J.P. Morgan: SMIC (0981.HK) Slow ASP Expansion and Margin Pressure Keep Us Cautious; Underweight
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J.P. Morgan maintained its Underweight rating on SMIC with a target price of HK$57.00. The bank highlighted that SMIC's 4Q25 gross margin missed expectations due to rising depreciation costs. Looking into 2026, while revenue is projected to achieve mid-double-digit growth, elevated capital expenditures are driving a 30% year-over-year surge in depreciation, placing continuous pressure on profitability.
Furthermore, blended average selling price (ASP) growth remains stagnant. Despite optimistic market commentary, sluggish demand across smartphones, PCs, and consumer electronics limits pricing power, with 2026 ASP expected to grow only 3%. The bank anticipates SMIC's gross margin will hover around 20.2% for 2026, down 0.8 percentage points year-over-year. This contrasts with previous estimates of 22.8%.
Fourth-quarter revenue aligned with forecasts, but the gross margin fell short of both J.P. Morgan and consensus estimates. The 1Q26 revenue guidance points to flat sequential growth, while the gross margin guidance of 18-20% lags market expectations of 20.9%. In 2025, capital expenditure reached $8.1 billion, exceeding the company's guidance of approximately $7.6 billion, which subsequently forced an upward revision in 2026 depreciation forecasts.
SMIC continues to expand capacity by adding 40-50k 12-inch equivalent wafers monthly, with utilization rates nearing full capacity at 95.7% in 4Q25. While China's semiconductor localization trend supports top-line growth, lower yields at leading nodes constrain ASP improvement and overall margin expansion. The bank sees limited gross margin upside over the next few years.