EB Securities: AI Demand and Manufacturing Reshoring Drive Operational Improvements, Maintain Buy Rating on Semiconductor Manufacturing International Corporation (00981)

EB SECURITIES released a research report stating that the AI syphoning effect is bringing back production capacity for specialized storage and consumer electronics to China, accelerating the process of domestic substitution. Benefiting from the certainty trend of AI computing power demand and domestic substitution, the strengthening of AI-related demand, domestic production shift, and specialized storage orders are expected to boost the outlook for orders and operations by 2026. The firm is optimistic about the capacity release and performance improvement brought by Semiconductor Manufacturing International Corporation's (00981) production and technological upgrades, maintaining a "buy" rating for Semiconductor Manufacturing International Corporation's Hong Kong and A shares. In terms of profit forecast, considering the significant depreciation pressure from new production lines, EB SECURITIES has adjusted Semiconductor Manufacturing International Corporation's Hong Kong net profit for 2026-2027 to $990 million/$1.25 billion (compared to previous forecast -8%/+0%), with additional forecasted net profit of $1.57 billion in 2028, representing a year-on-year growth of 45%/27%/26%; similarly, for Semiconductor Manufacturing International Corporation's A shares (688981.SH), the net profit for 2026-2027 is forecasted to be 6.93 billion/8.65 billion yuan (compared to previous forecast -7%/+1%), with an additional forecasted net profit of 10.76 billion yuan in 2028. Key points from EB SECURITIES: Event: 1Q26 earnings exceeded expectations, with positive 2Q26 guidance. 1Q26 revenue was $2.505 billion, YoY +11.5%, QoQ +0.7%, exceeding the company's previous guidance of $2.49 billion. Wafer shipments YoY +9.5%, QoQ -0.2%; wafer ASP YoY +0.5%, QoQ +2.5%. Gross margin in 1Q26 was 20.1%, YoY -2.4pct, QoQ +0.9pct, exceeding the upper limit of the company's 18%-20% guidance range, mainly due to product structure optimization and ASP increases. Net profit in 1Q26 was $231 million, YoY -28.6%, QoQ +13.5%; with attributable net profit of $197 million, YoY +5.0%, QoQ +14.2%; non-controlling interest was $33 million, YoY -75.3%, QoQ +9.6%. Positive guidance for 2Q26. 2Q26 revenue guidance is for a MoM increase of 14%-16%, with gross margin guidance of 20%-22%, both exceeding market expectations. Increase in revenue contribution from consumer electronics. Revenue breakdown: 1) Applications: In 1Q26, revenue from smartphones/computers and tablets/consumer electronics/Internet of Things and wearables/industrial and automotive accounted for 18.9%/13.6%/46.2%/7.3%/14.0% respectively, with consumer electronics revenue YoY +27%, industrial and automotive revenue YoY +63%, QoQ +16%, and smartphone revenue YoY -13%, QoQ -12%. 2) Size: In 1Q26, 12-inch revenue accounted for 76.4% of wafer revenue, YoY -1.7pct, QoQ -0.8pct. 3) Region: In 1Q26, revenue from China/US/Europe-Asia regions accounted for 88.9%/9.3%/1.8%, with the revenue contribution from China continuing to rise. AI-related demand, domestic production shift, and specialized storage orders make the company more optimistic about orders and operations in 2026. The company has sufficient existing orders: 1) AI driving demand for complementary chips and order return. On one hand, there is high demand for power management and data transmission chips due to AI data center construction; on the other hand, AI demand is leading to the return of consumer, IoT, and other customer orders to China; 2) New demand emerging in end-side AI and related areas. Rapid growth in new demand for logic circuits related to end-side AI, including IoT, Siasun Robot & Automation, electric vehicles, etc.; 3) Insufficient specialized storage supply. Storage capacity is shifting towards HBM, with even some IDM manufacturers exiting the niche storage market, resulting in an expanded gap in supply for Nor Flash and SLC NAND Flash, allowing the company to undertake relevant transfer orders; 4) Acceleration of the domestic substitution process. Based on a more optimistic outlook for orders and operations, the company expects gradual price increases in 2026, which will be reflected in Q2-Q4. Capacity is shifting towards high-demand products, with continued active capital expenditure in 2026. 1) Capacity: Monthly capacity in 1Q26 was approximately 1.078 million wafers for 8-inch, with the company actively expanding production towards specialized storage, power management, AFE analog, and other high-demand and continuously iterative product lines; 2) Utilization rate: Utilization rate in 1Q26 was 93.1%, YoY +3.5pct, QoQ -2.6%; wafer shipments (equivalent to 8-inch) was 2.509 million wafers; 3) Capital expenditure: Capital expenditure in 1Q26 was $1.563 billion, YoY +10.4%, QoQ -35.1%; the company expects capital expenditure in 2026 to be roughly similar to 2025, with continued strong investment; 4) Depreciation: The company forecasts a 30% year-on-year increase in depreciation in 2026, with continued high depreciation pressure. 5) Advanced packaging: The company is increasing its layout in advanced packaging, establishing an advanced packaging research institute to research cutting-edge technology; it has also established a subsidiary, Shanghai Xinsandev Semiconductor, to build supporting capacity to meet customer demands for advanced packaging. Risk warning: Soft downstream demand; intensified industry competition; technology not meeting expectations.