Daiwa has released a research report raising its target price for SMIC (00981) from HK$36.5 to HK$40, representing 1.1 times the average forecast price-to-book ratio for 2026 to 2027. The firm has also increased its earnings per share estimates for 2026 to 2028 by 11% to 48%, while maintaining a "Sell" rating.

Daiwa believes the stock price has already fully priced in positive factors, with current valuations appearing stretched. While SMIC reported second-quarter results that exceeded Daiwa's expectations, the third-quarter guidance presented a mixed picture.

The report noted that SMIC's second-quarter net profit reached US$512 million, surpassing market expectations by 104%, driven by price increases, early pull-in of consumer orders, and strong demand for AI-related chips. However, management expects third-quarter revenue to grow only 2% to 4% quarter-on-quarter, below the market consensus of 7% to 9% growth, primarily due to the rebalancing effect after the second-quarter order pull-in.

Daiwa acknowledged that price increases have improved gross margin expectations, with the third-quarter gross margin guidance of 22% to 24% also exceeding market forecasts. Nevertheless, the firm remains concerned about SMIC's valuation, depreciation pressure, and geopolitical risks.

The report pointed out that SMIC remains in an intensive capital expenditure cycle, with heavy depreciation charges. Its technology development is also constrained by geopolitical factors. Whether price increases can sustain earnings before depreciation peaks in the first half of 2028 remains uncertain.