UBS upgraded SMIC (00981.HK) to Buy from Neutral, raising its target price to HKD96.2 from HKD76 on China's AI semiconductor localization demand. The broker expects advanced logic capacity to reach 98,000 wafers per month by end-2028 and advanced logic revenue to grow at a 55% CAGR to $6 billion.
UBS upgraded SMIC (00981.HK) to Buy from Neutral, raising its target price to HKD96.2 from HKD76 on China's AI semiconductor localization demand.
The broker believes the market has underestimated the extent to which SMIC will benefit from the localization trend of AI semiconductors in China, according to the research note dated Aug. 7. UBS lowered its 2026-2028 earnings forecasts by 17% to 19% to reflect share dilution and lower assumptions for non-recurring gains, yet its estimates still run 20% to 30% above market consensus.
As China's only wafer foundry with 7-nanometer node technology capability and mass production experience, SMIC stands to benefit most from structural AI demand and localization of advanced manufacturing processes, UBS said. The broker expects SMIC's advanced logic production capacity to expand from 26,000 wafers per month at end-2025 to 98,000 by end-2028 and 166,000 by 2030, with advanced logic revenue growing from $1.6 billion in 2025 to $6 billion in 2028, a 55% compound annual growth rate.
With China's advanced logic supply expected to remain tight over the next one to two years, UBS forecasts capacity utilization to stay close to full, while average selling prices of advanced-node subsidiaries are expected to rise moderately. The broker projects SMIC's revenue to compound at 23% annually from 2026 to 2028, above the 16% growth expected for 2025, supported by rising localization demand, semiconductor upcycle inventory replenishment and improving product mix. Gross margin is expected to improve from 21% in 2025 to 22% to 28% during 2026-2028 despite elevated depreciation costs.
The new target price is based on an unchanged 3.3x price-to-book ratio, rolled forward to average book value per share of $3.7 for 2027-2028, compared with the previous $2.9. The stock closed at approximately HKD65.3 on Aug. 7, implying roughly 47% upside to the new target.
The upgrade aligns with a broader push toward China's semiconductor self-sufficiency. Apple has been testing domestic memory chips from CXMT for iPhones and MacBooks, according to a Wall Street Journal report, showing the accelerating localization trend across China's chip supply chain. As export controls become more manageable and domestic equipment supply chains mature, SMIC's advanced logic capacity expansion positions it as the primary beneficiary of China's AI chip localization drive.
The upgrade reflects confidence in SMIC's ability to capture AI-driven demand despite near-term earnings headwinds from share dilution. Investors will watch SMIC's next earnings release for updated capacity utilization and advanced-node ASP trends.
This article is for informational purposes only and does not constitute investment advice.
