Our target price for SMIC of HK$53.0 is based on 2.4x 2026 P/B, which is at the high end of its historical P/B range. In our view, this is justified by sustainable momentum from US-China decoupling demand, gradual improvement in the semi industry, which indicates a sequential recovery going forward, but GM pressure from rising depreciation burden. Our target price implies 82x/46x 2025E/26E EPS.

Key upside risks that could push the stock above our target price include: 1) better-than-expected margin on efficiency improvements; 2) strong policy support which helps SMIC to improve profit; 3) stronger-than-expected end-demand resulting in higher-than-expected earnings; and 4) sustainable decoupling trend. 

Key downside risks that could pressure the stock below our target price include: 1) less-than-expected margin due to heavy depreciation burden or ASP competition; 2) weak policy support which helps SMIC to improve profit; 3) slower-than-expected end-demand resulting in lower-than-expected earnings; and 4) temporary decoupling trend.