Zhongtai International: Initiates EPIWORLD (02726) with "Buy" Rating, Target Price HK$166.30

Zhongtai International released a research report initiating coverage on EPIWORLD (02726) with a "Buy" rating, based on a 22x 2027E price-to-sales valuation, with a target price of HK$166.30. The bank noted that EPIWORLD held a 31.6% global market share in silicon carbide epitaxy in 2024, with technology, scale, and customer resources forming competitive barriers. With rising demand from AI and new energy vehicles, as well as an increasing share of large-size products and rising capacity utilization, the bank expects the company's revenue to rise 77.5%/107.2% year-on-year in 2026/2027, with gross margins improving 5.2/3.2 percentage points to 30%/32.5%. Zhongtai International's key views are as follows: Absolute global leader in silicon carbide epitaxy, with technology and customer barriers building a core moat EPIWORLD was founded in 2011 and is the world's largest silicon carbide epitaxy supplier, with a global market share of 31.6% in 2024. The company's products cover 3/4/6 inches, and it is also the world's first company to achieve commercial supply of 8-inch silicon carbide epitaxy, and led the formulation of the world's only international standard for silicon carbide epitaxy. At the end of 2025, the company released the world's first 12-inch silicon carbide epitaxial wafer and achieved a breakthrough in small-scale orders in the first half of 2026, further widening the generational gap with peers. In terms of customer resources, the company is the first silicon carbide epitaxy enterprise in China to enter the international supply chain on a large scale, covering 4 of the world's top 5 silicon carbide device manufacturers, all of which are companies in Nvidia's AIDC supply chain. 8 of the world's top 10 power device manufacturers are long-term partners of the company. Silicon carbide epitaxy certification cycles are relatively long, and customer stickiness is extremely strong. The company's global customer layout continues to improve, and the triple barriers of scale, technology, and customers form a competitive advantage that is difficult to replicate. Resilience through industry cycles highlights strength, AI computing power + automotive-grade open up growth space In 2024-2025, the silicon carbide industry was mired in overcapacity and price wars, with peers under profit pressure, while the company demonstrated profit resilience relying on leading scale effects, high yield, and a high-quality product mix, with gross margins significantly better than peers and continued profitability. In 2026, industry supply and demand reversed, with AI computing centers, 800V high-voltage electric vehicles, and photovoltaic energy storage forming diversified demand drivers, and demand for high-value-added 8-inch epitaxial products increasing. The company is simultaneously advancing capacity expansion. The Xiamen base continues to increase 8-inch production lines, with monthly capacity reaching 60,000 wafers in June 2026; the Malaysian overseas factory began construction in August 2026 to support overseas customers, with planned annual capacity of 400,000 wafers, striving to achieve trial production in the second half of 2027. Combined with 12-inch cutting-edge technology reserves, the company fully benefits from the long-term expansion of third-generation semiconductors, with earnings certainty continuously being realized. Earnings forecast In the first half of 2026, industry sentiment rose, and the company's revenue and adjusted net profit increased significantly by 92.0% and 43.4% year-on-year, respectively. In the future, with rising demand from AI and new energy vehicles, the silicon carbide industry, along with an increasing share of large-size products and rising capacity utilization, will see a clear logic of both volume and price increases for the company. Zhongtai International expects the company's revenue to rise 77.5%/107.2% year-on-year in 2026/2027, with gross margins improving 5.2/3.2 percentage points to 30%/32.5%. The bank expects scale effects to dilute various expenses, and forecasts net profit to increase to RMB 130 million and RMB 480 million in 2026/2027, with adjusted net profit of RMB 300 million/RMB 640 million, showing steady growth. Risk warnings: price competition risk; downstream demand fluctuation risk; technology iteration risk; customer concentration and certification risk; raw material fluctuation risk; industrial expansion and capital expenditure risk; Hong Kong stock liquidity risk.