 2.87 billion), up 20% quarter-on-quarter, exceeding the company's guidance (14-16% QoQ growth). The growth in this quarter is mainly driven by rising demand from industrial & automotive, PC and tablet sectors.

Through volume-price decomposition, the company's product shipments in this quarter increased by 14% QoQ, while the average selling price (ASP) of products rose by 5% QoQ. Combined with market information, the company raised prices by more than 10% in some mature process fields, directly driving up the overall product ASP.

2. Gross margin: The company achieved a gross margin of 25.3% in the second quarter of 2026, far exceeding the upper limit of the guidance range (20-22%). The increase in gross margin this quarter is mainly driven by the rise in product ASP and the decline in unit cost. As for the decline in unit cost, although the incremental depreciation and amortization are still increasing, the unit cost is diluted with the support of massive capacity expansion.

3. Business progress: Driven by domestic substitution, SMIC's revenue from the Chinese mainland market accounted for over 90% this quarter. Since leading wafer manufacturers are shifting their production capacity to the AI sector, the company has obtained opportunities to capture the "spillover" demand for mature processes from some customers, further driving the increase of the localization revenue proportion.

From the perspective of business structure, affected by the sluggish mobile phone market, the proportion of mobile phone business revenue has dropped to less than 20%. The consumer electronics sector remains the largest revenue source of the company, accounting for 40% to 50% of total revenue, and it is estimated that this business segment includes part of AI-related revenue.

4. Expenses and capital expenditure: The company's operating expenses, mainly consisting of R&D expenses and administrative expenses, remain relatively stable.

The company's capital expenditure in this quarter reached USD 1.84 billion. Combined with the previous guidance that the full-year 2026 capital expenditure will be similar to that of last year, the total full-year capital expenditure will be around USD 8.1 billion, corresponding to a capital expenditure of USD 4.7 billion in the second half of the year, and the company will enter a peak investment period soon.

5. SMIC's next quarter guidance: The company expects its Q3 2026 revenue to grow by 2-4% QoQ, corresponding to USD 3.06-3.13 billion, slightly better than market expectations (USD 3.07 billion); the gross margin for the next quarter will be 26-28%, significantly outperforming market expectations (22.5%).

Dolphin Research's overall view: This round of growth relies on "substantial" performance rather than sentiment

SMIC's financial report this quarter is quite impressive, with both revenue and gross margin significantly beating market expectations. From the decomposition of gross margin, the company's product ASP increased by USD 49 per wafer QoQ this quarter, while the unit cost decreased by USD 15 per wafer (diluted by scale effect), driving a sharp rebound in gross margin.

Looking at the gross margin performance of the first three quarters of 2026: Q1 (20.1%) -> Q2 (25.3%) -> Q3 (26-28%), the price increase effect of mature processes has been clearly reflected in the company's gross margin, which means the company and the traditional semiconductor industry have entered an upward cycle.

Currently, the proportion of the company's domestic customers has exceeded 90%, which is far beyond the previous logic of "domestic substitution". The key concerns for SMIC at present are the following aspects: capital expenditure and production capacity, price increase of mature processes, and progress of advanced processes:

a) Capital expenditure and production capacity: The company's capital expenditure in this quarter was USD 1.84 billion (USD 3.4 billion in the first half of the year). As the company previously mentioned that the full-year capital expenditure will be similar to last year's (USD 8.1 billion), the second half of the year will be the peak period of investment.

Against the backdrop of the continued sluggish mobile phone market recently, the rebound of the company's gross margin is mainly driven by the price increase of mature processes. Even at the previous cyclical bottom, SMIC maintained an annual capital investment of USD 8 billion to carry out "counter-cyclical expansion".

Driven by continuous high investment, SMIC's current quarterly wafer production capacity has reached 3,062 thousand 8-inch equivalent wafers, up 13.6% QoQ. In the wafer foundry market, the company has steadily ranked the third place.

b) Price increase dynamics of wafer fabs:

With the continuously rising demand for AI Servers, general-purpose Servers and edge AI peripherals, wafer foundry capacity is obviously tilted to AI-related products, which accelerates the change of the supply-demand structure of mature processes. The current price increase is mainly concentrated in BCD (power integrated circuits), analog chips, power management, storage and other related products. The market expects the price increase effect to "spill over" to more product lines, driving the upward trend of the entire semiconductor cycle.

The current price increase is mainly concentrated on 8-inch mature processes, and the market expects it will drive the price increase of 12-inch mature processes in the second half of the year, among which UMC has clearly announced its subsequent price increase plan. Judging from SMIC's gross margin guidance for the next quarter, the price increase effect has emerged and will further boost the company's performance.

c) Competitiveness and process progress: SMIC has steadily ranked in the second tier in the wafer manufacturing field, and there are also UMC, GlobalFoundries etc. in the second tier, but only SMIC is still striving to break into the first tier.

Combined with information from the company and the industry, SMIC mainly uses "multi-patterning technology" to iterate and upgrade processes such as N+1, N+2, and N+3. Currently, the transistor density of the company's N+3 process is roughly at the level of TSMC's 6nm process, and the next-generation N+4 process will be close to TSMC's 5nm process.

In addition to the price increase of mature processes, the main source of SMIC's valuation improvement is the market's expectation for the company's advanced processes. H is already a major customer of the company. With the shipments of Ascend 950DT and Kirin 9030, SMIC's revenue from advanced processes is expected to see a significant increase in the second half of the year.

Combined with SMIC's current market value (HKD 578.3 billion), it roughly corresponds to about 25x PE of the core after-tax operating profit in 2027 (assuming a two-year compound revenue growth of +26%, gross margin of 28.5%, and tax rate of 8.5%). Driven by the recovery of the traditional semiconductor cycle, the upward trend of the company's gross margin and performance will digest its previously high PE.

From the perspective of PB, the current PB of wafer foundries is roughly "TSMC 11 > UMC 3.4 = SMIC (H) 3.4 > GlobalFoundries 2.4". Previously, the valuations of UMC and GlobalFoundries rose sharply, mainly driven by the market's enthusiasm for the mature process semiconductor price increase wave. After this round of overall valuation correction of the "price increase chain", the market will view each company with a more rational "fundamental perspective".

Compared with GlobalFoundries, UMC is more "aggressive" with a relatively smaller stock price correction. UMC has clearly proposed a subsequent price increase plan of 25-40% for 8-inch wafers and 10-20% for some 12-inch wafers, starting the price increase in the second half of the year and fully raising prices in 2027; while GlobalFoundries only used the mild wording of "selectively raising prices in the second half of the year".

Overall, driven by the price increase of mature processes, the performance recovery of second-tier foundries such as SMIC and UMC will be facilitated, and the company's valuation can gradually be viewed from the PE perspective. After the valuation correction of the "price increase chain", the market will become more rational and pay more attention to gross margin and performance.

The performance and guidance released by SMIC represent "substantial" performance, which is also a clear signal of the upward cycle of the traditional semiconductor industry. On this basis, the upcoming shipments of multiple new products from major customers will also bring growth highlights in the advanced process field to the market. With solid performance support and expectations for advanced processes, SMIC, which is at the core of domestic AI infrastructure, has higher cost-effectiveness after the overall correction of the semiconductor sector.

The following is the detailed chart of SMIC from Dolphin Research: