JPMorgan Upgrades SMIC Rating Amid Improved Profit Margins

JPMorgan released a research report on May 18, stating that Semiconductor Manufacturing International Corporation (SMIC) exceeded expectations in its first-quarter gross profit margin due to selective price increases. According to Jin10, the company's second-quarter revenue guidance is even more promising, with an anticipated quarter-on-quarter growth of 14% to 16%. The report highlights that demand related to AI and localization trends has driven price increases for certain products, such as BCD, analog chips, power management, and memory products, which collectively account for approximately 40% to 50% of revenue. These price increases were partially reflected in the first quarter and are expected to further manifest in the second quarter. However, JPMorgan anticipates that consumer electronics demand may weaken in the second half of the year due to early shipments in the first half and price hikes in end products. Despite the risks to consumer demand in the latter half of the year, the broader-than-expected price increases have led JPMorgan to upgrade SMIC's investment rating from 'underweight' to 'neutral.' The target price has been raised from HKD 57 to HKD 67, corresponding to approximately 2.8 times the price-to-book ratio. The report suggests that a clearer path to profit margin recovery, such as broader price increases sufficient to offset rising depreciation, could further drive stock price reevaluation. Conversely, weaker-than-expected consumer demand poses a downside risk by suppressing pricing.