Citi has released a research report indicating that the latest second-quarter results from SMIC (00981) and HUA HONG GRACE (01347) reveal an increasingly clear recovery in the mature process/specialty technology foundry sector. Utilization rates are rebounding, pricing trends are improving, and capacity is tightening. Meanwhile, artificial intelligence is creating direct demand for PMIC/MCU/power devices and generating an indirect "capacity spillover" effect on mature processes.
The firm believes both companies began price increase negotiations for supply-constrained products, particularly 8-inch wafers and AI-related items, starting in the first quarter. HUA HONG GRACE has also noted extended delivery times due to high fab loading, especially in BCD/PMIC, MCU, flash memory, and power process technologies. This is fostering a healthier environment for the industry's outlook.
Citi has raised its 2026/27 earnings per share forecasts for SMIC and HUA HONG GRACE by 10% to 39%, reflecting improved profitability driven by better pricing and utilization rate prospects. The firm maintains "Buy" ratings on both companies.
The H-share target price for SMIC has been increased from HK$90 to HK$100, based on an unchanged 4 times price-to-book ratio applied to the average net book value per share for 2026/27. For HUA HONG GRACE, the H-share target price has been raised from HK$160 to HK$175, based on an unchanged 5 times price-to-book ratio applied to the average net book value per share for 2026/27. Both target price-to-book ratios sit two standard deviations above their historical ranges, reflecting improved end-demand prospects and a recovery in pricing and utilization trends.
Citi notes that both SMIC and HUA HONG GRACE delivered better-than-expected second-quarter results, confirming that the recovery in China's wafer foundry industry has expanded from AI accelerators to mature processes and specialty products. SMIC reported revenue of $3 billion (up 20% quarter-over-quarter and 36% year-over-year), with gross margin rising from 20.1% to 25.3%, well above the prior guidance of 20% to 22%. Utilization rates also climbed to 93.7%.
HUA HONG GRACE recorded record revenue of $718 million (up 9% quarter-over-quarter and 27% year-over-year), with gross margin improving to 16.5%, supported by higher shipments and better average selling prices. The company's strong growth came from embedded non-volatile memory/MCU (up 42% year-over-year), standalone non-volatile memory/flash (up 149%), logic/RF (up 21%), and analog/PMIC (up 13%). The common thread is that volume recovery is now being reinforced by pricing power, creating significant operating leverage despite rising depreciation from new capacity.
Citi says both companies have a positive outlook for the third quarter, with each expecting momentum to carry through. SMIC guides for revenue growth of 2% to 4% quarter-over-quarter, with gross margin in the range of 26% to 28%. Management believes the industrial "spillover effect" from AI will persist into the second half of 2026 and is accelerating certification of new capacity to address supply shortages.
HUA HONG GRACE's outlook is even stronger, guiding revenue of $770 million to $780 million, representing another approximately 8% sequential increase, with gross margin between 16% and 18%. Management indicates that incremental revenue is a combination of both higher volumes and higher average selling prices, with particular strength in MCU/embedded memory, standalone flash memory, medium and low voltage MOSFETs, RF, and PMIC. More importantly, HUA HONG GRACE expects momentum in MCU and standalone memory to extend into 2026 and 2027, suggesting the recovery is becoming more structural rather than merely an inventory restocking cycle.